By: Richard Rabb
Without proper precautions in place, divorce can result in the complete dismantling of your life, your finances … and your business.
One valuable tool for helping a business to survive is a prenuptial agreement. A prenup is a contract, entered into by prospective spouses in contemplation and anticipation of marriage, which defines the value of your sole and separate property prior to marriage. It’s important to note that Ohio does not currently permit postnuptial agreements.
In divorce proceedings, one of the very first things the domestic relations court must do is determine what assets are marital property subject to division, and what assets are separate property. A court must divide both marital and separate property equitably. Marital property is presumed to include all property acquired during the marriage or those assets produced or earned as a result of the parties’ mutual efforts during the marriage.
Generally, for property division purposes, property acquired before the marriage is considered separate property. However, this generalized rule does not automatically mean that just because one spouse holds title to property it is automatically separate property. In addition, just because one spouse receives an inheritance or bequest during the marriage, or a gift that has been given only to that spouse, does not mean the acquired asset is the receiver’s in total. It’s still possible for a portion of that property to be transformed into marital property if it appreciates in value as a result of joint efforts. This is called active appreciation.
Active appreciation is defined as an increase in the fair market value as a result of the labor, monetary or in-kind contribution of either or both of the spouses that occurred during the marriage. For example, if you own a business before marriage with a value of $500,000 at the time of marriage, and that same business doubles in value as a result of a spouse’s role in the business, the increase may be considered a result of joint efforts and, therefore, must be considered marital property subject to division.
As a matter of course, a spouse has the ability to convert separate property into marital property through his or her actions during a marriage. Even an inconsiderable contribution to the growth of the company can convert a family-owned company into marital property subject to equitable distribution. When parties contest whether an asset is marital or separate property, it is presumed to be marital property unless proven otherwise.
In the absence of a prenup that provides otherwise, there are multiple angles and arguments to attack the separate nature of a business interest. The court relies on Ohio law to equitably divide property, entitling a spouse to a portion of your business’s appreciation in value, business assets and a portion of the company’s retained earnings. A carefully crafted prenup can protect your business by keeping the foregoing a separate premarital asset.
While a prenup can be drafted to waive any interest in property acquired by one spouse during the marriage, as well as any rights and interests in income or profits gained therefrom, it does not, however, have to exclude the other spouse from access to your business assets entirely. Prenups can be advantageous by simply providing the valuation method in case of divorce.