Divorce & Your Business: The Top 10 Things to Consider

By | Divorce, Marital Property Division

When couples own a business together, they have that much more at stake in a divorce. Even enough to
put off divorce until a liquidation event occurs in some cases. If divorce is a certainty, here are thoughts
on how to keep, modify, or divide the business. Also, in this blog will be what not to do.

1. Understand its character.

First, understand whether this company is community or separate property meaning, is it even a marital asset or wholly-owned by an individual party? Was the business created or acquired during the marriage? What funds, if any, were used to acquire the business and are those separate property funds? If it was created or acquired before marriage AND able to be traced by clear and convincing evidence, it may be characterized as separate property. There may also be arguments that the community estate or separate estate is entitled to reimbursement. For example, if the separate estate of one of the spouses purchased inventory for the community estate company, the separate estate may be entitled to be paid back for the inventory. (note: Every time I say argument, think $$$$, because that is just a lawyer arguing a side not a forgone conclusion.)

2. What’s in a name?

Whether or not a company is titled in your name, your spouse’s name or jointly together, will make a difference. If the company is a corporation for example, and you own all of the shares in your sole name, you have an argument that the property is sole managed community property and it is therefore more likely to be awarded to you in the divorce. Of course, this will likely mean your spouse will get a like amount of another asset awarded to him/her.

3. Good Will Making.

Let’s say you own 100% of a consulting company, but it’s your spouse that does all the consulting and whose name gets all the referrals. Perhaps, you have all the authority in the world to manage the company, but without your spouse doing the work and knocking on the doors, there is no income to manage. The more important your spouse’s name, reputation and work product to the business is, the lower the company is valued. Further, your spouse could simply quit working for the company you “own” and start their own.

4. Management.

Let’s say you and your spouse hate each other’s guts, but you run a darn good business and you don’t want to stop that side of the ‘er – partnership. Oftentimes, each spouse provides an indispensable value to the company. Think Chip and Joanna Gaines, Beyonce and Jay-Z, Jeff and MacKenzie Bezos (wait -er?). What would Fixer Upper look like without Chip throwing a sledge hammer? Recognize that your brand could be connected to both of you. In this situation, consider amending company agreements and bylaws so that each of you owns an equal amount with tie-breaker provisions and buy-out options should the best intentions fail. Involving a CPA and corporate attorney in this arrangement is recommended, unless you think you can do your own brain surgery too.

5. What Not To Do – Forgo Paychecks.

Many couples have a small business in which both people run the business full-time, but only one spouse earns a paycheck. I get it. It’s another payroll item and a hassle. But when you get divorced, the Court will want to know who earns the money and who does not. A person who does not have shares, units or an interest in the company at all and who also does not draw a paycheck will find they have few grounds to seek temporary control of the property. This means their direct knowledge of the company affairs could be withheld from him/her, cutting him/her off from cash flow and material information needed to value the business.

6. Divorce Planning Back-Fire.

Let me guess, your business was flourishing until right before the divorce was filed? Now the company is under water and should probably wind up? Us divorce lawyers see this all the time. It could be true, but it is very suspicious when the family’s main asset has decreased in value right before a divorce begins. At the same time, the decline in the business could be emblematic of problems in the marriage or one’s personal life. It is important to have good records at least three years back reflecting the business’s fluctuation for the sake of arguing either a temporary dip or a true decline in value. See above about argument$.

7. Being in the Red.

Oftentimes, lines of credit, security agreements and promissory notes are signed by one person in the marriage. This can leave that spouse at a disadvantage when dividing debt. The business may be doing well and in the black, but the guarantor knows that the bank will be pounding down his/her door when the red times hit. Although a divorce court will not necessarily take this into consideration for a number of reasons, it does matter in terms of valuing the property. If the debt is entered into jointly, it creates a more sober and realistic approach to valuing and then dividing assets.

8. DON’T go to Trial.

Every client has an automatic right to trial and a jury in some cases. But DO NOT. A trial judge will not likely secure debt payments, structure buy outs at a fair value, equalize tax liability, require amending operating agreements or otherwise get creative. A trial court will most likely only award property to a spouse or sell property and divide proceeds. Get a good CPA, a corporate lawyer and a divorce attorney who will structure a reasonable and private settlement. Believe it or not, CPAs and lawyers can actually be very creative in this regard. If you want to continue running the business with your spouse but protect your ability to get out (said every business person ever), this is possible with the right professionals.

9. Fraud Considerations.

I used to know a restaurant owner who took cash out of the register to pay for babysitters while they were married. It was a nice perk while it lasted. Can you imagine the amount of self-dealing that could be happening in your family owned business? Generous reimbursements are one thing, socking up faux debts and hiding cash is another. Perhaps the company is cash poor because it gave an unsecured loan to a cousin that has a weak or no explanation for repayment terms. Or perhaps there is an effort to dilute your ownership interest and bring on investor (college roommate) who will have majority decision making. If this scenario sounds like your situation, you may need to sue the company to remove your spouse’s hands from the honey jar, that is if you are also an owner. Again, you will need an experienced corporate attorney and divorce litigator to seek repayment of the fraud, obtain a judgment, or seek a rebalance of your divorce award. This scenario can be a real nightmare in terms of emotional stress and attorney’s fees. It could also be the only way to sort out the extent of the damage. Do yourself a favor and stay involved in the business enough to watch who the checks are being made out to and where the deposits are going.

10. Buy-Outs.

Buy outs can occur in several ways. It could be in continuation of joint ownership and management pending a sale or election of one of the members. With properly structured paperwork, spouses can be divorced but not divide the business to one or the other spouse until a certain event. As in non-married business partners, when one wants to sell his or her portion of the business, the other partner typically will have an option to buy. The key is to make sure the price is right in that buy out. If that sounds too complicated, a spouse can assign his or her shares or interest in the company to his or her spouse in exchange for a promissory note. What happens if the promissory note is never paid? The promissory note could be drafted in such a way that the shares of the company are held in trust by a third party until the note is paid in full. This will ensure that the payor is motivated to stay current on the notes. Other considerations will need to be made for the risk of the payor filing bankruptcy or diluting shares.

Divorcing can be particularly intense and problematic when a business is involved. Attorney’s fees could be exponential, compared to what they would be for a divorce with simple assets. Reasonableness on both sides is the key to preserving the assets during the divorce.

Choosing a Divorce Attorney

By | Divorce

This post is in response to the question I find being asked on Facebook, on Google, amongst friends and to me in confidence. These are my opinions as a 35 year old, 10 year lawyer (5 years in family law) and married mother of three. I say again, these are my opinions, this is NOT legal advice. If you want legal advice, hire a lawyer.

1. First – Do not look for a lawyer who will fix your problems.

Look for a lawyer who will get you a divorce and what you are entitled to under the law. Your problems will work out through therapy, prayer and time. Do not search for a lawyer that will “defend a mother/father’s rights”, that will “stand up to him”, that will “fight for you”. These concepts are marketing plans, not legal strategies. Of course your lawyer will stand up and fight for you, that’s a lawyer’s job period. Looking for a lawyer to represent you strongly is like looking for a pediatrician who vaccinates.

2. Get recommendations from like minded people and interview a few.

That doesn’t mean ask your friend who is all drama for one of her attorney’s names. Ask someone who is like you, who has the same temperament, budget and life goals as you. Then interview those people in person or over the phone. See if you are going to feel comfortable telling this person both sides of the story, including the one you’d rather not admit to yourself. You have to be comfortable, because if you are not, you will doubt the agreements, strategies and decisions you make later in the process. If you do end up doubting the path you’ve chosen in the process, it’s a time bomb waiting to explode and the subject matter of a different post.

3. Reputation = Value. 

There are lawyers in town that will charge $70k-$100k in less than 90 days making an absolute scene at the courthouse, all in the name of “fighting for their client”. Well, their client might feel empowered to hear their lawyer accuse their spouse of this, that, and the other, but they look like a fool to everyones else, including the judge. And, the community estate is wiped out before the ball even starts to roll. Like preschool, you need a lawyer that plays well with others even when they are opposed on a material issue. Its about communication, respect and ethics.

4. Lawyers aren’t like shoes – it’s not “you get what you pay for.”

In Tarrant County, lawyers typically charge between $200 and $750 per hour with a $2,500 to $50,000 retainer. Initial court costs/fees are in the $500 range. In many cases, there isn’t a difference between a $250 lawyer and a $750 lawyer. Don’t feel empowered just because your lawyer is more expensive. I hear spouses accusing the other of being “stupid” in their choice of an attorney simply because of the hourly rate. Don’t feel ill-prepared if your lawyer is less.  When you interview the lawyer, ask if he/she can estimate the range of fees they typically charge in your type of case. A smart lawyer will not guarantee anything, but can at least give you a worst and best case scenario. Board Certification is a great thing and qualifies that lawyer as an expert in the field. But if you ask some of the best lawyers in town, they will say Board Certification doesn’t have anything to do with it.

5. “I’ve never lost.” If a lawyer says that, run. RUN!

This means 1. they’ve never fought over close calls and therefore would be too risk averse to be aggressive when it matters and 2. they are liars. No, liars and lawyers are not synonymous.

6. Know this before you chose: At some point, YOU WILL HATE your lawyer.

That’s because, at some point, you will hear news you did not want to hear. You will find out about debt, you will learn you have to share your kids, you will discover that your lifestyle is out the window, you will find out he or she doesn’t want you back or you will be on the losing end of the judge’s order. Remember that the lawyer you choose wants to avoid surprise. My worst case scenario is when a client is shocked by a bad ruling. My job is to prepare him/her for all outcomes, good and bad, so that he/she can make an informed decision on what they want to fight for. That means, I’m going to sucker punch him/her with the truth so that he/she is prepared to hear it from the judge, when and if that happens.

7. Stop comparing.

Just stop. Don’t. You do not have the same marital troubles, kids, religion, family support, career and so on as the person who said she got $10,000 in spousal support per month and was able to move the kids to Canada. After you have picked your lawyer, tell him/her everything, and then follow his/her advice.

Co-Parenting Tips for the Holidays – It’s the Golden Rule, Duh.

By | Co-Parenting, Custody and Conservatorship, Divorce

Christianity: So in everything, do to others what you would have them do to you, for this sums up the Law and the Prophets. Matthew 7:12.

Buddhism: Hurt not others in ways that you yourself would find hurtful. Udana-Varga 5,1

Judaism: What is hateful to you, do not do to your fellowman. This is the entire Law; all the rest is commentary. Talmud, Shabbat 3id

1. Say yes and keep saying yes. “Can I bring him back late?” “Will you pack her Christmas dress?” “Can I trade days?” Say yes every time. Always know what your decree or other order requires but then always say yes. Don’t say, “yes if you will do x, y, z.” You can’t make someone else be kind. You can only make sure you are kind. Look for these opportunities because your kids are watching and will notice. Just say yes. Maybe smile a little too.

2. Buy the other parent a gift from your child. This is such a cheap and easy way to show the other parent you acknowledge and support the relationship between your child and his or her mother or father. If you want halos or you are an overachiever, also buy your co-parent’s significant other a present. Think Julia Roberts in Step Mom.

3. Follow your child’s lead on Christmas/Hanukkah. If your child wants mom to come to lunch but its not her day, invite her! If your son wants to see what his father got in his stocking, drive him by his dad’s house.

4. Include other half and step siblings in all traditions. Every child wants to be equal to their siblings and every child wants love from the mother and father, grandmother and grandfather figures in the homes they live in. All traditions should be evenly shared among the children. Tell your parents to bring a gift for your step son and to make sure if there is a family day planned to see Santa, that it’s scheduled around your step child’s visitation day. The only qualifier should be that the child is a child, not that the child belongs to so and so or doesn’t belong to so and so. Remember that halves and steps are terms and types of relationships children learn. Try to teach them that “halves” and “steps” are like “bonus” and “cool”.

5. Take a family photo. Not photo of your family. Take a photo of your child’s family. Who are important to him? Who is his mimi, her sisi, his mommy, her other mommy, his big brother…? Let that picture be his family photo he shares at school. Show him his family tree and how many people he belongs to. You have plenty of photos of your family, but does your child have one photo of everyone in HER family?

Four Women Who Need a Pre-Nup in Texas

By | Community Property, Divorce, Just and Right, Marital Property Division, Pre-Marital Agreements, Separate Property

1. The Business Owner. A properly created business has exhaustive company agreements, succession planning and creditor protection. Unless you have every confidence in your documents, you may want to consider a pre-nup to set up agreements between you and your spouse. I see many family-owned businesses severely disrupted by divorce, especially by the temporary orders phase. Image a couple in crises and both spouses are signatories on the company checking account. Perhaps each believes he/she runs the business and should be able to continue to run it exclusive to the other spouse. Where does a court begin to do what’s in the marital estate’s best interest? It is much easier on the Court if there is an agreement in place.

2. The Second Wife and Step-Mother. The reason wife No. 2 needs a pre-nup has everything to do with the probate code. When a spouse dies without a will and has children from a different marriage, Texas law requires that the majority of the estate goes to the deceased’s children. This is a huge problem for second wives.

Imagine a second wife who has young children being left with almost nothing. She will have her community interest in property earned or acquired during the marriage except for property her husband inherited, but that’s it.

A pre-nup can avoid this problem in two ways. One, a pre-nup can provide for trusts, bequests and contingent awards in a highly tailored manner. Typically, these provisions satisfy the needs of children from prior marriages as well as the spouse and children from the second marriage. Because a pre-nup is created before marriage, it provides answers to these issues before the challenges of marriage influence decisions. Secondly, a carefully drafted pre-nup can trump a will that leaves out a spouse. Yes, that’s right. Spouses do not have to leave their estate to their surviving spouse unless they have a pre-nup.

3. The Stay-At-Home Mom. As you may have read in previous articles, a stay-at-home mom is the most common penniless woman in the family courthouse. If the plan is for you to stay at home — the flexible one, the one who doesn’t climb the corporate ladder and so on — you won’t have much of a launching pad for a career should you divorce or your spouse pass away.

There isn’t a way to provide for a launching pad in divorce, but you could at least ask for yearly retirement savings in the likely amount you would have earned had your career not been the priority. For example, if you leave your advertising job of $80,000 per year to raise children by your never-home regional manager husband, consider asking for him to agree that the family will deposit 10 percent of your forgone salary into a retirement vehicle that would be considered your separate property upon divorce or death. Your resume may not be prepared, but at least you wouldn’t have to start all over on retirement planning.

4. The young (and dumb). Please do not take offense. I say young and dumb because undisclosed credit card debt is a very big and growing problem. Refinancing, consolidating, co-signing … can be very confusing and often misleading to the young and in love. A key element to pre-nups is that they require full disclosure of assets and liabilities. Younger people simply do not have the skills to confirm the credit worthiness of their fiancé. I suppose a good liar would also lie about their liabilities before marriage, but at least with the majority of people, a meaningful conversation can be started about debt, who is paying for it and how to get out of it.