In his valuable article for Inc. Magazine, “How to Protect Your Business in a Divorce”, divorce financial analyst Jeff Landers offers an in-depth look at how to best guard your most valuable financial asset in the event your marriage dissolves.
Separate property vs. marital property
Landers lays the preliminary foundation for his advice by distinguishing between separate property and marital property.
Separate property includes property owned prior to the marriage; an inheritance received by only one spouse; a gift received by only one spouse from a third party (not the other spouse); and the pain and suffering portion of a personal injury judgment
Marital property consists of all income and assets acquired by either spouse during the marriage. That property can include real estate; retirement, brokerage and bank accounts; life insurance and annuities; and tangible property like vehicles, art and antiques. It can also include any increase in value during the marriage of any separately owned property.
Landers also points out the importance of knowing whether your state is a Community Property or Equitable Division state. In an Equitable Division state, courts consider many factors when determining a settlement, like the length of the marriage, and the spouse’s earning power and involvement in building the business. For our purposes, Washington is one of nine Community Property states in the United States, which means that state law considers both spouses as equal owners of all marital property (a 50-50 split is the rule).
Forging a Prenuptial Agreement
Landers notes that a prenuptial agreement is probably the most powerful tool in protecting your business. This is because a prenup can both authoritatively designate what qualifies as marital property in the relationship, and detail crucial aspects of your business in that context. He also notes that a prenuptial agreement can be complicated and that the strength of such an agreement lies in both how well it’s written and on how well each spouse’s interests are represented by their own attorney. Prenuptial agreements need to be reasonable, devoid of coercion, completely disclosing of assets, fully documented and witnessed or notarized. Landers also notes that although postnuptial agreements are a less desirable way to protect a business during divorce, they’re better than nothing.
“Locking Out” Your Spouse From the Business
Landers then presents provisions that a business can instill into its partnership, shareholder and/or operating agreements in order to protect the interests of the other owners if one of them gets divorced. For example, the business can require unmarried shareholders to provide the company with a prenup agreement before marriage along with a waiver by the owner’s spouse-to-be of any future interest in the business. The business can also prohibit the transfer of shares without partner approval and establish the partners’ right to buy the shares or interest of any of the divorcing parties in order to maintain control of the business.
Paying Yourself, and Limiting Spousal Involvement in Your Business
Landers notes that if you reinvest all your profits back into your business instead of paying yourself a competitive salary, your soon-to-be-former-spouse might claim a larger percentage of your business because you didn’t put any money into the household. Also, your spouse can similarly claim a large percentage if he or she was employed by you or your company, helped run the company in any way or even contributed business ideas during your marriage.
Last Resort: Paying Off Your Spouse
Finally, Landers presents three options to pay off your spouse in case you were not able to adequately protect your business in advance against his or her claim to ownership interest. You can use your share of other marital assets to pay. Or you can set up a long-term payout (with interest) of the amount you owe your ex-spouse for the value of his or her share of the business. Finally, and least preferably, you can sell the business and divide the sales price.
Getting Legal Help During the Divorce Process
The divorce process can be extremely taxing on an emotional level, before having to work through issues like protecting your business. John L. Davis PLLC uses his years of experience in divorce cases to help you reduce the stress of safeguarding what you’ve built. Contact our Vancouver office today at (360) 597-4740 to schedule a consultation with an understanding and trusted divorce attorney.