Protecting Your Business in a Divorce
Divorces are generally not the most pleasant of experiences. Unless your marriage was short-lived, the spouse or partner with the most assets or who is more financially advantaged often stands to lose the most when it comes to distributing the assets. In an equitable distribution state like Florida, the parties typically divide the marital assets and debts evenly.
Marital vs. Nonmarital Property
If you own a business or have business interests, it is important to classify those interests as either nonmarital or marital. Nonmarital property is typically that which was acquired before the marriage, was inherited by one party or was a gift made solely to one party. Nonmarital property, though, can lose its nonmarital identity and become marital (for instance if one comingle funds, transfers property, etc.). This could encompass any income your business generated during the marriage and includes stocks, stock options, annuities, retirement plans, and real property.
Many high net worth divorces where considerable assets were at stake came down to whether certain valuable marital property became nonmarital (or vice versa). In Florida as in other states, the date of filing the initial petition for dissolution of marriage typically determines when any accumulated asset becomes nonmarital separate so that its marital value can be determined, but defining that date is not so apparent. For the most part, the court will look at the intention of the parties to separate as expressed by words or conduct.
Advantages of a Prenuptial and Postnuptial Agreement
Many wealthy couples, as well as middle class ones, enter into a premarital agreement to preserve their assets or considerable wealth from being distributed to their spouse. An enforceable premarital or prenuptial agreement can override community or equitable property rules so that the recipient spouse receives less than what he or she would otherwise have been entitled to. A valid prenuptial agreement must be in writing and should contain the following, amongst other things:
- Full disclosure of all assets and sources of income
- Been entered into freely and of your own accord
- Not be unconscionable or so unfair as to shock the conscience
- Been drafted and signed a reasonable time before the marriage (at least one month)
This last provision is important since a prenuptial agreement signed the day or week before the marriage will be more closely scrutinized if challenged as being coerced and not freely entered into by the parties. The court will not, however, generally judge the fairness of the agreement unless the marriage was of long duration and one spouse is essentially left with nothing. You can protect your business interests in this fashion so long as the above essentials are followed, and you do not leave your spouse an unreasonable amount of assets.
A postnuptial agreement is one made during the marriage and can also protect your business interests – though such agreements will be held to higher standard of review regarding fairness. A postnuptial can set forth terms regarding spousal and child support and division of business interests though its fairness will undoubtedly be scrutinized. Follow the factors used for a prenuptial agreement as a means of having such an agreement enforced.
Business Operating Agreements and Other Methods
Besides a prenuptial or postnuptial agreement, consider the following suggestions that can protect your business interests in case of divorce:
- Include a provision in a partnership, operating agreement or LLC where any unmarried shareholder or partner has to submit a prenuptial agreement with a waiver by the future spouse to any interest in the business.
- Prohibit any transfer of shares without the express approval of the other shareholders or partners and an option for the shareholders and partners to purchase the stocks or interest of one or both of the parties who are divorcing.
- Do not involve your spouse in any phase or facet of the business.
- Pay yourself a competitive salary from the business to foreclose any argument your spouse may assert in that he/she failed to benefit from it during the marriage, or that you voluntarily underemployed yourself.
- Pay off your spouse by giving him/her more of the marital assets so you can retain your full interest in the business.
The lessons to be learned here is to plan for the future, which may mean a divorce even if it seems so remote or inconceivable when you married. In the end, you are more likely to retain most, if not all, of your business assets and interests so you can move on to a secure life after divorce.