When you own a business, divorce can impact not only personal assets, but business assets and ownership as well. Even if you owned the business prior to the marriage, the fate of the enterprise can be at risk – unless, that is, you “divorce-proof” your business. Fortunately, for divorce involving a family business, there are several legal ways to protect your interests. Timing can be critical, but in general, these measures include establishing prenuptial or early postnuptial agreements, creating a “Buy/Sell Agreement,” or setting up an Irrevocable Trust.
Prenuptial Agreements / Early Postnuptial Agreements
You’ve probably heard of a prenuptial agreement, but did you know that postnuptial agreements are sometimes used to determine asset division before a divorce? It’s true, but let’s start the with “prenup”:
A prenuptial agreement is a contract between two people prior to their marriage. It can be simple and short, or highly detailed and lengthy. The prenup sets forth an agreement regarding assets each party brings into the relationship and how those assets would be divided in the event of a divorce. In Indiana, the law governing prenuptial agreements is called the Uniform Premarital Agreement Act.
According to the law, here are the matters a prenuptial agreement can include:
- The rights and obligations of each of the parties in any property of either or both of them whenever and wherever acquired or located
- The right to buy, sell, use, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of, or otherwise manage and control property
- The disposition of property upon legal separation, dissolution of marriage, death, or the occurrence or nonoccurrence of any other event
- The modification or elimination of spousal maintenance
- The making of a will, a trust, or other arrangement to carry out the provisions of the agreement
- The ownership rights in and disposition of a death benefit from a life insurance policy
- The choice of law governing the construction of the agreement
- Any other matter not in violation of public policy or a statute imposing a criminal penalty, including the personal rights and obligations of the parties
Without a pre-or postnuptial agreement in place, Indiana courts typically adopt the baseline standard of a 50/50 division of marital assets as being just and reasonable. By law, those assets include all assets, regardless of when acquired (before or during the marriage).
With a properly drafted prenuptial agreement in place, however, individuals may protect assets they bring into the marriage. They can also protect future assets such as inheritance. For each party to understand what they will give up by entering into the prenuptial agreement, it must include schedules approximating each party’s net worth. The law makes it clear, however, that “a premarital agreement may not adversely affect the right of a child to support.”
A prenup becomes effective at the moment of the marriage. During a divorce, the agreement is presented to the court to be enforced within the divorce proceedings.
A postnuptial agreement is essentially the same in scope as a prenuptial agreement. The main difference lies in the timing. A “postnup” is drafted during the marriage and takes effect upon signing or as otherwise specified in the document. While postnuptial agreements are NOT covered in the Uniform Premarital Agreement Act, they are recognized under Indiana law.
An “early” postnuptial agreement may help clarify marital asset rights and restrictions that would have been included in a prenup. A postnup can also be used to modify terms set forth in a prenuptial agreement. Often, a postnuptial agreement is drawn up when a marriage is headed toward divorce, but prior to a legal separation. It may detail the assets to be assigned to each spouse, as well as alimony and spousal maintenance expectations. Child support recommendations to the court may be included, too, although the court may deviate as appropriate under law.
When the parties can agree to the terms of a postnup, it can simplify divorce proceedings in what would otherwise be a bitterly contested case. For couples contemplating divorce involving a family business, both a prenuptial agreement and a postnuptial agreement can be valuable to protect business assets, clarify any continuing legal entanglement regarding the business, and provide guidance for divestiture from the business.
Create a Buy-Sell Agreement
A “buy-sell agreement” is another legal instrument that can be used when business assets are entangled in a divorce. Think of a buy-sell agreement as a contingency plan that anticipates the future ownership and/or leadership of a company if one partner leaves. The Buy-Sell Agreement can clarify what happens concerning the business after a triggering event – in this case, divorce.
Because a business may become a marital asset upon entering the marriage, even if one spouse had no prior interest in the business, a prenup or postnup might not be sufficient to cover necessary aspects of the post-divorce transfer of the business. It is important, therefore, for a buy-sell agreement to be drafted as soon as possible after the business is formed or its ownership structure expanded to more than one party (e.g., due to marriage).
Also commonly called a “buyout agreement,” buy-sell agreements may, in fact, have little bearing on an overall sale of the business to a third party. Rather, they generally cover only buyout transactions between the business owners – in this case, the divorcing spouses. Of particular importance in a business divorce situation is to include provisions prescribing the price to be paid by one spouse to the other for his or her ownership interest in the company.
A buy-sell agreement can also be useful as an instrument that requires a spouse who obtains an interest in the business by way of a divorce ruling to sell that interest back to the company or other co-owners (including the former spouse) in equitable exchange for cash or other property.
Create an Irrevocable Trust
Another potential method of divorce-proofing a business is to establish an “Irrevocable Trust” concerning the business. A legally sound irrevocable trust, especially one set up prior to marriage, can help shield assets from the divorced spouse by keeping business assets separate from marital assets subject to a presumptive 50/50 split. This is because the trust – not a divorcing spouse – is the legal owner of the business assets.
Establishing or transferring assets to an irrevocable trust just prior to filing for divorce, however, could give the appearance of illegally dissipating marital assets to keep them out of reach of the other spouse.
When setting up an irrevocable trust, keep in mind that naming a spouse as beneficiary cannot be undone by a subsequent divorce decree. Remember that this type of trust is irrevocable. However, it is possible and advisable when initially drafting the irrevocable trust to name a contingent beneficiary in the event of divorce.
Key Takeaways:
Can you divorce-proof your business and protect your business in the process? It can be complicated, but here are some important considerations:
- A prenuptial agreement is a contract between two people before marriage. It details assets each party brings into the relationship and how those assets would be divided in the event of a divorce.
- The Indiana law governing prenuptial agreements is called the Uniform Premarital Agreement Act
- A carefully drafted prenuptial agreement can protect future assets such as inheritance but may not adversely affect the right of a child to support
- A postnuptial agreement is essentially the same as a prenuptial agreement but is drafted during the marriage
- An “early” postnuptial agreement may help clarify marital asset rights and restrictions that would have been included in a prenup; it can also be used to modify terms in a prenuptial agreement
- Both a prenuptial agreement and a postnuptial agreement can be valuable to protect business assets
- A “buy-sell agreement,” also commonly called a “buyout agreement,” is a contingency plan that can be used when business assets are entangled in a divorce.
- A buy-sell agreement generally covers only buyout transactions between the business owners – in this case, the divorcing spouses.
- A legally sound irrevocable trust, especially one set up prior to marriage, can help shield assets from the divorced spouse by keeping business assets separate from marital assets subject to a presumptive 50/50 split
- Establishing or transferring assets to an irrevocable trust just prior to filing for divorce could give the appearance of illegally dissipating marital assets
At Dixon & Moseley, P.C., our business divorce attorneys serve our clients by drawing on decades of collective family law and business divorce experience, including divorce involving a family business. To learn more, contact us today at (317) 972-8000.
We believe that being an educated legal consumer can help you make the most of the legal experience in meeting your legal objectives. This blog post, for example, provides general educational material regarding how to divorce-proof your business. This information is presented by attorneys at Dixon & Moseley, P.C. who practice throughout the State of Indiana. It is not a solicitation, nor is it intended to provide specific legal advice. It is an advertisement. Information contained herein is subject to change.