Marriage is a very powerful and wonderful thing. When you’re with the one you love, nothing feels impossible. But, as terrible as it sounds, divorce is possible. No one goes into a marriage thinking about when it will end, but it happens. In fact, 38% of marriages end in divorce in Canada, and due to the pandemic this year, that number is likely to increase. That is why it’s a good thing to think about a prenuptial agreement before you get married. As we’ve discussed in earlier blogs, a prenup has a bad reputation of being a signal that you don’t ‘trust’ your partner, when in reality a prenup is a great way to protect both of you in case your marriage takes a turn for the worst. Particularly if you or your partner own a business, it’s almost necessary to have a prenup prepared – and this is why.
Your business is an asset
If you are a business owner, it’s important to remember that your business is considered an asset, just like anything else you own. Having a prenup, it can help you protect your business from financial ruin. A business is an asset like a car or a house, but the challenge is determining the value of it. At Galbraith Family Law, if it’s necessary, we can engage in hiring a business valuator to determine the value of the business so that your spouse can be paid off in the event you separate. The business valuator considers the assets and debts of the business, the cash flow and profitability, and the ability to sell the business. It can be a complicated calculation, which is why we recommend leaving it to the pros and to save yourself a lot of time and financial stress in the long run in case your marriage does end in divorce.
Think about retained earnings.
An issue with some business owners is retained earnings. This profit is generated by the business but not distributed to the shareholders. The profit just stays in the business. The challenge is that if you are paying spousal support, your ex may claim that these retained earnings should be considered income for support purposes resulting in you having to possibly pay more spousal support each month. The issue is whether there is a good business reason for keeping profits in a corporation or not. For example, if there is an anticipated need to replace equipment or other capital investments to be made in the foreseeable future, then the retained earnings should not be viewed as income for the business owner. On the other hand, if the only reason the retained income is still in the business is to minimize the personal income taxes that the business owner would have to pay, then the retained income may be seen as income for the purposes of setting spousal support. If retained earnings are considered income, they would be added to the business owner’s actual income statement and they would have to pay more spousal support each month as outlined in their agreement.
So, how does a prenup help protect each party?
As a business owner or person of wealth in general a prenuptial agreement allows you to outline what is included to be divided equally if the marriage ends in a divorce and what does not get included. A good example of this is in second or third marriages. Say you remarry at the age of 50 and at that point in your life you’ve run your own business very profitably to this point and it has a very nice valuation. Your plan is to pass this business on to your two daughters who will take over the business once you retire. To ensure that can happen without any muddy waters if you were to divorce your new partner, you could include in your prenup that the business is not to be included in any way as a financial asset that would be split if you were to divorce.
If you currently planning an upcoming wedding and would like to get a prenup to protect your business and other assets, we can help you at Galbraith Family Law. We have represented many clients who own their own business or even multiple businesses, and with our experience and expertise, we can show you what you can do to protect your assets and financial wellbeing ‘til death do us part. Give us a call to get started and we will schedule a consultation for you with one of our knowledgeable lawyers as soon as possible.