Talking about a prenup before getting married is a complete buzz kill. I know. It’s like talking about life insurance at a baptism, or disability insurance at your college graduation.
You’re in love. You know in your heart that you and your spouse will be holding hands and gazing into each other’s eyes for decades to come. Divorce isn’t going to happen. Love will prevail over every challenge.
Unfortunately, I’m a divorce lawyer and tend to be a wet blanket who sours the moment with thoughts of “what if”, or “just in case”. I am the annoying conscience awaking you from your dream of optimism to show you how to protect yourself when the poop hits the fan.
This annoying conscience has one question for you. If you can answer yes, without a hesitation, then you don’t need to finish reading this article. You can get back your train of eternal bliss, and optimism.
Here’s the question. Would you go into business with your brother-in-law without a written agreement?
You know, the brother-in-law who always has a business idea for you, but who has neither money nor business sense. Would you go into business with him with this guy with no written document detailing how the business will be valued and divided if either of you pass away, or if either of you decides to wrap up the partnership?
Probably not. Even if you would, can you see the potential problem? Marriage is similar in that you now have a business partner who owns half of everything.
When you marry, you and your spouse are now business partners in a business called Community Property, Inc. You are now sharing in all assets or debts earned or incurred during the marriage. Your wages, your investments, the homes, the cars, and the business are all presumed to be community property.
It does not matter whose name in on the property. It does not matter whose name in on the bank account, or on the business. All of it, with a few exceptions, is community property.
Community property is divided equally (or equitably in some states) between the spouses if either spouse asks for a divorce. If a divorce is requested by either spouse, the court will divide the assets equally.
You might think dividing them equally is fine. But, what if your spouse is causing the divorce. What if he or she has been having an affair? What if you can’t afford to buy-out your spouse from the house or abusiness?
It doesn’t matter why the divorce is requested. Your spouse could be the one who had the affair, or who has been wasting assets, or who is verbally abusive. Most states ignore fault. The reason for the divorce, or whose fault it doesn’t change how the courts divide the assets and debts during a divorce.
Your spouse’s infidelity or abusive behavior won’t prevent the court from dividing your pension and your assets evenly. Even worse the court may award you to pay alimony to your cheating, abusive spouse.
What? That’s crazy! We know. That’s why we recommend prenups.
Who Should Consider a Prenup?
Most couples who have assets, or any bonafide prospects for earning assets, or earning good income should consider a prenup. A business owner is probably our number one candidate for a prenup. Especially a business owner with partners. We have seen dozens of businesses crash and burn because a divorce causes the business to be valued and divided immediately.
Not too many businesses can instantly buy out a partner. But divorce does exactly that. Your spouse is a silent partner who is entitled to half the value of the business. If your spouse files for divorce, then half the value of the business is due, almost immediately.
Prenups can evolve. A good prenup can evolve and change as your life changes. You can plan for events like staying home to raise children, leaving the workforce, early retirement, and infidelity.
A prenup isn’t designed to punish the other person and leave them with nothing after a divorce. Prenups are about peace of mind.The goal is to protect the assets the spouses accumulate together and to pre-determine how those assets would be fairly divided in the event of a divorce.
What if you are already married?
As you are reading this you might be thinking; “Yes, I agree with this discussion. But, I’m already married.”
You are in luck. An agreement, called a postnup can be used for couples who are already married. This agreement is similar to a prenuptial agreement but is signed after you are married.
Again, business owners are prime candidates for a postnup. Your spouse owns 50% of the business. It doesn’t matter they are not listed as an officer or director. It doesn’t matter if you are the qualified or licensed employee. It doesn’t matter if they don’t even know what you do at your business. They are entitled to half.
The following are some common rants heard in echoing through divorce court:“Only my name is on the corporation”, “I alone have been running this business for 20 years,” “I am the one who works every day until 8 at night, and Saturdays and holidays”, “She has never had to work, or deal with a customer.”
None of these rants (regardless of how true they are) changes the law.The truth is the court views all the time, energy, and effort put into building a business as community property. This means the value of the business is divided in equally. This is a serious threat to your business and happens every day.
You probably think that there is no way you are having a conversation about divorce. No way will your spouse agree to a postnup. The conversation is easier than you think. Especially, when you explain the advantages to them; protects against debts, assurances of future income.
A postnup can protect your spouse against debts.
A credit of the business can be a potential problem to the community.A creditor who is entitled to recover a debt generally “steps into the shoes” of the debtor, or in other words, has the same rights as the debtor.
This means the creditor “steps into the shoes” of the spouse who originally incurred the debt, and has the right to satisfy the debt using their interest in the community property. Thus, the creditor can use community property to satisfy the debt of one spouse. Yikes!
With a postnup, a couple may agree in writing that certain debts, or property is the separate property of one spouse, protecting the community. Separate property of a spouse is a typically not reachable by creditors, if an agreement is signed before the debt occurred.
By agreeing to make some assets separate assets of the partner who is not in debt, rather than community property, the couple may be able to prevent creditors from being able to “go after” those assets.
Easy valuation of the business.
Courts are horrible at business valuation. Judges are lawyers, and lawyers are not usually good at math. It’s one of the reasons we went to law school.
Valuing a business is all sorts of talk about gross income, net income, multipliers, and percentiles. Judges may get the numbers wrong, and now you and your spouse are stuck. A postnup allows you to choose how to value the business.
An agreement detailing how the business will be valued and how the buy-out can be paid alleviates all of these issues.
We know prenups and postnups can be challenging subjects to discuss. Hopefully this article gives you enough reasons why to approach the subject.