It’s one of the more commonly asked questions on the topic of property division: how can a “family business” be kept as wholly separate property during marriage? As it turns out, there are several key pieces of information which parties can use to ensure that their interests in a family business remain separate property rather than marital property. Let’s go through each piece of information, one by one.
The first (and simplest) way to ensure that interests in a family business remain separate property is to identify them as such in either a prenuptial or postnuptial agreement. The only significant difference between these two types of agreements is timing, as the prenuptial agreement is just developed prior to the marriage and the postnuptial agreement is developed afterwards. In this agreement, the party holding the interests can state that those interests shall remain separate, regardless of whatever actions may be taken during the marriage. Of course, even with either a prenuptial or postnuptial agreement, the party seeking to keep the property separate must be certain that the agreement is enforceable, and that means professional expertise is needed.
Classification of property as either marital or separate occurs according to certain preexisting rules. For instance, as a general rule, separate property is any property acquired prior to marriage, or via inter vivos gift or inheritance (at any point, before or during the marriage). Hence, someone wanting to keep his or her interests in a family business separate should be sure to avoid holding those interests in a way which might render them as marital property. Suppose that a party acquires business interests during the marriage, but acquires them through a standard purchase as opposed to a gift. If the business interests are acquired in this way, and there is no postnuptial contract, then they will likely be classified as marital property.
One element of asset classification (as either marital or separate property) which is commonly overlooked is that commingling assets can alter how something is classified. For example, if a separate bank account commingles marital funds, this can end up turning the entire separate bank account into a marital bank account (and therefore subject to division). When it comes to a family business, avoid commingling funds derived from the family business with marital funds, as they can potentially provide grounds for marital property classification.
Another thing which can a piece of separate property to be classified as marital property is contributions made to separate property. For example, a house which is held separately during the marriage may become either wholly or partially marital property if the other spouse makes contributions to the house. If the other spouse contributed to the mortgage payments, for instance, or made financial contributions to house repairs or maintenance, that other spouse might have a basis on which to argue that the house is actually marital property. If we apply this basic principle to our hypothetical case of a separately owned family business, it’s best to not allow the other spouse to make contributions (in the form of monetary investments) in the business.
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