We recently discussed the advantages of having a premarital agreement (also known as a “prenup.”) In addition to settling financial matters, it also helps couples realize whether or not their goals are aligned in other facets. Marriage is, among other things, a contract for a long-term partnership. If you’re in business, you would commit to due diligence before signing a contract with a client or vendor. Shouldn’t you also have due diligence when you sign a contract for life?
Premarital Agreement Basics
Texas has adopted the Uniform Premarital Agreement Act, which seeks to make these agreements consistent nationwide. This contract can include a variety of conditions that you and your spouse both agree to, including:
- The rights and obligations of both parties during the marriage
- The distribution of money, property and other acquired assets in the event of divorce
- Conditions that would change each individual’s outcome in the event of a divorce (i.e., illness, infidelity)
While each party should ideally have their own premarital agreement attorney to review the agreement, couples can put just about anything they want into their premarital agreement, as long as it’s legal.
The Business: Yours, Mine Or Ours?
Community property means that anything that’s acquired during the marriage is generally considered to be part of the dividable marital estate, unless it’s declared separate property in the premarital agreement.
Owning a business during the marriage brings an entirely different piece into the community property mix. If you started and ran your business before marriage, it’s generally considered to be separate property, unless:
- Income from the business was used in the marital estate
- Your spouse worked for the business, contributed to its growth and operations (such as an office manager)
- Contributed community property funds
The business would then become community property. This is also the case for a business that the two of you started and worked together to make it successful.
There are three ways to handle this conundrum:
- The divorcing spouses can continue to co-own the business and run it as they did while they were married. This requires that the couple have a good working relationship with a strong bond of trust despite the end of their marriage, but may not be a viable solution for you.
- Sell the business as any other marital asset and divide the profits. The business owner can then take his or her share and re-start another business, if they wanted to.
- The spouse that is the business’ owner can buy out the other spouse’s interest and retain full ownership, he or she has the means and the resources to buy the other half of the business. If not, the cost could be offset by other marital assets, such as the equity in the marital home, retirement accounts, or other securities.
- A “property settlement note,” similar to a promissory note, where the buying spouse pays the selling spouse over time. The note will include an interest rate, a repayment schedule and the principal amount being paid to the selling spouse. Proper valuation of the business becomes a vital part of asset handling, and will require the services of a business appraiser.
A business in the middle of a divorce turns it into a much more complex legal matter than it would if both parties simply had jobs. Deciding on a buyout, note, or co-owning during the premarital agreement stage will make the transition easier.
Protecting The Business
Even a small business like a convenience store or service provider like a computer repair shop can provide all or part of a family’s income. It may be in everyone’s best interest to keep the business intact rather than sell it and divide everything.
When drafting your Fort Worth premarital agreement, consider the business that may one day provide the family’s sole form of income, or may be your former spouse’s only form of employment. Will he or she keep the business as separate property, or will they be forced to sell and divide? Setting the disposition up in your premarital agreement can protect the business and avoid closing it.
Let Fort Worth’s Family Law Attorney Help With Your Premarital agreement
Wendy L. Hart is an experienced premarital agreement attorney helping people throughout Tarrant County who need help in marriage and family matters. Wendy understands the divorce process as well as the difficulties involved in most family law cases. We represent both men and women in Fort Worth family law matters. We’ll make sure you’re treated fairly, and will protect your interests and your children.