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What is the difference between active and passive appreciation?

Welcome back. In our last post, we introduced the concept of “appreciation” in terms of defining marital property during a divorce case. We explained that in the divorce case of billionaire oilman Harold Hamm and his estranged wife Sue Ann, the difference between active and passive appreciation could be worth billions.

That’s because Hamm started the massively-successful oil company Continental Resources prior to marrying Sue Ann, which would seem to suggest that the value of the company is separate property, or his alone. However, the amount in which a piece of separate property increases during the marriage can be considered “marital,” so long as the appreciation was active and not passive.

Active appreciation means that the property increased in value at least in part because of efforts or contributions made by one or both spouses. Passive appreciation, on the other hand, occurs because of outside market forces and not because of efforts or contributions made by either spouse. Passive appreciation means that the property remains separate in nature.

An example of active appreciation would be a business that one or both spouses worked at to grow over the course of the marriage. The growth of the business would then be considered marital property during divorce even if the business itself was started prior to the marriage.

An example of passive appreciation would be a plot of land that was owned prior to the marriage and then increased in value over the course of the marriage, but neither spouse did anything to improve its value.

As you may have guessed, Hamm is arguing that the extreme growth of his oil company during his marriage was passive appreciation, meaning that his estranged wife isn’t entitled to any of it. Sue Ann, on the other hand, is arguing that the oil company’s growth was due to her husband’s efforts, or active appreciation, meaning she is entitled to a fair and equitable share.

It will be up to the judge presiding over the case to determine if the oil company’s tremendous growth over the past 25 years was active or passive appreciation — or a combination of both. Since billions of dollars are at stake, it’s not a decision that the judge will take lightly.

Source: Forbes, “A Multi-Billion Dollar Divorce: What All Divorcing Women Can Learn From Sue Ann Hamm,” Jeff Landers, Sept. 22, 2014