Family Law Issues for Entrepreneurs
by Kevin Segler
Family lawyers can help entrepreneurs protect their businesses before marriage, during marriage, and at the time of divorce.
Marriage and divorce are both significant personal life events as well as business transactions. A marriage creates a de facto 50-50 partnership in all business ventures from that point until divorce or death. These major life events should be part of any entrepreneur’s discussions about risk analysis and asset protection.
Entrepreneurs routinely hire business lawyers for help and advice before, during, and after starting a company to protect their company. However, rarely does that advice involve a discussion of the risks to a business due to marriage or divorce or what steps can be taken to eliminate or limit those risks.
A business is property. Simply put, a business can be community or separate property. If the business interest is community property, then it is subject to division in a divorce. If the business interest is separate property, then it cannot be divided in a divorce.
Having a business characterized as separate property is the best way to protect a business from a divorce. A family lawyer can provide valuable advice on protecting your business before marriage, during marriage, and at the time of divorce.
While characterization of marital property can be complex, hypertechnical, and nuanced, there are some general concepts to be mindful of when thinking about how some of these concepts apply to businesses.
Premarital Business Counseling with a Family Lawyer
One of the best times to consult with a family lawyer about your business is before marriageand far enough in advance of the wedding date (usually three to six months).
Separate property is defined (at least in part) as property that is owned or claimed before marriage. Generally, if a business is formed or incorporated before the date of a marriage, then that business is separate property. Also, if the business has not yet been formed, but is close to that stage, then strategizing early about when and how to get that completed is important.
Moreover, premarital agreements are a phenomenal tool for protecting a business from a divorce. In a premarital agreement, potential spouses can agree on what property will be community and what will be separate. A premarital agreement can also contain other provisions for characterization of property that would not ordinarily apply under Texas law. For example, under Texas law, even if a business is separate property, the income and profits from the business during the marriage would still be community. A premarital agreement can change that as well as many other aspects of marital property law. However, starting the premarital agreement process can take time and should be started well in advance of a wedding date.
Separate Property Maintenance Advice During Marriage
Generally, all property that exists at the time of divorce is presumed to be community property. To rebut the community property presumption, separate property must be proved by “clear and convincing evidence.”
There are a few key concepts in understanding how to prove separate property in Texas: (1) Inception of Title; (2) Mutations; and (3) Tracing. First, inception of title looks at when ownership of the property is rooted in a separate or community property source. Separate property sources include property acquired before marriage, by gift, by inheritance, or as a result of a premarital agreement. Second, mutations occur when separate property is sold or exchanged for other property. There can be multiple mutations of separate property, but mutated separate property is still separate property. Third, while mutated separate property is still separate property, proving it is separate property requires tracing. Tracing is a technique that must be used to trace the mutated separate property back to the original separate property source.
During marriage, claims of separate property can be inadvertently forfeited in a variety of ways. Failing to maintain documentation of separate property and its mutations and commingling separate funds with community funds are two of the common ways people accidentally lose their separate property claims.
For businesses, if there are changes to the entity type or structure during the marriage, then it could result in the company losing separate property characterization. For instance, it may make sense to change the entity type or structure during the marriage for liability protection or tax reasons. But doing this incorrectly could result in the business inadvertently becoming community property. How you fund and paper this type of transition can be crucial. A new entity created during the marriage and funded with community funds will be community property. Discussing these types of transitions with a family lawyer beforehand is imperative.
A postmarital agreement can also be a valuable tool in protecting a business and converting community property into separate property. The requirements for a postmarital agreement are similar to those of a premarital agreement and, in some situations, can provide benefits and protections for both spouses.
Bottom line: Consulting with a family lawyer during the marriage and before major business changes can help ensure that separate property claims are preserved and not unintentionally forfeited.
Family Lawyers at Time of Divorce
At the time of divorce, a good family lawyer can help you identify what is needed to prove a separate property claim, help assemble that information, and help find the right experts to try to put the pieces together to prove the separate property claim. Even if a business is community property, a good family lawyer can help protect your business by developing a trial and settlement strategy geared toward protecting the business. There is no one-size-fits-all solution in these situations, but a good family lawyer can help find the best solution for each set of circumstances.
Ultimately, marriage and divorce can have just as significant an impact on a business as it does on an entrepreneur’s personal life. Family lawyers can help entrepreneurs protect their businesses before marriage, during marriage, and at the time of divorce.