Divorce is challenging, with significant implications for business owners. Protecting the business is essential. After all, you've poured your heart and soul into building and making it successful. That's especially true in divorce cases involving high net worth, where the stakes are much higher.
A high-asset divorce involves $1,000,000 in liquid and non-liquid assets subject to valuation, negotiation, and division. That figure may include residential or commercial real estate or closely-held businesses. Distribution of business assets and commercial real estate holdings are particularly problematic.
With so much on the line, it's easy to understand why high-net-worth divorces are often complicated. It's also why they're typically more expensive and time-consuming than less-involved divorce proceedings. And that's independent of child support and child custody concerns.
Therefore taking appropriate steps to protect your business is critical. One of those steps is talking with an experienced divorce lawyer, particularly one familiar with divorces involving considerable assets.
Understanding Marital Property Laws
High-net-worth households often have assets split across numerous jurisdictions. For example, it's not uncommon for wealthy couples to have money, land, and investments in different states or countries.
And that can sometimes create problems because divorce is jurisdiction specific. For instance, each state has its own set of divorce laws and procedures, increasing complexity.
State marital property laws can substantially impact business assets. For example, even if you started your business before the marriage, local laws may consider some or all of the value of marital property subject to division. That's why working with a divorce lawyer familiar with the relevant state laws is valuable. They can help you understand the legal requirements in your jurisdiction.
Separating Marital and Business Property in a High Net Worth Divorce
Marital property typically includes assets acquired during the marriage. Conversely, individual non-marital property, like assets owned before the marriage, is generally non-marital. It also considers assets acquired through inheritance or gifts non-marital with an important twist. There may be partial marital value. It's worth noting that personal premarital assets can convert to marital property over time.
So, for example, a business you formed before the marriage may be yours alone, provided the following occurred:
- You and your spouse reached a binding agreement that your spouse will seek no interest in the business
- You prove that the industry has no transferable value like a service company that depends on your involvement
- You confirm the business has not increased in value during the marriage
On the other hand, if you formed your business during the marriage, it is considered marital property. That applies even if your spouse doesn't own any part of the business. Consequently, a spouse can claim a share of the company's value in a divorce.
Your spouse has a claim to your premarital or gifted business that increased in value during the marriage. That's where business valuations become essential (more on that briefly).
Pennsylvania is an Equitable Distribution State
It's critical to distinguish between marital and separate property to protect business assets during divorce.
In equitable distribution states, courts seek to split marital property fairly between spouses. Pennsylvania is one of them. Courts assume assets acquired during the marriage belong to both spouses. And as a result, the judge will divide the business value, though not necessarily equally.
However, in community property states, there is a 50-50 split of property acquired during the marriage. There are nine community property states. Courts generally consider a business started during the marriage to be community property.
Marital agreements can be valuable in avoiding future property concerns. Typically, they include prenuptial or postnuptial agreements.
Marital Agreements Provide a Safeguard in a High-Net-Worth Divorce
Advanced planning can be beneficial for protecting your business interests. For instance, marital agreements can protect your business assets during a high-net-worth divorce. These agreements allow you to define the property stake of each spouse in the business.
A prenuptial or postnuptial agreement can help avoid bitter and lengthy property battles. It defines what qualifies as marital property or marital value. Moreover, it presents how you intend to divide it in a divorce.
For some couples, that could mean a 50/50 split of marital values of assets. But for others, an unequal distribution may be more appropriate.
Even if you didn't create a prenuptial agreement, postnuptial agreements can still provide a safeguard. Like a prenup, they define marital property after the wedding to offer terms for division between spouses if the marriage crumbles.
Other Ways to Reduce the Impact of Divorce on Your Business
As mentioned, property ownership often becomes the sticking point in high-asset divorces. Apart from marital agreements, there are other ways to protect your business in a divorce.
Formal Agreements: You can create ownership shares and buyout agreements based on fair value among the business owners. For instance, exploring options such as a buy-sell agreement or restructuring ownership may avoid accusations of self-dealing.
Business Succession Plan: A business succession plan in a closely held business can provide clarity and ensure the long-term stability of your enterprise. The plan involves actions regardless of a future divorce of an owner like:
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- Identifying potential successors
- Outlining their roles and responsibilities
- Creating a roadmap to transition ownership and control
Collaborative Divorce & Mediation: These approaches promote open communication, helping to preserve relationships. Equally important, they minimize the chances of an adversary relationship. Alternative dispute resolution with the help of a family law attorney works toward mutually beneficial solutions while protecting your business's interests.
Again, you'll want to consult a divorce attorney and tax advisor. They can help create a plan to reduce the disruptions of a divorce.
The Role of Business Valuation in a High-Net-Worth Divorce
Determining the value of your business plays a critical role in high-net-worth divorces. An accurate valuation ensures a fair distribution of the marital value of a business between you and your spouse.
That starts by gathering all relevant financial and business documents. Those documents include tax returns, financial statements, shareholder agreements, and business contracts. A strong Confidentiality Agreement is needed to protect proprietary business information.
Forensic accountants use various methods for determining business valuation, including market, income, and asset approaches.
Market Approach: This method compares your business to similar businesses recently sold. It involves comparing the valuations of comparable companies. Factors include company size, industry, growth potential, and financial performance.
Income Approach: This involves estimating the expected cash flows the business will likely generate. It then discounts them to their present value. The income approach considers factors such as your financial performance history, projected earnings, risk factors, and rate of return.
Asset Approach: The asset approach assesses the value of a business based on the value of its tangible and intangible assets. It subtracts business liabilities from the fair market value of its assets to determine business value.
Tangible assets include equipment, inventory, and property. Intangible assets include intellectual property, brand value, and customer relationships.
Talk to a High Asset Divorce Lawyer
With high-asset divorce cases, working with a divorce lawyer is imperative. Our Montgomery and Bucks County divorce lawyers can work with you to safeguard the business you worked so hard to create. We have law offices in Norristown and Doylestown. Call us to help preserve the company you worked hard to build.
Currently a rising 2L at Charles Widger School of Law at Villanova University, Li Shao has proven herself as an exceptional student of law and valuable asset to multiple High Swartz practice areas. In the coming fall, she will take on the role of Treasurer at Villanova's Asian Pacific American Law Students Association (APALSA), where she aims to promote cultural awareness and advocate for the interests of the Asian American community within the legal sphere.