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.

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.

Anonymous Client Post About Divorce, Attorney’s Fees and Preparedness

By | Child Support, Client Posts, Custody and Conservatorship, Divorce, Marital Property Division

Note from Kelly:
A client wrote this blog after her divorce was final, with the benefit of hindsight and (probably) the anxiety of my final bill. This client was one of the most organized clients I have had. She also listened well, especially when I told her things that were difficult to hear. This client is NOT an attorney and the below information is not legal advice.

“Choosing to end a 19 year marriage, or any marriage, is not an easy decision. As Dr. Phil says “you have to earn your way out of the relationship.” Once you have decided that it is the right decision for your life, there are steps you can take to make this excruciating experience a little less painful. First and foremost, make sure you have a good therapist to walk you through the emotional process of divorce. The attorney you decide upon is NOT your family therapist.

Second, prepare before the separation. Scan and save all the important information on an external drive or zip drive and include copies of your tax returns and income for the previous four (4) years. Gather pay stubs, bank statements, 401k statements or any information regarding retirement accounts, documents regarding life insurance, health insurance, titles to vehicles, deeds for your home or other property such as a timeshare or even a burial plot, and copy all household bills. Create a clear spreadsheet of monthly income and expenses. Prepare a list of all household items you own from the kitchen table and chairs to the dishes. These are assets that you have acquired over the years and they will be a part of the division of your marital estate. Be clear about what property was brought to the marriage, what was gained during the marriage and what was inherited during the marriage. Take photos of the house, the household items or any large assets. All of this information should be organized in a logical manner that is easily found by you or the Paralegal for your attorney. (These documents should be saved in PDF format.) Now that you have an asset list, prepare the liability list and include the mortgage, rent, credit card bills, doctor bills, loans and any other debt you may owe including any family members who have loaned you funds.

Now that you have gathered the information, prepare a summary or list of what you want to come away with, best case scenario. Think about not only the present moment, but the future. Come back to this list a few days later, and NOT when you are upset, and then decide what you can let go. What is it that is a deal breaker for you? You had to decide what the deal breaker was when you made the decision to leave the marriage, do it again with regards to your financial future and the future of your children if applicable. Be flexible and creative, trust your gut.

Third, find an attorney that is a good match for you. I have been a Paralegal for 20 years and personally know plenty of attorneys. I learned first-hand through my divorce that finding the right attorney is much like dating or finding a mate. It is important to talk to two or three attorneys to find the right match for you. Prior to meeting with the attorney, review the list of what you want to come away with, the issues that are involved in the divorce, and know that you will not get everything on your list.

Fourth, approach the split as a business decision. We all know that divorce is expensive any way you approach it. However, it can be less painful and less costly if you keep your emotions out of the decision making process. The business and finances are the issues that your attorney is skilled and equipped to help you resolve. Regardless of the reason for the divorce, how mad or hurt either party is, neither of you win (certainly the children lose) by continuing to hurt each other while fighting with your attorneys in the middle. In the end, all you come away with are more wounds and less money, so no matter what, stay focused. Time to time, you will veer of the path, but a good attorney will redirect you.

Fifth, do not use the divorce as a means to seek revenge. While negotiating think carefully about what you and your soon to be ex are arguing over. Every phone call, email, letter or communication with your attorney or staff will cost you and your ex significant money which lessens the amount of money to be divided. Look at it this way, most of us can go to a one hour therapy session for a co-pay of $50.00; however you are most likely paying your attorney at a minimum $250.00 per hour, plus paying the Paralegal $150.00 per hour. Mathematically, you are going to get more bang for your buck if you keep the two issues separate. That doesn’t mean that your attorney doesn’t need to know what is happening. You should contact your attorney if your soon to be ex is sending crazy text messages, emails, showing up at your house or taking money from bank accounts. As always, clear communication is essential, however, the attorney and paralegal do not need to hear a blow by blow detail of your day. Keep a journal and notes of all of the issues at hand. When you do communicate with your attorney stick to the subject, be concise and focused. He or she is most likely billing you in 15 minute increments. Each e-mail and/or telephone call will be billed at a minimum of 15 minutes. So send one concise email bullet pointed with the core matter and do not call to ask if the attorney or paralegal received the email, they will respond when it is appropriate.

Sixth, one of the most difficult decisions you make may be regarding custody and visitation with your children. Think about custody based on the age of your children. It is not only the present relationship that is important, but the one you will have with them long after custody is over. That is the most valuable and longest time you will have with your children. Once your children are teenagers they will have a life beyond mom and dad and, they will have more of a voice in where they go and who they spend time with. No one can force a driving teenager to go someplace they don’t want to be. If you have older teenagers, do you really want to spend the next year or two fighting the other parent over custody, visitation, splitting of assets or money? By the time the issue is resolved, you have spent a lot of money and heartache fighting and the children will be ready to go off to college and live their own life. A wise woman once reminded me that your child’s parent is just that, his/her parent and you can never change that. You couldn’t change him/her while you were married to them and you certainly can’t change them after divorce.

Finally, a divorce decree is a contract and in order to enforce the contract you have to take the offending party to court. Are the issues you and your ex are quibbling over in the decree really something that you would take them to court for and spend thousands of dollars to try to enforce? In the end the chances are most likely not. In the same respect, perhaps you can give in on another matter just to get the divorce resolved. Always trust your gut and be true to yourself. You are not going to get everything you want. Determine early in the process the things that mean the most to you and what you might want, but would be willing to give up, so that your attorney has some items to with which to negotiate.

If you choose to incorporate one or more of these suggestions, your divorce will most likely end more quickly with less money wasted fighting and most importantly, with fewer wounds and scars. While divorce is terribly painful, there is the possibility of happiness, peace and hope in the end. I am living it first-hand.” Anonymous

Two Regrets of a Divorced Woman

By | Child Support, Community Property, Custody and Conservatorship, Divorce, Marital Property Division, Separate Property

This article was originally published by Plaid for Women https://www.plaidforwomen.com/read-post/two-regrets-of-a-divorced-woman/

The Family Courthouse is paved with women who claim the system is against them. Many feel that they waited too long and some wish they had tried harder to reconcile. Beyond the emotional wasteland left by a divorce, a divorced woman has many economical regrets. Here are two I have heard over and over again:

1. That they didn’t stay employed.

Some women report being frustrated that they were not entitled to spousal maintenance or did not get as much as they would have liked. This is especially true for the homemaker, but in our changing society where women are increasingly doing the “bread winning,” it can be true for husbands as well. Texas law allows for monthly spousal maintenance (a/k/a support) up to $5,000 or 20% of an ex-spouse’s gross income, whichever is lower, if a spouse can prove that she “lacks sufficient property including the spouse’s separate property, on dissolution of the marriage to provide for the spouse’s minimum reasonable needs” among other elements. Please refer to Texas Family Code Chapter 8 for the entire law which contains other elements and factors not addressed here.

Flushing out what “lacking sufficient property” actually means is difficult. Case law demonstrates that Courts look to a variety of factors including, the community property award in the divorce and the spouses education, separate property, health, employment experience and business opportunities. There is no formula such as monthly expenses are $3,000 therefor the spouse is awarded $3,000. It’s much broader than that.

The practical application of this law makes spousal maintenance quite difficult to obtain. One, the ex-spouse may not have sufficient income to pay what is needed for the spouse to get by and two, minimum reasonable needs are typically shelter and food, not mani/pedis. Much to the disappointment of many women, the standard is not to keep the divorced spouse’s lifestyle the same as her married lifestyle.

A common example would be a spouse married to a hard working executive who chooses to stay home because it’s hard enough on the family that one parent is gone all the time. The hard working executive works too hard and picks up a nasty addiction to alcohol. The alcohol abuse leads to the couple’s cash reserves being used up for rehab, disability, therapy and suddenly, when the alcoholism finally destroys the relationship, the money is gone. Now, homemaking spouse is unemployed with a ton of bills and the hard working spouse is no longer employed at the rate he was. Her best asset is now her resilience, from which she has to dig deep to find and use to fuel moving on.

On the flip side but on the same side of the coin, had the homemaking spouse stayed employed, she would at least have somewhere to start. Any place other than unemployed and broke is better than that. True, a spouse with some employment opportunity would be less eligible for spousal maintenance but at least she would have a paycheck rather than being subject to the court’s wide-ranging discretion. It can take months before spousal maintenance is ordered by the court and actually paid by the spouse. A judge can only enter orders and enforce them. She cannot babysit the parties to make sure it gets done. And can you hear the “cha-ching”? Every time a lawyer has to go back to court for something, it costs.

2. That they kept documents.

The way assets and debts are awarded in divorce requires some level of proof as to the asset or debt’s status. How do you prove you used your inheritance to buy the house if you don’t have any records? How do you show that you funded your 401(k) for years prior to marriage? How much cash does a spouse earn under the table? How many credit cards and lines of credit are out there? The dining furniture was a gift to both of you right?

Keeping original documents regarding important transactions are important for many reasons, too many of which to cover in this article. I will discuss two. One, having documents is important to show when property or debt is separate since the law presumes all property and debt owned by either party belongs to the community. In order to overcome that presumption, a party must submit proof that a particular asset or debt is separate property. Separate property is acquired before marriage, by gift or by inheritance. Proof is usually in the form of bank accounts, check stubs, contracts, paychecks, letters, titles and so forth. Who keeps up with that stuff? Not everyone, but the divorced spouse wishes she had.

Secondly, keeping original documents is important to show the current status of income, debt and other property rights. For example, wife swears husband got a $50,000 bonus and bought a sports car for his girlfriend in her name with the cash. This stuff happens people. I know you know it does. Continuing on, the company that bonused him is now out of business and the $300 an hour lawyer can’t subpoena documents to prove the bonus ever existed. This leads to another topic for another day. Stay involved in the finances. This scenario can be a huge waste of time and money for everyone to prove either the existence of a lie or to disprove a wild allegation impossible to disprove because it never happened.