High-Net-Worth Divorce and Business Interests

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Divorce is always a challenging experience, involving delicate matters such as property division, child custody, and alimony. However, when high-net-worth individuals go through a divorce, the complexities increase, especially when business interests are at stake. These cases can have long-term financial repercussions and often lead to higher litigation costs.

Understanding High-Net-Worth Divorces

A high-net-worth divorce usually involves significant assets, often worth several million dollars or more. These divorces are unique because they typically include a variety of assets that may include retirement accounts, real estate, investment portfolios, and business interests. Among these, business interests can become particularly contentious, often rivaling child custody arrangements.

In any divorce, assets are categorized as either separate or marital property. In most cases, separate property includes assets owned by one party before the marriage or acquired through inheritance or gifts during the marriage. Marital property, on the other hand, encompasses everything acquired during the marriage. In general, only marital property is subject to division in a divorce. In most states, separate property can transform into marital property if it is treated as such or “used regularly for the common benefit of the marriage.” A home owned by one spouse before the marriage might be considered marital property if the couple lives there together for many years, regardless of whose name is on the deed.

A high-net-worth divorce will often include a significant amount of premarital or inherited property. This may consist of assets such as bank accounts, real property, or other investments that have never paid income that has benefited the marriage. These assets would likely be considered separate property despite their large value. On the other hand, if a party owns an interest in a business and earns dividends or income by virtue of that interest, it is possible that a court will determine that the interest is marital property.

The Valuation and Division of Business Interests

Much like a marital home, a business can become marital property if it contributes to the family’s lifestyle, even if it was originally owned by one party before the marriage. If the business income supports the family, it might be considered marital property and subject to division.

When a business interest is divided in a divorce, the court faces two primary challenges: valuing the interest and deciding practically how to divide it. The court must first determine the business’s value to fairly distribute the marital estate. This can be done through various methods, such as assessing the business’s market value, calculating the value of its assets minus liabilities, or analyzing its net income. After valuation, the court decides the best course of action, which might include awarding a portion of the business to the spouse, requiring a buyout of the marital interest, or compensating the spouse in other ways, such as through alimony.

In some situations, business owners might need to hire financial experts to perform detailed valuations and develop fair distribution plans that minimize disruptions to the business.

Strategies for Protecting Business Interests

The best way to protect business interests in a divorce is through pre-nuptial or post-nuptial agreements. Without these, it’s essential to include clear provisions in the business’s operational documents that address buyback rights in the event of a divorce. This is especially critical for small, closely held businesses, where the introduction of a new owner could complicate management. Including a multi-step right of first refusal can help prevent such scenarios. Business owners can further protect themselves from litigation expense by clearly stating how a business valuation is to be conducted. This provision should be accompanied by a statement that the valuation method applies in the event of sale or buyout of a business interest incident to divorce.

High-net-worth divorces pose unique challenges, especially when business interests are involved. These cases often feel like navigating the winding down of a business or managing a buyout. To protect these interests and ensure the business’s survival after a divorce, proactive legal and financial planning is vital. Early engagement with legal counsel can help navigate this complex landscape and safeguard the business’s future.