Fact or Fiction: A Business Owner’s Guide to Divorce
A divorce is a stressful and complicated process full of uncertainty about the future. When a divorce involves a closely-held business, there is an extra layer of complexity and anxiety to an already challenging situation. This article explores some common questions about whether a business interest will be divided in the divorce.
Fact or Fiction: If you owned the business before marrying, it is automatically yours and is not eligible for division in a divorce.
FICTION. According to Wisconsin law, all assets owned at the time of divorce are subject to division in the divorce, including assets held before the marriage. There are two exceptions to this rule. The first is for assets that were part of a gift or inheritance. This exception is regardless of whether this occurred before or during the marriage. The second is if there is a marital property agreement (like a prenup) that applies. If neither exception exists, the business is part of the total property the spouses will divide between them.
Wisconsin law assumes everything is divisible in the divorce unless proven otherwise. The spouse who wants to exclude a business from the divorce has the burden of proving a gift or inheritance occurred. Evidence and documentation of the gift or inheritance is helpful. Offering verbal testimony or a newly-created written statement from the third party-giver (who is typically a relative) about a gift made in the past might not be sufficient. This is especially true if there is historical documentation proving otherwise. For example, if you acquired an ownership interest in a family business after working for the business without receiving fair wages for your labor, the court might not consider that a gift. Or, if you bought into the business, or contributed capital, that might prove that you did not receive it through a gift.
Fact or Fiction: If the business has always been titled in your name, your spouse has no claim to it in the divorce.
FICTION. The way an asset is titled does not dictate whether it is divisible in a divorce under Wisconsin law. As explained above, all assets (regardless of which spouse is on the title) are subject to division, unless the asset was a gift or inheritance, or if a marital property agreement applies. However, the conversation doesn’t end there. Even if you legitimately received a business interest as a gift or inheritance, the business could be eligible for division in the divorce if you added your spouse to the title, or if you mixed it with other marital assets or income.
The spouse who wants to exclude an asset from division in a divorce due to gifting or inheritance has the burden of proving that the business interest was kept separate and distinct from any other assets or income in which the other spouse has a marital interest. This can often be problematic, especially if business earnings were retained or re-invested into the business.
Fact or Fiction: Even though a business interest was a gift or part of an inheritance, its increased value since then might be divisible in the divorce.
FACT. If you received the business as an inheritance or gift, its growth in value might be divisible with your spouse if the increased value was due to the efforts of either spouse during the marriage. When either spouse manages the business, participates in crucial decision-making for the business, or works at the business without fair compensation, such efforts could mean that the appreciation in value during the marriage is divisible between the spouses, even if the underlying ownership shares are exempt from division. On the other hand, if the business’s value saw an increase solely due to passive appreciation, it may preserve the separate, non-divisible nature of the business upon divorce. Types of passive appreciation include general economic conditions, inflation, market performance, or typical appreciation in real estate.
Fact or Fiction: If a business is divisible in the divorce, it means your spouse has to become a co-owner.
FICTION. Just because the business is divisible in the divorce, that does not mean your spouse will walk away with 50% of your ownership interest. There may be provisions in your Operating Agreement or Buy/Sell Agreement restricting your spouse’s ability to become an owner. Most likely, your spouse will be interested in a buyout. In a buyout, your spouse receives cash or other assets to offset their marital interest in the business. You may need to hire an expert to perform a business valuation to determine the amount of the buyout owed to your spouse.
Furthermore, the divorce court has the discretion to divide the assets unequally between the spouses under the appropriate circumstances. In shorter marriages where one spouse owned significantly greater assets at the time of the marriage, courts are more inclined to divide the assets unequally in favor of the spouse who brought more assets into the marriage.
In summary, don’t assume that just because you owned the business before the marriage that your spouse does not have a claim to some portion of its value. Be sure to consult with an experienced attorney right away if you do not wish to divide your business upon divorce.