When the Partners Separate: How to Keep the Business in the Divorce
WHEN PARTNERS SEPARATE: HOW TO KEEP THE BUSINESS IN THE DIVORCE
by: Ann Fischer
When people get married, typically they do not anticipate getting divorced or wonder how they could keep the business if they ever got divorced. Accordingly, couples typically do not plan for it.
When a couple dissolves their marriage, they enter a court-approved settlement agreement to divide assets. A court recognizes two types of property between the couple: 1) marital property; and 2) non-marital property. If a prenuptial agreement was entered into prior to the marriage, then assets have been pre-determined as marital or non-marital property. All assets, both marital and non-marital, fall within one or more of three “estates” 1) the husband’s estate; 2) the wife’s estate or 3) the marital estate.
The Illinois statute 750 ILCS 5/503 provides specifics regarding property distribution upon divorce. One property issue that can become legally complex is the division of a family business upon dissolution of marriage, especially when each spouse wants to keep the business in the divorce.
Here are three examples of situations and how they are typically resolved by the courts.
A couple divorces when one spouse has contributed to the growth of the other spouse’s pre-existing business.
When divorcing spouses have an interest in a family business, that interest is considered marital property. Each spouse is therefore entitled to be compensated for interest. In general, the courts prefer not to award the unrelated spouse an interest in the family business of the related spouse, due to the potential resulting conflicts. As such, the non-related spouse’s interest is valued and compensated for through other marital assets.
The valuation of the business, especially a closely held business, is the biggest challenge. Once determined, it is typical to compensate the non-interested spouse with a marital asset other than business assets, i.e., a 401K plan of similar value. If there are no other assets to compensate the non-related spouse, the related spouse may need to pay them the appropriate compensation over a period of time. As you can imagine, such an arrangement is not ideal since it will delay the finality of the relationship, which is typically the goal of the dissolution proceedings.
Factors that are considered when determining the non-related spouse’s interest in a family business include years of marriage and type of contribution made by the non-related spouse, such as the employment of the non-related spouse within the family business. As these are not necessarily defined considerations, the process can take a significant amount of time to clarify them.
A couple opens a business together and then divorces.
In this situation, typically the couple has set up the business as a partnership. In the process, arrangements should be made in the event of the dissolution of the business partnership, which would hold true whether or not the partners are married. However, when married business partners divorce, one spouse may “buy-out” the other, as indicated in a partnership agreement. Unfortunately, often businesses are set up without addressing buy-out and dissolution of marriage concerns, thus leaving the issue back in the hands of the court.
A couple has a prenuptial or postnuptial agreement concerning the business.
It is advantageous for married business partners to set up a pre-or postnuptial agreement that addresses the business assets. Pre or postnuptial arrangements makes an eventual divorce process much easier, and in the case of a couples who want to keep the business in the divorce, it streamlines the process by predetermining the division of business assets upon separation. If a couple’s business grows rapidly during the course of the marriage, a postnuptial agreement is also an excellent tool for protecting the changing interests of both spouses.
Discussing the unthinkable.
While both pre-and postnuptial agreements can be an awkward subject for engaged or married couples to address, they can be exceptionally helpful. According to a survey by Brandon Gaille, the top three reasons to have a prenuptial agreement are to 1) provide protection of separate property; 2) determine alimony/spousal maintenance; and 3) division of property.
The prenuptial agreement is on the rise. The survey revealed that 63 percent of divorce attorneys say they have seen an increase in prenuptial agreements in the last three years. It’s also interesting to note that 46 percent of divorce attorneys noted a dramatic increase in the number of women, rather than men, initiating the requests for a prenuptial agreement.
At Gardi & Haught, we encourage any couples who want to keep the business in the divorce consider a pre or postnuptial agreement. The process can take as little as 2-3 weeks and the investment can save many times more in legal fees should a couple divorce later. If you have questions regarding prenuptial or postnuptial agreements, please don’t hesitate to contact us at 847-944-9400 or fill out the free case evaluation form below.