Business owners are often floored when their ownership stakes in their companies are put in jeopardy by their divorces. They worked hard over the years to build their businesses, both in size and revenue. It’s not uncommon for entrepreneurs to spend the several years working long hours for little or no reward. They are driven by the belief (and hope) that their companies will one day sustain them, their families, and with time, their employees’ families.
Then, divorce happens. These entrepreneurs who have sacrificed a substantial part of their lives to nurture their companies watch as those companies are suddenly put at risk. Invariably, they wonder what they might have done to prevent it.
If you’re a business owner, you can take steps to prevent your company from falling into the hands of your spouse in a divorce. We’ll describe them below. Ideally, the earlier you can take the following measures, the better.
Protecting Your Company With A Trust
One way to shelter your company is to place it in a trust. A trust houses assets that are managed by a trustee for the benefit of a person or organization (i.e. the beneficiary). The trustee is appointed to manage the trust. Called a Domestic Asset Protection Trust (DAPT), it can, in many ways, serve as an alternative to a prenuptial agreement.
Typically, an individual would establish a DAPT before getting married, and place his or her assets in it. The terms of the trust can be written in any way that meets the individual’s goals. This is not to say that all assets, including businesses, are protected in every divorce case. State laws vary, and judges sometimes ignore trusts when deciding how to split assets between divorcing spouses.
That being said, having your company in a trust provides much more protection than not having it in the trust.
Will A Premarital Agreement Protect Your Business?
Since a prenuptial agreement is one of the most common strategies couples use to protect their assets from divorce, let’s spend a moment discussing its pros and cons.
A prenup can be a very effective way to not only shield your assets during divorce, but to reduce the level of conflict certain assets might otherwise generate. And of course, the less conflict there is between you and your soon-to-be ex-spouse, the smoother and less costly the settlement negotiations.
Also, a premarital agreement can be used to specify certain terms of a divorce. Although few couples plan to separate when they get married, many understand that a large percentage of couples do so. A prenup can help them plan for that potential outcome.
One of the downsides to using a prenuptial agreement is that they cast a somber shadow over a marriage. It is a constant reminder that divorce can occur, regardless of how close the spouses feel toward one another. In some cases, it plants the seeds of resentment.
Another drawback is that prenups are established based on current circumstances and assumptions about the future. Circumstances change. That makes the future impossible to predict. Thus, any assumptions made about it are fallible.
Also worth considering, a premarital agreement is not always airtight. Divorce court judges oftentimes ignore certain aspects of prenups they feel to be inappropriate or unfair.
You can definitely use a prenup to shield your business. In most cases, that alone will suffice in sheltering your company in the event you divorce. But be aware that it’s not foolproof.
Asking Your Spouse To Sign A Postnup
Let’s suppose you neglected to establish a trust or a premarital agreement for your business. Can you still protect your company? The answer is maybe.
One option is to ask your spouse to sign a postnuptial agreement. As its name implies, it’s a contract agreed upon by both spouses after getting married. The downside to using a postnup is that it is even less reliable than a prenup. Divorce court judges often hold them in low regard. One reason is because many judges dislike the idea of one spouse giving up his or her rights. Such rights do not exist prior to a marriage, which makes a prenup more reliable.
The good news is that there are effective ways to shield your business from a divorce. Unfortunately, with the exception of a postnuptial agreement, they must be initiated prior to getting married. The key, of course, is planning upfront. Insulate your business from the moment you launch it. Additionally, if you and your spouse are thinking about separating, it is important to consult an experienced divorce attorney about your options.