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It may seem strange to think about divorce while you’re still single or happily married, but, as a woman business owner, divorce-proofing your business should be an important part of your financial plan, even if you never need to use it.
Consider this as a type of insurance policy, similar to your homeowner’s insurance – you hope you never have to use it but you feel secure having it. And, if that storm ever blows through and levels your house, you’ll be really glad that you have it!
After all, the divorce statistics do not bode well. Approximately half of all first marriages and about 70% of second and third marriages end in divorce. So even if you are happily married—or not yet married – you should never assume that this can’t or won’t happen to you.
If you’re a successful woman business owner, you’ve worked hard to build your business. You’ve sacrificed so much and spent untold hours making it what it is today. However, in a divorce, your husband (or future husband) can put all your hard work and your ownership stake in your business at risk. This is true whether or not he was involved in the company, and regardless of who initiated the divorce.
It can seem incredibly unfair, but if your business grew in value while you were married, the amount of increased value must usually be included in the pot of marital assets to be divided between you and your husband.
Since it’s probably safe to assume that you will not want your future ex-husband and his next wife to become your business partners, what can you do now to protect your business in the event of a future divorce?
Before we begin, please keep the following in mind:
To be truly effective, these protective methods should be in place long before divorce is a possibility. Obviously, something like a prenuptial agreement needs to be signed before you are married, but techniques such as transfers to an irrevocable trust need to be done years in advance. Depending on your state’s fraudulent transfer laws, transactions can be voided up to seven years after the transfer!
It’s very important that you understand the differences between marital and separate property. While the topic of marital and separate property is complicated, for the purposes of this article, you should just understand that your husband could be entitled to a substantial percentage of your business, whether or not he directly contributed to building it.
So let’s start off with the most familiar protective technique:
The Prenuptial Agreement
A prenuptial agreement is a contract signed by both parties before their wedding. The prenup details what the couple’s property rights and expectations would be upon divorce. If done correctly, a prenup can be an excellent way to supersede your state’s marital property laws. For a prenuptial agreement to be effective, it is very important that both parties have their own separate attorneys. It should also contain the following elements:
1. The agreement must be in writing.
2. It must be executed voluntarily and without coercion.
3. It must provide full disclosure (no hiding of assets and/or liabilities).
4. The agreement cannot be unconscionable, meaning that it cannot be completely lopsided giving one party so much more than the other.
5. It must be executed by both parties, preferably in front of witnesses.
6. It should be in a recordable format.
By using a prenuptial agreement, both parties can decide in advanced what property will be considered separate property and what property will be considered marital property and how that marital property should be divided.
As we all know, discussions about prenups can be, at best, quite awkward and unromantic. In addition, they are often contested once the couple heads for divorce.
So what are your other options?
The Domestic or Foreign Asset Protection Trust
If you do not want to create a prenuptial agreement or if you worry that your fiancé would not sign one, there is another option that, for a number of reasons, might be an even better alternative and you don’t need your fiancé’s approval. You could set up a Domestic or Foreign Asset Protection Trust.
Basically, this would transfer the ownership of your separate property into the trust, including your company. This would work for most entities — C Corporations, Limited Liability Companies, Limited Partnerships–but not necessarily for an S Corporation. Only certain types of trusts can own S Corporation stock, so this is something that you would need to discuss with a trust attorney that is experienced with asset protection trusts.
How these types of trusts work is complicated and the details are too long for this article. But the bottom line is that by creating the right type of trust, you can make the entire issue of separate vs. marital property irrelevant. This is because, rather than you, the trust would legally own your separate property, including your company.
By the way, the use of a Domestic or Foreign Asset Protection Trust would certainly not preclude you from also having a prenup. However, in that case, the prenup would no longer need to address the issue of your separate property and its appreciation. Instead it could purely focus on how marital property would be divided and who would receive alimony, in what amount, and for how long.
What about a Postnuptial Agreement?
A postnuptial agreement is a contract between husband and wife. It is similar to a prenuptial agreement except that it is entered into and signed after marriage. In order to be valid, a postnup should include the same important elements as a prenup.
It is important to note that a number of states don’t recognize postnuptial agreements. Even in the states that do, they are frequently challenged and often invalidated. In spite of that, having a postnup in place is probably better than having nothing at all.
There are a number of other important divorce-proofing techniques that you should know about (buy-sell and operating agreements, other types of trusts, etc.), but I did not want to make this article any longer than it already is.
If you found the information in this article useful and would like me to write more on this topic (or on anything else), please leave me your comments and feedback.
Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a national divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to “divorce-proof” their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.
All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.
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