With the U.S. divorce rate at around 50% for first marriages and even higher for second marriages, a divorce’s impact on the fate of your business should be cause for concern. The best thing that business owners can do is take preventive measures to ensure their companies will not suffer from a divorce – either your own or a business partner’s marriage breakdown. Here are 5 preventive strategies:
Prenuptial agreement – prenups are becoming more popular as baby boomers divorce and remarry late in life, after significant assets have already been accumulated. You can designate your business as separate property in a prenup if it existed prior to your marriage. You must have independent counsel to make a prenuptial agreement valid, so don’t try to use one lawyer for both parties.
Postnuptial agreement – these are similar to prenups, but occur after a marriage has already occurred. The earlier you are able to implement a postnuptial agreement, the better the chances it will hold up in a divorce action.
Trusts – using a domestic or foreign asset protection trust to protect business assets is a common strategy. Since the business is placed in the irrevocable trust and managed by a trustee, it is considered separate property since you no longer technically own it.
Buy-sell agreement – a buy-sell agreement will specify what happens to a business in the event of an owner’s status change, including divorce. The agreement can be used to prevent spouses from obtaining ownership or voting rights or specify a pre-determined price to buy out any ownership rights awarded to a spouse in a divorce.
Insurance – you can purchase a life insurance policy that can be cashed in to buy out an ex-spouse’s business shares.