Keeping Your Family Business in the Family
A Guide to Premarital Agreements
It is the dream of most family business owners to pass their business down to the next generation. Many business owners, however, do not account for how marriage can impact this goal. Without proper planning, marriage risks the severance, or even dissolution, of your business in the event of death or divorce. Premarital agreements (commonly referred to as prenuptial agreements or prenups) allow business owners to mitigate this risk by dictating how their business interests will be treated in these instances.
Indiana Divorce Law
Marriage can have an irreversible impact on rights to a business. Indiana utilizes a “one pot” theory of property division in a divorce. Under this theory, all property acquired or brought into the marriage by each spouse is included in the “marital pot,” which is then divided between the spouses in a divorce. All property, including business interests, are included in the marital estate regardless of who obtained the property, how it was obtained, how it is titled, and when it was obtained.
In a dissolution, a court divides the marital assets between the divorcing spouses. Indiana law presumes an equal division of the marital estate, but a court may deviate from an equal property division under certain circumstances. For instance, a court may give more assets to a spouse that left the workforce in order to raise children or be a homemaker as this spouse reduced his or her earning capacity by leaving the workforce.
These property division rules often have complex consequences for business owners. The business itself can be the most highly valued asset in the marital estate. This means that in order for a court to divide the assets between the spouses, the business owner may be left with few assets outside of the business or be in a position to pay property settlement payments to the other spouse. If the business constitutes more than half of the value of the marital estate, the business owner may be in a position where he or she has to sell all or a portion of his or her business interest in order to pay the other spouse for his or her share of the property settlement.
Indiana Estate Law
Another event in which marriage may jeopardize a family business is the death of the business owner. This is especially true when the business owner wishes to leave the business to the children of his or her first marriage and is currently married to a subsequent spouse.
A valid will is usually sufficient to control to whom your business will pass after your death. One notable exception to this rule is spouses. Under Indiana law, a spouse can elect to take one-third of the deceased spouse’s assets if he or she is not satisfied with the provisions of the will. In instances where a business constitutes most of the value of the estate, this could mean that a subsequent spouse can take a share of the business that the owner intended to pass to his or her children.
A well drafted premarital agreement can help reduce much of the risk that marriage poses to a family business. Indiana law specifically permits couples to enter into premarital agreements which control how property will be divided in the event of death or divorce. Indiana considers these agreements to be beneficial because they improve marital harmony by allowing couples to make their own decisions on important financial matters before marriage. Because they are considered beneficial, Indiana courts have a history of enforcing premarital agreements so long as they are not unconscionable or otherwise invalid.
Premarital agreements are an invaluable tool for family business owners. A premarital agreement can mitigate the risks that marriage and subsequent divorce poses to a family business by designating the business as the separate property of the owner, not subject to division at death or divorce.
Given the impact that marriage has on business assets, premarital agreements are an essential element of business planning. If your goal is for your family business to stay in the family, there is no substitute for a thorough and well drafted premarital agreement. To take the necessary steps to protect your family business, talk to an experienced family law attorney and talk to your children about the importance of having a premarital agreement.