There are few good divorces. Most occupy a range from the not too bad to the absolutely horrific. One of the worst things that can happen to a business owner is to have the ownership interests of a business become the subject of a messy divorce. But with a little advance planning, it's possible to avoid the worst.
The Legal Framework
Everyone residing in the United States lives in either a separate property state or a community property state. If you live in a separate property state, the assets that each spouse owns are generally governed by the title. If the share certificate for a business says that Mary Smith is the shareholder, then she--and she alone--is the shareholder. But even in most separate property states, everything gets thrown into a hat when the spouses divorce.
The division of property in a community property state is usually more clear-cut. Titles generally don't matter. If a business was acquired during the marriage, it's irrelevant that the stock certificate (or the partnership interest) is titled in the name of "John Smith." If acquired during the marriage, it's owned 50 percent by each spouse.
If a divorcing spouse owns an interest in a business, the other spouse usually realizes that the last thing that the business-owner spouse wants is to have the other spouse be a co-owner of the business after the divorce, especially if the business-owner spouse has other partners or shareholders in the business. At that point, a minor form of extortion takes place. It generally goes something like this: "You own an interest in a business worth $1 million. We have a home worth $700,000, securities worth $500,000 and retirement plans worth another $300,000. I'll waive any claim to the business if you give me the house, the stocks and all the cash. If not, I want my share of the business. I'm sure your partners won't mind having me around for the foreseeable future."
Let's assume that Mary, Sue and Janet each own a third of the stock of Quality Printers Inc, a commercial printing business. The last thing they want is for the shares of Quality Printers to be tied up in a divorce. If Mary gets involved in a divorce, her shares might be divided by a judge in a separate property state or in a community property state if the shares were acquired during the marriage.
The solution is a provision that simply says that no interest in the business may be transferred in the event of a divorce. To give the agreement teeth, it should provide that in the event that one party files a divorce petition, or has a petition pending against him or her, one or more of the other shareholders or partners should have the option to acquire the divorcing person's shares at a predetermined price. In the case of Mary, Sue and Janet, no divorce court judge could award any interests in Quality Printers because there would be no interests to award. This would prevent the extortion that results from the possibility that a divorce court judge could award an interest in a business to a divorcing spouse.
But let's assume that Mary is the only shareholder of Quality Printers. For those who really think ahead, nothing beats a pre-nuptial agreement. A pre-nuptial agreement between Mary and her husband could state that in a divorce Mary will get the business, and her husband will receive assets having an equivalent fair market value. Each spouse will get a fair share, but Mary will not have to bargain to save her business in the divorce.
For couples already married, it's not too late. Mary and her husband could each receive half the stock in Quality Printers now, subject to a contract giving Mary the first option to acquire her husband's 50 percent at an appraised value. Once again, her husband would receive fair value, and Mary would have the assurance the she wouldn't be extorted out of more than the business is worth.
Planning for a divorce follows the same rules for all other asset protection planning: Almost anything is possible, provided you plan early.
Robert F. Klueger (J.D.; LL.M.), attorney at law for Klueger & Stein, LLP, is the author of Asset Protection , available from Entrepreneur Press . Robert has been practicing law since 1974 and has represented clients against various taxing authorities in all courts, including the U.S. Supreme Court. He is the author of several books and articles on the topics of tax planning and asset protection. His website is www.maximumassetprotection.com .