What Happens If Couple Divorce and Own Business?

What Happens If Couple Divorce and Own Business?

High-profile divorce cases like the Bezos or the Gates should cause many people to consider how their business and marital assets are tied together. You need to have plans in place from the beginning. No one thinks their partnership will end. However, it’s necessary to have a plan in place, just in case.

The Dallas Business Journal’s recent article entitled “Does your business need a prenup?” explains that there are three typical outcomes when married couples working as business partners decide to end their relationship:

  • One individual buys out the other partner’s shares and continues running the business;
  • The partners sell the business and divide the proceeds; or
  • The couple continues working as partners after the divorce.

Safeguards can be put in place on the first day of the relationship to protect your personal and business assets in the event of a divorce. A way to do this is through a prenuptial agreement, which states what will happen if a split happens. A pre-nup should:

  • Establish the value of the business as of the date of marriage or the date the agreement is signed;
  • Detail a course of action with the appreciation or depreciation of the business from the date of the marriage;
  • Say how business value will be measured; and
  • Specify the allocation of business interests to be awarded to each spouse in the event of a divorce.

In addition to a prenuptial agreement, any privately held company should have a shareholder agreement (or “operating agreement” for non-corporations). The shareholder agreement is one of the most important documents owners of a closely held business will ever sign.

It controls the transfer of ownership when certain events occur, like divorce and states the following:

  • Which party will buy out the other’s shares of the company if a buyout occurs; or
  • If either party has the right to sell, how the ownership interest will be valued and the terms and conditions concerning the acquisition.

Because there are some tax implications involved in a buyout, it’s best to bring in experienced estate planning attorney for this process. In addition, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies.

Reference: Dallas Business Journal (Aug. 1, 2022) “Does your business need a prenup?”

What If Your Spouse Refuses Estate Planning?

What If Your Spouse Refuses Estate Planning?

Blended families are quite common in the U.S.

A married couple may have a small child—but one spouse may also have children from a first marriage. The spouse may be concerned about assets and protecting those older children in estate planning.

A spouse on a second or third marriage may insist on a prenup with the other spouse relinquishing any rights. As compensation, many spouses will purchase life insurance with the other spouse as beneficiary. However, what if this plan never comes to fruition?

Nj.com’s recent article entitled “My husband won’t make an estate plan. What can I do?” says that many spouses want to provide for children from a first marriage. However, second marriages can get messy when it comes to estate plans.

Even if the spouse doesn’t help, there are steps a recently married individual can take. One thing is having estate documents prepared by an experienced wills, trusts and estate attorney.

Another is to secure life insurance policies that designate the child or children of the second marriage as beneficiary and naming their mother or father as trustee.

A life insurance policy is a non-probate asset; as such, a beneficiary can receive the proceeds from the policy more quickly than if they had to wait for your estate to be settled through a probate court.

A person in this situation should speak with an experienced estate planning attorney about a will and the life insurance.

A will provides direction for what happens after a person dies and can distribute his or her property to their loved ones, name an executor to handle their affairs, name a guardian for any minor children and specifically state a person’s wishes for family and friends.

It may also be beneficial to look into a trust or other estate planning tools with an attorney to distribute the assets. Exploring these options early in the child’s life in the above example may make a parent feel more prepared for the future, and more secure with the circumstances of the second marriage.

If the spouse tells the other that he or she has an appointment with an estate planning attorney, they just might decide to attend.

Reference: nj.com (March 10, 2022) “My husband won’t make an estate plan. What can I do?”

What Should I Know about Estate Planning before ‘I Do’?

What Should I Know about Estate Planning before ‘I Do’?

Romance is in the air. Spring is the time for marriages, and with America coming out of the pandemic, wedding calendars will be filled.

AZ Big Media’s recent article entitled “5 estate planning tips for newlyweds” gives those ready to walk down the aisle a few things to consider.

  1. Prenuptial Agreement. Commonly referred to as a prenup, this is a written contract that you and your spouse enter into before getting legally married. It provides details on what happens to finances and assets during your marriage and, of course, in the event of divorce. A prenup is particularly important if one of the spouses already has significant assets and earnings and wishes to protect them in the event of divorce or death.
  2. Review you restate plan. Even if you come into a marriage with an existing plan, it’s out of date as soon as you’re wed.
  3. Update your beneficiary designations. Much of an individual’s estate plan takes place by beneficiary designations. Decide if you want your future spouse to be a beneficiary of life insurance, IRAs, or other pay on death accounts.
  4. Consider real estate. A married couple frequently opts to live in the residence of one of the spouses. This should be covered in the prenup. However, in a greater picture, decide in the event of the death of the owner, if you’d want this real estate to pass to the survivor, or would you want the survivor simply to have the right to live in the property for a specified period of time.
  5. Life insurance. You want to be sure that one spouse is taken care of in the event of your death. A married couple often relies on the incomes of both spouses, but death will wreck that plan. Think about life insurance as a substitute for a spouse’s earning capacity.

If you are soon-to-be-married or recently married and want to discuss it with an expert, make an appointment with a skilled estate planning attorney.

Reference:  AZ Big Media (March 23, 2022) “5 estate planning tips for newlyweds”

Does a Prenup Make Sense?

Does a Prenup Make Sense?

Take the time to think about your financial plans before you get married to help set you on the right path. chase.com’s recent article entitled “How to prepare your finances for marriage” explains that a prenuptial agreement sets out each prospective spouse’s rights and responsibilities, if one spouse dies or the couple gets divorced.

This is a guide for dividing and distributing assets. A prenuptial agreement can also be a valuable tool for planning since it will take priority over presumptions about what’s deemed community property, separate property, and marital property. A prenup can also prevent one spouse from being responsible for premarital debts of the other in the event of death or divorce.

A prenup is used frequently when one spouse or one spouse’s family is significantly wealthier than the other; or when one family owns a business and wants to make sure only family members can own and manage it.

Negotiate a prenuptial agreement early. If you know that you want to have your fiancé to sign a prenuptial agreement, do it ASAP because some courts have found a prenup invalid because it was entered into under duress and signed and negotiated right before the wedding.

Examine employee benefits. Make certain that you understand know how marriage will impact your employee benefits, especially if you and your spouse are working. See what would be less expensive, and if one offers significantly better coverage. Marriage almost always is a life event that permits you to modify your benefits elections outside of annual open enrollment.

Review beneficiary designations and estate planning documents. It’s common for young people prior to marriage to name their parents or siblings as beneficiary of accounts, like IRAs, 401(k)s, life insurance and transfer on death (TOD) and payable on death (POD) accounts. Review these designations and accounts and, if needed, change your beneficiary to your new spouse after the wedding. You should also be sure you to update your estate planning documents, including wills, health care designations, powers of attorneys and others, to reflect your new situation.

Communication is critical. Start your marriage with strong communication to help you better face future challenges together.

Reference: chase.com (May 25, 2021) “How to prepare your finances for marriage”

What Is Family Business Succession Planning?

What Is Family Business Succession Planning?

Many family-owned businesses have had to scramble to maintain ownership, when owners or heirs were struck by COVID-19. Lacking a succession plan may have led to disastrous results, or at best, less than optimal corporate structures and large tax bills. This difficult lesson is a wake-up call, says the article “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’” from Bloomberg Tax.

Another factor putting family-owned businesses at risk is divorce. Contemplating the best way to transfer ownership to the next generation requires a candid examination of family dynamics and acknowledgment of outsiders (i.e., in-laws) and the possibility of divorce.

Before documents can be created, a number of issues need to be discussed:

Transfer timing. When will the ownership of the business transfer to the next generation? There are some who use life-events as prompts: births, marriages and/or the death of the owners.

How will the transfer take place? Corporate structures and estate planning tools provide many options limited only by the tax liabilities and wishes of the family. Be wary, since each decision for the structure may have unintended consequences. Short and long-term strategic planning is needed.

To whom will the business be transferred? Who will receive an ownership interest and what will be the rights of ownership? Will there be different levels of ownership, and will those levels depend upon the level of activity in the business? Will percentages be used, or shares, or another form?

In drafting a succession plan, it is wise to assume that the future owners will either marry or divorce—perhaps multiple times. The succession plan should address these issues to prevent an ex-spouse from becoming a shareholder, whose interest in the business needs to be bought out.

The operating agreement/partnership agreement should require all future owners to enter into a prenuptial agreement before marriage specifically excluding their interest in the family business from being distributed, valued, or deemed marital property subject to distribution, if there is a divorce.

An owner may even exact a penalty for a subsequent owner who fails to enter into a prenup prior to a marriage. The same corporate document should specifically bar an owner’s spouse from receiving an ownership interest under any circumstance.

A prenup is intended to remove the future value of the owner’s interest from the marital asset pool. This typically requires the owner to buy-out the future spouse’s legal claim to future value. This could be a costly issue, since the value of the future ownership interest cannot be predicted at the time of the marriage.

Many different strategies can be used to develop a succession plan that ideally works alongside the business owner’s estate plan. These are used to ensure that the business remains in the family and the family interests are protected.

Reference: Bloomberg Tax (April 5,2021) “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’”