If You Are A Small Business Owner Facing Divorce, Get Specialized Help

They are in the news every month – the celebrity or business owner going through an excruciating divorce that threatens to wipe out their life’s work.  I was reading an article recently about Frank and Jaimie McCourt. Frank (and arguably Jaimie) was the owner of the L.A. Dodgers until the divorce closed the door.  Ms. McCourt fought her husband tooth and nail for half ownership of the team.  When it was over, Jaimie agreed to surrender the bankrupt team to Frank in exchange for a promise of about $130 million. 

What has that got to do with you?  Maybe more than you want to know.  It is a great example of the risks of going through a divorce that involves a family business.  While most of us don’t have a gazillion dollars to fight over, many of us own small businesses.  Often one or both spouses work in the business, and when the divorce comes along, sorting out the pieces is a nightmare.  And that is just between the two spouses!

It is common for two or more individuals to own and run a business together.  One owner gets divorced and the other owners suddenly find themselves in a bad place.  Business records may be scrutinized in the divorce by experts for the parties and by the court.  The non-owner will often claim an interest in the business and may even try exerting some control over the business.  Can you imagine the heartburn?

There is no way to be completely certain to avoid such headaches, but there are precautions that may provide the business owner some security and may minimize the turmoil.  Prenuptial agreements setting out the rights of the spouses in the event of a divorce are great if done properly.  They can specify how any business interest will be treated in the event of divorce – up to and including exclusion of the business from the marital assets. 

A buy-sell agreement between owners is also critical to minimize the uncertainty associated with the divorce of any owner, since it establishes rights vis-à-vis the owners of the company.  Such agreements determine what happens if one of the owners dies or leaves the company.  I’ve heard them referred to as prenuptial agreements between the owners.

If you are unsure of where your business stands, or you own a small business and are facing (or are in the midst of) a divorce, you need to consult with counsel who are experienced not only in the field of family law, but in the field of business law and contracts as well.  If you find yourself in such a situation, give us a call.  We can help.

PROS AND CONS OF PRENUPTIAL AGREEMENTS

Prenuptial agreements are subject to some serious misconceptions.  They are neither the savior nor the destroyer of western civilization – or of marriages.  There are numerous advantages and disadvantages to prenuptial agreements.   Consider these strengths and weaknesses:

Strengths

·         If you have children or grandchildren from a prior marriage, a prenuptial agreement can protect their inheritance rights.

·         If you marry someone with a lot of pre-marital debt, a prenuptial agreement can protect you from taking on the spouse’s obligations.

·         If you own a business – including a professional practice, a prenuptial agreement can protect that interest and free it up from a messy entanglement in the event of a divorce. 

·         A prenuptial agreement can cover details of decision-making unrelated to money – i.e. responsibility sharing. 

·         A prenuptial agreement can avoid or reduce the amount of alimony paid by a party to divorce by looking ahead.

·         Older persons marrying for a second or subsequent time can protect their wealth.

Weaknesses

       ·         You could end up giving up rights to property, inheritance rights, or other benefits through
               a prenuptial agreement that you would otherwise be entitled to.

·         An unwary spouse could give up her right to recover from a business’s increase in value where he or she has contributed to the business throughout the marriage.

·         It can be hard starting your marriage with even a suggestion that you either do not trust your prospective spouse or that you don’t expect the marriage to last.

·         It’s hard to know today what tomorrow will bring, much less to know how potential issues should be handled ten years or more down the road.  Situations can develop over time that make well intentioned plans cumbersome or unmanageable.

·         While you may see yourselves as moving forward on equal footing, it is possible – if not common – for one spouse’s earning capacity to develop over time in such a way as to create vast disparities.  It’s usually hard to predict that eventuality.  

·         It’s easy to make decisions while you are emotionally vulnerable that, in hindsight, you would never have agreed to.

For these reasons, it’s often good to have a professional working with you on your agreement.  He or she can help you to avoid some of the more common pitfalls, avoid the bad decisions made based on emotion, and put together something that is reasonable and protects your interests in the long run.

Prenuptial Agreements: Who Needs Them?

While not the most romantic way to begin a marriage, a prenuptial agreement can provide a pragmatic way of ensuring that your separate assets are protected if the marriage should come to an unanticipated end and that goals you may have set prior to marriage are not frustrated.  The following circumstances are particularly conducive to prenuptial agreements:

1.       One or both spouses own a business or a professional practice – medical, dental and such.  Failure to have a prenuptial agreement can result in impediments to the sale of such businesses or practices or other complications arising from a divorce.

2.       One or both spouses have a lot of assets.  Whether liquid assets (money) or non-liquid (real estate), a premarital agreement as to how property will be treated upon the advent of a divorce can save a lot of costs in the divorce, can preserve pre-established goals for the property or assets, and can often serve to dissuade unnecessary litigation over the distribution of the assets.  Of course what constitutes “a lot” will vary from individual to individual.

3.       One spouse has a disproportionate share of the assets.  A prenuptial agreement can be even more important where one spouse has significantly greater assets than the other spouse.  I have heard the ratio of 2:1 and 3:1 as benchmarks.  This is probably the category of individuals that most of us think about when we envision the need for an agreement.

4.       One or both spouses have a lot of debt.  We commonly think of the prenuptial agreement as a way of designating property as “separate” in order to protect it from the other spouse in the event of a divorce.  It is every bit as important to protect yourself from being saddled with debt that the other spouse brought into the marriage in the event the marriage ends prematurely.

5.       One or both spouses have children (or even grandchildren) from previous marriages.  Often prenuptial agreements are entered into in these circumstances to protect assets intended for use in providing an education, bestowing gifts, or otherwise providing for children who the new spouse may not have the same commitment to. 

Of course not everyone in these categories will want a prenuptial agreement and every set of circumstance comes with its own landscape, as unique as the personalities and histories of the individuals themselves.  In our next post we will talk about the pros and cons of premarital agreements.

Prenuptial Agreements: Preparation for Failure?

I was sitting in my office one night last week working on a client’s prenuptial agreement.  We had put together a draft and had provided it to the other side to review.  They had, in turn, responded with objections and proposals that would improve the future wife’s position in the event of a divorce.  I found myself wondering (as I often do when I’m sitting in my office too late at night), “what would my mom and dad have thought of the concept of a prenuptial agreement?” Negotiating the terms of the “potential” divorce before they were even married?

Not to over simplify the matter, but prenuptial agreements are contracts between a prospective husband and wife that are intended to dictate how assets and debts will be addressed in the event of a divorce.  They may cover other issues as well – whether spousal support will be pursued, whether attorney fees and costs for the divorce will be paid by one party or shared, how the interim period of the divorce will be handled, whether one party will retain the marital home, even custody related issues (though these are subject to much stricter review by the court).  In essence, they are intended to take the decision-making role from the judge and place it in the hands of the parties to the . . . divorce.  And more and more people are entering into such agreements before they are married.  So the question is: “if you marry for love, is a prenuptial agreement appropriate?” 

Over the next couple weeks I’m going to be posting several blogs explaining why the answer is often “yes.”  I understand this may fly in the face of some strongly held beliefs regarding marriage, but the fact is, everyone’s material circumstances are different.  What works for one person or couple may be completely outside of consideration for another.  As a simple example, while one couple may bring millions of dollars in assets with lots of other business interests to a second or third marriage, the next couple at the chapel may bring nothing but their enduring commitment to one another and a toothbrush.  Different circumstances, different needs.

Tune in for the next post when I discuss some of the factual circumstances that might be more appropriate for entering into a prenuptial agreement.