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Preparing for a Divorce

Dear Advisor:

Unfortunately, our family business is confronted with a divorce. As it relates to family ownership, what do we do now?


Under ideal conditions, you signed a prenuptial agreement so that your soon-to-be-ex has no claims on your stake in the business. Since so few in family businesses actually sign these agreements, it’s important to have some type of plan that will protect your legacy from being dismantled in case of a divorce. This is crucial because in some cases a divorce may result in an in-law taking half the spouse’s stock and cripple a family business or put it out of business.

If you did not sign a prenuptial, own company shares and a divorce is imminent, you will first need to consult competent legal counsel to determine whether your spouse may have some legal claim against your stock. Different states’ laws address this issue differently. It is often difficult to quantify what a divorce court may do with respect to awarding custody of the business “baby.” If there is a risk that partial ownership may pass to your spouse, your next steps will be to have the business valued by an independent expert to obtain a current worth, total your other assets and work out an equitable arrangement that will not include business stock. That may mean that you’ll have to give a disproportionately large share of other wealth to your ex, or possibly to pay more alimony.

You probably want to keep ownership within bloodlines so that you and your immediate family have full control over all business decisions. Plus, if you aren’t able to be “partners” in matrimony, you most likely won’t make good business partners. Some families buy out an ex’s stock over a number of years so that the fleeing dollars don’t pose a drag on the day-to-day goings-on of the business or so you don’t have to consider selling the business to pay the divorcing spouse.

Several high-profile divorces of CEO’s of publicly held companies in recent years have created concern among family business owners as well because of the huge sums that the ex’s have demanded from the courts and in many cases received in trials or in out-of-court settlements. In cases where an owner is very wealthy, the odds are against the ex getting half the net worth since most people don’t need so much to live on according to the courts. With a lesser net worth, the ex could walk away with a 50/50 split of assets and/or perhaps an alimony claim against future earnings. In community property states, the ex could take half of the wealth regardless of magnitude, unless steps were taken prior to and during the marriage to maintain the separateness of property. In some cases, fairly simple bookkeeping and asset-separation strategies can help maintain ownership in the “right” hands.

If you did not sign a prenuptial agreement, there may be other options, although what steps you take while the marriage is “happy” often are critical. Families should create a shareholder’s agreement, which states that nonfamily members who hold shares agree to sell them back to other family members or back to the business in case of a divorce. The agreement can set forth the terms for the purchase to reduce the cash-flow strain on the company and other family members. Senior generation owners can consider making stock gifts in trust, rather than outright, with properly written trust agreements to shift stock to the divorcing spouses’ mutual children, rather than have it pass to the ex. All these options should be bandied about with your attorney.

Even without a prenuptial agreement, you can take steps to safeguard your business in case someone in the family divorces. Without question, a shareholder’s agreement is critical to assure that any stock that finds its way outside the bloodlines can at least be retrieved under reasonable terms. Trusts may be used to protect stock from donees’ creditors and ex-spouses. Like many issues, advance planning with competent advisors is critical to reducing the risk of the jewels falling into the wrong hands or at least to help make sure that they can be returned to the rightful owner under reasonable terms.

The Advisor

Reprinted with permission from the forthcoming book Family Business Answer Book: Arthur Andersen Tackles 101 of Your Toughest Challenges, by Barbara Buchholz, Margaret Crane, Ross Nager. Prentice Hall, copyright 1999 Arthur Andersen LLP. Prentice-Hall, Paramus, NJ. For information, call 1-800-288-4745.

 

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