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Saving Your Business From Divorce

Many of us work long and hard hours and invest every last penny we've saved to make our business a success, yet, when contemplating marriage, we are quite often blinded by love and fail to stop and ask ourselves, "If I bring my business interest into my marriage or, if I were to establish a new business with my own money after my marriage, will I be able to keep my business should the marriage fail?" Unless you take certain precautionary measures to protect your business from divorce, the answer to this question could be "No."

Prior to the passage of Maryland's Marital Property Act which became effective on January 1, 1979, the property of divorcing spouses, including any and all business interests, was divided according to title. The preamble to the Marital Property Act (the "Act") states that "it is the policy of this State that when a marriage is dissolved the property interests of the spouses should be adjusted fairly and equitably, with careful consideration being given to both monetary and non‑monetary contributions made by the respective spouses to the well‑being of the family. What the Act does is give the courts the authority to resolve disputes between spouses over marital property, rule on their respective ownership interests and, if necessary, order a sale of the property and a division of the proceeds. Such a court ruling could result in a forced sale of your business, unless you were fortunate enough to work out a buyout agreement with your spouse.

How do you know if the respective business interest of you and your spouse is "marital property?" Marital Property The Act defines marital property in terms of what it includes and what it does not include. Maryland law defines marital property as that property acquired by one or both parties during the marriage, regardless of how it is titled. The law goes on, however, to state that marital property does not include property:

1) acquired prior to the marriage;

2) acquired by inheritance or gift from a third party;

3) excluded by a valid agreement; or

4) that is directly traceable to any of these sources.

Although you might be quick to identify your business interest as being excluded from marital property under one or more of the above exceptions, there may be a catch. You should be aware that the spouse who originally owns the property must be very careful to avoid taking any actions or measures by which he or she could be deemed to have made a gift of such property to the other spouse, after which event the property would likely be considered marital property. An example of an agreement that might exclude a business from marital property is a Prenuptial Agreement that specifically discloses and excludes the business interest and any after‑acquired property or proceeds of the business from becoming marital property. Another example of an agreement to which the Act refers is a Voluntary Separation and Property Settlement Agreement that the parties enter into once it has become clear to them that their marriage has failed. Unless both spouses can resolve their dispute over who gets the business, however, the issue will likely end up before a court. When drafting and negotiating a separation agreement, one should keep in mind the above definition of marital property. The marriage has now existed for a period of time and, while such an agreement might include terms excluding the business from marital property and giving it to one or the other spouse, by law, the business is quite possibly all, or nearly all, marital property.

You should also be aware that the "goodwill" you have built in your business, as distinguished from your personal reputation, may be evaluated and be determined to be marital property. And keep in mind that a court's ruling that your business is not marital property may have a certain repercussion on your obligation for payment of alimony to your spouse. The amount of alimony that the court awards to your spouse can take into account the amount of the monetary award granted to him or her, his or her ability to earn an income and his or her financial needs and resources. Lastly, it is interesting to note that while courts generally do not treat professional degrees as property, a New Jersey court has created a concept of "reimbursement alimony." Mahoney v. Mahoney, 453 A.2d 527 (N.J. 1982). In Mahoney, the court stated:

Several courts, while not treating educational degrees as property, have awarded the supporting spouse an amount based on the cost to the supporting spouse of obtaining the degree. In effect, the supporting spouse was reimbursed for her financial contributions used by the supported spouse in obtaining a degree.

There has been a substantial amount of litigation dealing with the identification and the evaluation of marital property, and with the amount of the monetary awards granted to the respective parties pursuant to the Act. Taking precautionary measures to protect your business from divorce often involves complex legal issues for which you should consult with your legal counsel.

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