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How To Divorce-Proof Your Business: The Prenup

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Part 2 in an ongoing series about keeping your business assets safe in the event of divorce. Part 1 can be found here.

So what is a prenup? A prenuptial agreement is a contract signed by both parties before their wedding that details what their property rights and expectations (including alimony) would be upon divorce. A well-drafted prenup can "override" both Community Property and Equitable Distribution State laws and the courts will usually respect such agreements (which is one reason why they are so powerful).

It is very important that each spouse-to-be is represented by their own separate attorney and that the prenup contain the following elements:

1. Agreement must be in writing (No oral prenups)
2. It must be executed voluntarily and without coercion (having your fiancé sign a prenup the day before the wedding is a good way to invalidate that prenup)
3. Full disclosure (no hiding of assets and/or liabilities) - this is another way to invalidate a prenup
4. The agreement cannot be unconscionable (the prenup could be invalidated if the agreement is too lopsided with one party getting almost everything and the other getting only a pittance)
5. It must be executed by both parties preferably in front of witnesses (or a notary).
6. It should be in a recordable format (such as a real estate deed).

Some attorneys even recommend having a judge witness the signing to make sure that no party was coerced into signing.

By using a prenuptial agreement, both parties can decide in advanced what property will be considered separate property and what property will be considered marital property and how that marital property should be divided.

You'd like a prenup but it sounds too legal and unromantic--you don't even want to ask him.

Okay! Here's another way to protect your assets:

If you are concerned that the terms of your prenup could be challenged and possibly not upheld in the future; or if your fiancée refuses to sign a prenup; or if you don't even want to ask, then you should definitely consider setting up a Domestic or Foreign Asset Protection Trust.

In essence, you would transfer the ownership of your separate property into this trust, including your company (this would work for most entities--C Corporations, Limited Liability Companies, Limited Partnerships--but not necessarily for an S Corporation. Only certain types of trusts can own S Corporation stock, so this is something that would need to be discussed with a trust attorney that is experienced with asset protection trusts).

Without going into further detail about the various types of trusts and how they work, suffice it to say that using a trust could make the entire issue of separate property, and its appreciation, a moot point. The reason for this is that the trust, and not you, would legally own your separate property, including your company.

The transfer of your separate property into the trust should be done while you are still single and would not require any approval from your fiancée. The use of this trust would certainly not preclude you from also having a prenup. However, the prenup would no longer need to address the issue of your separate property and its appreciation. Instead it could focus on how marital property (and possibly his separate property) would be divided and who would receive alimony, in what amount and for how long.

What is a postnup? A postnuptial agreement is a contract between spouses. It is similar to a prenuptial agreement except that it is entered into and signed after marriage. In order to be valid, a postnup should include the same important elements as a prenup.

Having said that, a number of states still don't recognized postnups and even when they do, postnups are challenged and invalidated much more frequently than prenups.

Here's the reason why: Before marriage, the parties are entering into an agreement much like two business people entering into a contract and neither party has any legal family law rights on the other. Theoretically, if they don't like the contract, either party can walk away. However after marriage, the situation is very different. The married couple now have very well defined legal rights regarding support and property division and they are considered to be in a fiduciary relationship with each other (meaning each party has to act in the best interests of the other party). Therefore, any transactions between them will be viewed with caution. By negotiating a postnuptial agreement, one party will typically be giving up some of those rights and that's why postnups will usually be held to a higher standard of fairness than prenups on the theory that individuals have less bargaining power once married.

Nevertheless, if you don't have a prenup, try to get a postnup. It's better than nothing. Just understand that a postnup is not nearly as ironclad as a prenup and you never know how the courts would act if one spouse decides not to abide by the terms of the postnup.

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Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to "divorce-proof" their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.

All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.