Special Considerations When Entrepreneurs Divorce

As many studies have shown, couples in which one spouse is an entrepreneur have a high rate of divorce. Whether it’s because the business encompasses much of entrepreneurs’ time, or because the non-entrepreneur spouse feels neglected, divorce is common.

While divorce is already a complicated process, generally, entrepreneurs have a special set of considerations when divorcing. As such, it is important to consult your family law attorney regarding the special financial concerns you may assume as an entrepreneur or the spouse of an entrepreneur.

For starters, as Massachusetts looks at property division in divorce under an equitable distribution standard, marital property and separate property are equally considered. Regardless of whether a business was started before a marriage, during a marriage, or even with an ex-spouse, it is important to know what rights you have in your company, and what your company is worth.

When divorcing, family law attorneys will ask their client to bring forth all assets, so that property can be distributed equitably. For entrepreneurs, your business may be your biggest asset. If this is the case, there is a good chance your former spouse would like a portion of your business during settlement. When the divorce proceedings begin, it is important to know exactly what your business is worth. While estimating this number is helpful, disclosing the actual figure can help divorce proceedings run more smoothly.

Before having your business appraised, it is in your best interest to have a third party, who is not connected with you or the business to perform this type of unbiased work. If you are being represented by a lawyer, ask your family law attorney if they know of any accountants or business appraisers who could assist in these efforts. An appraiser will be able to effectively run through all of your invoices, books, company property, and other assets in order to arrive at the correct figure for the worth of your business.

If you are the ex-spouse of an entrepreneur, it is important that you make certain your business owner ex-spouse is not concealing assets, hiding contracts, or bringing forth a fraudulent appraisal. Is it possible that your ex could be swindling you out of hundreds, thousands, or even millions of dollars? Consult with an attorney to confirm that any appraisal and valuation of the business is valid.

The next step for entrepreneurs is to consider what comes next for their business. As this is likely a valuable divorce asset, a business owner spouse is forced with the decision on whether to sell, retain or split the assets with their soon-to-be ex-spouse. If a business was established prior to marriage, there is more uncertainty about how much money your ex will receive. However, it is very likely that if the business began during the marriage, both spouses will have rights to it. In an equitable distribution state, a court considers many factors such as length of marriage, educational background, profession, and financial responsibility among other things.

Additionally, if this entrepreneurial venture is a partnership or a closed corporation, it may be necessary to consult the partnership agreement and/or by-laws. It is possible that these contractual agreements may disclose information pertinent to what occurs if one partner gets divorced. There could be further cases where a person may want to buy their former spouse out of a business. If you find yourself in this situation, it may be possible to give your former spouse a promissory note, so that he or she is financially satisfied after being bought out of the business.

Also, if you and your ex-spouse were in business together, it is possible that a prenuptial agreement or partnership agreement could disclose what business assets are disclosed to what spouse. If this arose in a prenuptial agreement, either spouse can challenge, potentially, the validity of the agreement. A prenuptial agreement may be invalid if a spouse did not have proper time to consult with their own individual attorney when the agreement was signed, or if the agreement was signed under duress, among other possible reasons.

Overall, if you and your former spouse are amicable, working through a divorce for entrepreneurs can be as simple as coming together and negotiating this specific property division. As this would be a simpler, less expensive to get what you want out of a divorce agreement, attempt negotiation before going to court.

If you need more information about entrepreneurship and divorce or about family law generally, you may schedule a free consultation with our office. Call 978-225-9030 during regular business hours or complete a contact form and we will respond to your phone call or submission promptly.

Full Disclosure of Assets is Needed for Prenuptial Agreements

Peter and Petra are getting married. Peter has considerable assets, including several homes, vacation homes, and checking and savings accounts. He also owns a string of rental properties from which he receives income. He deposits the rental income into an account which is not under his name, but rather the name of a trust he created. Petra, conversely, does not have much by way of assets, save for a modest savings account.

Peter and Petra have agreed to draft and sign a prenuptial agreement. Their respective attorneys have informed them that they would need to fully disclose their assets to the other party—in other words, they would need to inform each other about anything and everything of value they own. Peter has asked his attorney whether he needs to tell Petra about the rental income. After all, it is held in trust; what if Peter chose not to disclose it?

Prenuptial Agreements, Generally

An antenuptial agreement, also called a prenuptial agreement, is a written contract between two people who are about to be married. It serves to set out the terms regarding the division of property in the event of a divorce, along with any provisions for alimony.

Generally, in order for a prenuptial agreement to be considered valid and enforceable in Massachusetts, the agreement must meet the following elements:

  • it must be in writing;
  • signed by the parties;
  • signed voluntarily and under no signs of duress or fraud;
  • made after full disclosure of the parties’ assets;
  • the agreement must be fair and reasonable, and enforcement must not be against countervailing equities;
  • the parties must have adequate opportunity to consult with independent counsel;
  • the parties must understand and clearly indicate the rights which they are contracting away; and
  • the parties must not relieve themselves of their legal obligations during the marriage through the agreement.

 

Full Disclosure of Assets

In the above scenario between Peter and Petra, the element of full disclosure is at issue. To ensure that the process of signing the antenuptial agreement is fair and equitable to both parties, the court requires a full financial disclosure of the parties’ assets. In essence, the parties will be viewed to have a confidential relationship which brings with it the duty to disclose, mutually attributed to each party.

Lack of full disclosure may result in the parties’ agreement being invalidated. In some cases, lack of disclosure amounts to a form of fraud, particularly where there is a demonstrable inequity between the parties’ assets. Looking at the above example, this is the case, as Peter clearly possesses more assets than Petra.

In one case, the Massachusetts appeals court invalidated a prenuptial agreement after finding a lack of full disclosure on the husband’s part. Schechter v. Schechter, 88 Mass. App. Ct. 239 (2015). In that case, the husband kept the wife in the dark regarding his financial assets. He also claimed during the divorce proceedings that his primary asset, his real estate company, was a partnership. He claimed that his parents owned a one-half interest in the company. Moreover, the husband then attempted to make a fifty-percent, retroactive distribution of the real estate company’s assets to his parents during the divorce proceedings.

Financial Disclosure Schedules

In order to avoid any potential questions down the line, full disclosure should take place in writing. Each party should, for best practices, draft a financial disclosure schedule, which will be attached to the prenuptial agreement as an addendum. This schedule should clearly delineate and disclose all of the party’s assets to the other party. It should include:

  • a listing of the party’s assets, along with the value of each asset;
  • any outstanding liabilities of the party;
  • the sources and amounts of the party’s income;
  • any interests in businesses, partnerships, etc.; and
  • any expectations of inheritances or other potential assets.

Moreover, the agreement should include a section which makes it clear that both parties have read each other’s financial disclosure schedules, understand it, have acknowledged reading it, and have had the opportunity to consult with an attorney regarding it.

If you need assistance with a prenuptial agreement or have any questions about divorce or family law issues, you may schedule a free consultation with our firm. Call 978-225-9030 during regular business hours or complete our online contact form, and our experienced family law attorneys will respond to your phone call or submission promptly.

 

Are Marital Liabilities and Debts Considered in Division of Property and Alimony?

Ken and Kora are going through a divorce in Massachusetts. Although they were only married for a short time, Ken managed to rack up a substantial credit card debt during the marriage. Ken and Kora both work full-time, but Kora makes significantly less money than Ken. She is worried about the Court’s division of marital property—will the Court saddle her with parts of Ken’s debt?

This is a possible scenario. Typically, the debts incurred by the couple during the marriage are considered marital liabilities, and they will be factored into the Court’s decisions regarding marital property division. The Massachusetts Probate and Family Courts use a process called equitable distribution to divide marital property in general. Here, the term “equitable” means “fair,” and not necessarily equal: the court will determine how best to divide marital property in the fairest manner in each particular case. There are many factors that the Court considers as part of this process.

In addition to assets, the parties’ liabilities are also considered. As some examples, the courts have considered tax liabilities, student loans, and bank loans owed by one or both parties. Debts are examined by the courts not only regarding responsibility for payment of those liabilities, but also regarding whether they will have any effect on the equitable division of proceeds and grating of alimony. For instance, the courts may find that, although both parties have their own debts, because one party makes significantly more than the other, it would be unfair to burden the other party with some or all of the liabilities incurred during the marriage.

The Court will take into consideration many factors and questions in regards to the parties’ debts and liabilities. For example:

  • Did one or both parties accumulate the debt? Did either party object to the prospect of accumulating this debt?
  • Was the debt incurred before or after the marriage took place? Was it incurred after separation, or even in contemplation of divorce?
  • Was the debt incurred for the benefit of both spouses, or only one? Was it incurred for the benefit of the family?

Of course, in cases where one party profligates and incurs debt (particularly debts which were the result of significant unreasonable spending or mismanagement of finances), the Court may order that party to settle his or her own debts, rather than assigning the debt to both parties as part of the marital assignment. For example, in one case, the Court noted that the couple’s debt was largely due to the husband’s financial mismanagement and living beyond his means. The Court held that a fifty-fifty split of liabilities and assets was not necessary. [1]

If you have any questions about division of marital property, you may schedule a free consultation with our office. Call 978-225-9030 during regular business hours or complete a contact form here, and we will get back to you at our earliest opportunity.

[1] Duckett v. Duckett, 27 Mass. App. Ct. 1164 (1989).