Business Interests and Premarital Agreements in New Jersey

In this podcast, family lawyer Cynthia Ann Brassington answers questions regarding business valuation, asset division, alimony, and the importance of prenuptial agreements in the event of divorce.

By Cynthia Ann Brassington
July 28, 2017

Linwood, New Jersey family lawyer Cynthia Ann Brassington is certified by the Supreme Court of New Jersey as a matrimonial law attorney, and helps people resolve their divorce related issues across all areas of the process. In this podcast, Cynthia answers questions regarding business valuation, asset division, alimony, and the importance of prenuptial agreements  in the event of divorce.

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Guest speaker: Cynthia Ann Brassington, Matrimonial Law Attorney
A panelist on the Matrimonial Early Settlement Panels in both Atlantic and Cape May Counties, Cynthia also taught family law as an adjunct professor for Atlantic Cape Community College. She is certified by the New Jersey Supreme Court as a Matrimonial Law Attorney.

Hosted by: Diana Shepherd, Editorial Director, Divorce Magazine 

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Read the Transcript of this Podcast Below.

1. I'd like to start by asking that if both spouses co-own a business together, how will it be divided on divorce?

Before we talk about parties continuing to co-own the business, we need to identify what kind of business it is. Is it a sole proprietorship? Well, in that case it would not apply because it's only one owner. But both parties may work in the business. Is it a partnership in which they both own 50%, which is not uncommon? Is it a C-corporation or an S-corporation? So, we begin with what type of business.

The next question to ask is it the kind of business that the parties can continue to work? Are both parties active in the business and are they able to put aside their differences in order to continue to work in the business because both parties bring value to the business by their specific contributions? That is not common however. What is more common is we value the partnership or the corporation or the sole proprietorship, we put a value on it and then we discuss one party buying out the other party in accord with what percentages might be equitable under their circumstances.

2. In a divorce case that involves a business, how is support determined?

I take your question as applying to both child support and/or alimony, which is also known as spousal support. In New Jersey, alimony is addressed under the factors that are set forth under the Alimony Reform Act. The first step would be to determine the standard of living of the marriage and we do that by disclosure of such things as a case information statement, which reflects the expenses of the parties monthly and separately if they have already separated. The court looks at the needs of the supportive spouse and the ability of the supporting spouse to pay among other factors such as the duration of the marriage, the age of the parties and their respective physical health as well as other equitable factors.

3. If one or both spouses own a business, is it always necessary to hire a business evaluator? I'm wondering if there's a minimum size or potential dollar value that's needed to make it a worthwhile exercise.

The first step is to evaluate whether the business is a marital asset or what portion of the business is a marital asset. Was the business gifted to one of the parties before or during the marriage, or has it grown during the marriage, that it was a premarital business and the parties invested into it during the marriage, is it a gifted business by say a parent and then say the parties invested into the business during the marriage? We may have a blend of a marital or pre-gifted business that then the parties invested into. So, we really have to first begin to look to and carve out the marital portion of the business.

Before I consider whether to utilize a forensic accountant to value a business, I look to the size of the business. For example, some businesses are just side businesses of a spouse, and from a cost-benefit perspective, it does not make fiscal sense as the business does not generate more than a small profit if a profit at all. When a business is a larger business with multiple employees and supports the parties in their marital lifestyle, generally under those circumstances a forensic accountant would be necessary.

4. How are business assets divided during a divorce in New Jersey?

There is no set formula to divide a business. There are many factors that determine what each spouse will receive equitably. If the business is evaluated the supportive non-ownership spouse will likely receive a percentage but the percentage is subjective to numerous factors including the type of business, tax consequences in the event that the business is going to be sold in the future, or whether the person keeping the business has a spousal support obligation just to name a few.

5. If one spouse receives stock options at work, are they considered assets to be divided during divorce?

The first thing we need to look at is what is a stock option? A stock option is the right to buy stock in a company who employs the spouse at a discounted or fixed price within a certain period of time. Stock options can be valuable and they're subject to equitable distribution as a marital asset. The issue that you're asking is how to distribute them as the stock has not yet been purchased and the right is not transferred to the non employee. The options are distributed by something called a Callahan Trust, which is a constructive trust and the non-employee receives his or her percentage of the shares when the options vest.

6. Let's switch to prenuptial agreements now. What should be included in a prenuptial agreement for a business owner?

That's a great question. The prenuptial agreement is a contract between two people who are contemplating marriage and is effective upon the date of the marriage or civil union. The agreement should include all property of the parties including their business, real estate investments, retirement accounts or pensions, and debts.

When I prepare a prenuptial agreement it is imperative that the agreement contain full disclosure. In a business, I obtain the corporate and personal tax returns of the business owner – which may include a K1, Schedule C, or whatever tax documentation is applicable. Parties do generally not obtain a forensic evaluation for a prenuptial agreement, but a business owner generally has an idea of what his or her business would sell for. I include that value but the parties confirm any agreement that they accept that stipulated value knowing that they waived their respective right to any formal forensic evaluation.

7. Many high-net-worth clients come from family with significant wealth, how common are prenuptial agreements in these kind of marriages, and how well do they hold up in court?

The short answer is in a family with a high net worth, a prenuptial agreement is invaluable especially when the party marrying has an interest in a family business. Prenuptial agreements in these situations are very common as the family wants to protect the family business in the event that a divorce arises sometime in the future.

The agreements are intended to hold up in court and that is why it is essential that the agreement include the party's rights and obligations and includes full disclosure of the party's assets and debts. The full disclosure is supported by documentations such as statements of net-worth, investment statements, savings statements, retirement statements, tax returns and those parties should be represented by counsell. Parties sometimes will not enter into a prenuptial agreement because they think it will harm the romance of the wedding.

However, once you're married, entering into a post-marital agreement is risky and I would not gamble on their enforceability. A prenuptial agreement can be amended after the marriage, which is another good reason to have one.

8. If someone signed a prenuptial agreement, is there any way of getting it set aside during divorce?

If a prenuptial agreement is prepared in accord with requirements of the New Jersey statute, it should not be set aside. It must be signed by the parties voluntarily and must be conscionable. The parties must each provide full and fair disclosure of the earnings, property and the respective financial obligations. If there is a waiver of financial obligations such as spousal support, the waiver must be voluntary. Issues of child support and custody would not be enforceable in a prenuptial agreement.

Also, did each party have adequate knowledge of the property or financial obligations of the other party? The prenuptial statute includes that the party may waive counsel but I do not recommend that. In my prenuptial agreements the other party is represented and if not I would be concerned as to its enforceability.

9. If a person is getting married and they don’t have any assets, do they need a prenuptial agreement?

That's a great question, Diana! I believe everyone should have a prenuptial agreement because you never know if a divorce is in your future. After all the statistics are one in two marriages end in divorce. Assume two people get married and one party just graduated from college and is a teacher and therefore has a prospective teacher's pension, the other party works in construction. Twenty years later, he has a construction company and she has a teacher's pension. Now we have to have this construction company valued and the pension valued. And she wants to keep her pension and he does not want to buy her out of his construction company.

This non-complicated divorce now is complicated. If they had agreed to what would have happened when they were getting along with each other and wanted to treat each other fairly, they would know their expectations in advance and that is why prenuptial agreements are invaluable.

10. If there is a great disparity between the amount and value of the assets each party is bringing to the marriage, how does the party with fewer assets protect themselves in a prenuptial agreement, and how can the less moneyed spouse make sure he or she isn’t being taken advantage of.

The first step is to get a lawyer to ensure that you are being treated fairly in a prenuptial agreement. If a party does not have significant assets and they are marrying the person that does have significant assets, it's valuable for that party to have a prenuptial agreement so that he or she knows what would happen in the event of a divorce. And then they can make the decision as to whether they want to live with it.

We also use life insurance as an invaluable tool in a prenuptial agreement. If the financially empowered spouse has significant prenuptial assets that they want to leave to their children for example from their first marriage, a life insurance policy benefiting the less financially empowered spouse may be an option. But as I always say every case is different.

11. What affect does a prenuptial agreement have during divorce?

I explain a prenuptial agreement as the divorce in advance because you then know exactly what's going to happen in the event of divorce. Therefore upon filing the complaint for divorce I move before the court to then enforce the agreement.

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July 28, 2017
Categories:  Podcasts|FAQs

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