Business Ownership and Divorce
Divorce can impact the future of your business.
What should you be thinking about now?
As a business owner, you’ve
spent time and energy building a
successful business. Along the way,
you got married and, like anyone,
expected the marriage to last a
lifetime. But as with many things in
life, it didn’t work out as planned.
Now you’re asking yourself what
impact your impending divorce may
have on your business.
- Will you be able to keep the
business or be forced to sell it
or split it with your spouse?
- Were there any agreements or
structures put in place early on
that could help now?
- How can you protect this
most valuable of assets and
move forward?
Unfortunately, your situation is
not terribly uncommon. Recent
statistics show that in the United
States, about two in five marriages
(39%) end in divorce†. Of particular
concern to small business owners
may be the dramatic increase in
so-called “gray divorce,” meaning
couples that divorce at age 50+.
Gray divorces have roughly doubled
since the 1990s‡. By the time
they’ve reached their 50s and
beyond, couples are likely to have accumulated significantly more assets than they had when they were just starting out. They have much more to lose in a divorce, including possibly the business that they’ve worked so hard to build.
Regardless of your age or individual circumstances, any business owner considering divorce would be well-served to consult with their trusted advisors and carefully think through all their options and the potential financial consequences of each before taking action.
"No matter what the
circumstances, going through
a divorce is hard. We can’t
make it a completely painless
process, but we can help
mitigate the damage to your
finances and provide guidance
on steps you can take to
protect your business. You
don’t have to navigate this
difficult period on your own
and, while it may seem hard to
imagine in the moment, you
will get through it.§"
Dan Griffith
Senior Vice President and Director of Wealth Strategy, Huntington Private Bank®
Start with understanding concepts around the division of assets
To know what could be at risk in a divorce, consider the difference between separate property and marital property. Property or other assets acquired prior to the marriage, such as a home, retirement account, or inheritance, for example, generally are considered separate property, while anything acquired afterwards is generally considered marital property. The same is true for a business. However, appreciating value of certain assets occurring after marriage may be generally considered marital property, owned by both you and your spouse. Or let's say you started a business prior to the wedding but then your spouse became involved with it and you comingled business funds with personal funds. In this case, a court could look upon the business as marital property.
In community property states, judges split assets down the middle, but the majority of states operate under equitable distribution rules. In those states, judges have more discretion to consider other factors, including fairness, a spouse’s ability to support themselves independently, and the duration of the marriage.
Review asset
protection
agreements that may
already be in place
Your business structure or
agreements put in place before
the marriage may provide some
protection for your business.
For example, if the business is
an LLC and was structured such
that it forbids transfer of shares
to any third-party without the
approval of all the partners, the
business may be out of reach in
a divorce. The same holds true
if a buy-sell agreement is in
place. Another example is if the
business was put into a domestic
asset protection trust prior to
the marriage. A DAPT enables
the person who creates the trust
to also be a beneficiary. This type
of trust is irrevocable. Once you
put an asset into it, you cannot go
back and change your mind and
take it out. On the upside, a DAPT
protects the asset from being
considered marital property.
Determine the
current value of
the business
Regardless of prior agreements,
ideally your business valuation
will be current. Regular business
valuations done every year or
two can make the inevitable negotiations that happen during
divorce proceedings easier;
since at least the value of the
asset itself will be less subject
to debate.
If you need to get a business
valuation, there are several
different approaches to consider,
including asset, market-based,
and income approaches. The
asset approach takes into
account the assets minus the
liabilities and sets a value based
on the expected proceeds from
a liquidation. The market-based
approach takes into account
the value of other comparable
businesses, while the income
approach calculates value based
on earnings. The best method
to use depends on the type of
business. An accountant or other
business valuation professional
can determine which makes the
most sense.
Imagine your ideal outcome
What a couple wants to do about a business may depend on the state of their relationship at the time they decide to divorce. If a couple both have a financial interest in the business and their divorce is amicable, they may want to maintain joint ownership where both remain involved. However, they may prefer instead to part ways and not continue as co-owners.
If this is the case, one option may be to sell the business and split the proceeds. While that option may seem the simplest it often may not be the most
desirable. You may be forced to
sell the business at a suboptimal
time when its value is not the
highest, or you may want to
keep the business as an ongoing
concern. If that is the case, it may
be best to buy out your spouse,
by offering them cash or some
combination of assets that would
be equal in value to their share
of the businesses, such as a
vacation home or securities in an
investment account.
Secure your
future
Conflicts inevitably arise in a
divorce given the competing
interests of each side, but
there should be no competing
interests among your advisors
when it comes to your finances
and your business. That’s why
having a team of trusted advisors
who work well together is so
important. Advisors who aren’t
closely aligned or who don’t have
a full picture of your situation
may unintentionally end up
working at cross-purposes. But
a trusted advisor with a team of
specialists who understand your
needs and circumstances and are
aligned around your goals will
help keep you on the path to a
secure financial future.
A divorce is stressful no matter how you look at it and having a business in jeopardy raises the stakes even more. A Huntington Private Bank® advisor can help you find ways to navigate the complexities and plan for the future.
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†Luscombe, Belinda. The Divorce Rate Is Dropping. That May Not Actually Be Good News. Time. November 26, 2018.
‡Stepler, Renee. Led by Baby Boomers, divorce rates climb for America’s 50+ population. Pew Research Center. March 9, 2017.
§Dan Griffith interview, July 26, 2021.
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