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April 2012
SURVIVAL TRAINING: Premarital Agreements and Controlling Your Business’s Density
By Steve Ockerman

Destiny; n. 1. The seemingly inevitable or necessary succession of events. 2. Fate.

 

Density; n. 1. The quality or condition of being dense; a) thickness; or b) slow-witted.

 

George McFly: Lorraine, my density has brought me to you.

Lorraine Baines: What?

George McFly: Oh, what I meant to say was...

Lorraine Baines: Wait a minute, don’t I know you from somewhere?

George McFly: Yes. Yes. I’m George, George McFly. I’m your density. I mean...your destiny.

 

     By some accounts, well over half of married couples will separate and divorce. In doing so, they will split marital assets and debts between them. Is it therefore “destiny” that a judge, knowing little or nothing about the separating couple (one of whom is a business owner) will apply a one-size-fits-all property division statute telling the couple what each will receive, and impacting the family business, the business assets, and even the businesses’ employees?

     It need not be destiny. Or density. The law allows a married or unmarried couple to agree between each other (by contract with no court involvement!) how to divide some or all of the marital property and debt (including businesses or ownership interests in a business) if they separate, and even how one spouse will support the other. A couple can negotiate such a contract while they are arguing, angry and hurt (difficult), or, while they are in love and initially planning their future lives together (much, much easier).

     The second way results in a contract called a Premarital Agreement. Think of it as divorce insurance with only a single premium payment. You may never need to use that policy, but if you do need to invoke it, that agreement will be the best policy of insurance you ever obtained, and no one will ever accuse you of being “dense.”

     Premarital Agreements allow business owners, like our good friend Bob the Businessman, to set the business (or any other asset) apart as his or her “separate property,” including the value of the growth of that business over the years. There may be sound reasons for doing this; many business owners spend significant time (years) laying the foundation for a successful business, sometimes with spectacular results, and some of which are not realized as profits, or increased capital, for years.

     Or a person may work in their parent’s, or other family member’s business with the knowledge that they will one day inherit that business. In the meantime, the current or future business owner may marry, and then later face the prospect of sharing part or all of that business, or the businesses’ value, with a spouse who has very little stake or sweat equity in that business. That can indeed by a bitter pill.

     Worse, Bob the Businessman may have to sell his business, or shares in that business, to others, or even to his ex-spouse, to equalize the division of all of the marital assets and debts, leaving the owner’s children from a previous marriage, or other family members, in the cold. No more family business, or, heaven forbid, a family business run by two ex-spouses with no love lost between them. Unpalatable to say the least.

     You say that you and your spouse are happily married, and that this just will never happen. You may be right, but what about your business partners? Do they intend to marry? A restriction against transfers of ownership interests may or may not be enforceable under North Carolina law. Do you want to run the risk of your partner’s replacement by his future-ex-spouse as your business partner? Heaven forbid.

     Okay, these are nightmare scenarios, for certain—but they are also certainly possible, and more importantly, easily avoidable.

     If you (or your business partner) anticipate marriage, the concept of a Premarital Agreement should be raised with the fiancée as early as possible (raising this subject at the rehearsal dinner is a bad idea).

     Discuss the concept of restrictions on transfer of ownership interests. List your assets and debts—all of them—clearly and logically (houses, cars, accounts, pensions, heirlooms, businesses, mortgages, loans, etc). Organize the company financial documents (balance sheets, tax returns). See your attorney as early as possible, and bring those documents with you. Full disclosure of all assets and debts is an absolute necessity when negotiating Premarital Agreements.

     Loss of a business, business assets, or change in ownership need not be a business owner’s destiny if he or she is contemplating marriage. You or your partners can control the significant risk (or at least one part of the total risk) incurred with the decision to marry. Consider the use a Premarital Agreement, and see your attorney as early as possible. Doing so is the furthest thing from density; it’s an excellent business protection strategy.

 

 

J.D. at Wishart, Norris, Henninger & Pittman, P.A.
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