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Protecting your business against the effects of a divorce

Protecting your business against the effects of a divorce

Your business, no matter how big or small, is probably the most valuable financial asset you own. But the reality is, while a business owner is investing long hours to build and grow a business, a marriage might fray under the pressure. Although divorces are always difficult for all the parties involved, they can become much more arduous when one or both spouses own a business.

It can happen to the best of entrepreneurs, and by the time the divorce summons is issued, it will be too late to act and the damage will have already been done.

Depending on your individual circumstances, i.e. the marriage regime you and your spouse chose initially, your spouse may be entitled to as much as 50 percent of your business in a divorce, if you are married in community of property (which is the default position in South Africa).

Therefore, it is necessary to divorce-proof your business well beforehand, because that business might come crumbling down if you or your spouse decides to file for a divorce. With the correct planning in place you can protect your business by taking a few simple steps which this article will highlight.

Entering into an antenuptial agreement
It is important for business owners to make sure that their marital regime is governed in terms of an antenuptial agreement i.e. out of community of property. If you do not enter into this agreement before your date of marriage, you will automatically be married in community of property, as aforesaid. Being married in community of property poses the biggest risk to your business, as your spouse will automatically be entitled to half of your business.

An antenuptial agreement is the most cost-efficient and reliable pre-marital contract that can protect your business assets in the event of a divorce as it regulates exactly what happens to your assets and sets forth how marital property will be divided. A marriage out of community of property has the effect of each spouse’s estate staying completely separate and there is no creation of a joint estate. This means your spouse has no claim against your assets or your business.

If, however, you want the accrual system to apply to your marriage and you do not want your spouse to share in any value from, for example, the sale of your business or the sale of shares in your business in the future, you need to exclude your business specifically from the working of the accrual system. The accrual system still does not mean he or she has a claim against the actual asset which is your business but any value derived there from will form part of your estate for accrual purposes if not excluded.

A well drafted antenuptial contract can thus save you time and money during a divorce and prevent a battle over the ownership of a business and other assets.

Entering into a postnuptial agreement
You can enter into a postnuptial agreement after date of marriage if you want to acquire an existing business or start a new business that you would want to protect. This agreement will have the same effect as an antenuptial contract and will result in you being married out of community of property.

However, this is not the best option, as it involves a costly court application to obtain the court’s consent to change your marital property regime. It is thus a safer and more cost-effective option to enter into an antenuptial agreement before you get married.

But, if you did not own the business at the time of marriage and did not feel the need to protect your assets with an antenuptial contract, it is an option to explore when trying to limit claims by your spouse against the business.

Using a trust as an estate planning vehicle
The position in our law is that a trustee of a trust does not become the owner of trust property but merely holds such property for the benefit of third parties (beneficiaries). For this reason, trust property cannot be considered as part of a person’s estate for purposes of determining the value of an estate in divorce cases. Setting up a trust and buying the business through this trust and not in your personal capacity keeps the business from being counted as a marital asset as you no longer personally own it. This will also protect the value of the company's growth.

In this case, it is best to create a trust before purchasing or starting the business. If the asset is transferred into an already existing trust, the reason for such a transfer is normally either a donation or a sale. If it is a donation, donation tax will have to be paid and it can be a costly exercise.

However, if a party transfers assets into a trust with the intention of deceiving or defrauding a marriage partner of his/her potential claims in an approaching divorce action, the validity of the trust may be suspect due to the lack of bona fides on the part of the founder/donor or trustees of the trust. A court will also consider whether the trust is a trust in the real sense or merely a “corporate veil” or alter ego of a person. Should the court find that the trust is basically an alter ego, the assets will be deemed to be part of the spouse’s personal estate, and must be shared with the other spouse in a divorce.1

It is of vital importance that professional legal advice is sought to determine which marital property regime is most appropriate to enter into with consideration of your personal circumstances and whether a trust is suitable for your estate planning purposes. At SchoemanLaw Inc. can assist you with advice and a professionally drafted antenuptial agreement to protect the business you built. Contact us today.

1 Badenhorst v Badenhorst [2006] 2 All SA 363 (SCA)

© Arinda Truter - Schoemanlaw Inc. - 2017

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