Love may be eternal, but all relationships on this earth are guaranteed to end at some point.
In fact, we know with certainty that every marriage is going to end in one of two ways, either by death or divorce. For business owners, planning for these eventualities can prevent the end of a marriage from also triggering an end to their business.
Marriages that End due to Death
The hope of most newlyweds is that they will breathe their final breath while they are still in love with and married to their spouse, after spending a long, happy life together. Even those individuals who are fortunate enough to experience this rosy outcome would be well-served by putting in place an estate plan to dictate the settling of their affairs after their death.
An estate plan typically consists of a Last Will, though various trusts might be incorporated into the plan if appropriate. An estate plan contains instructions about how assets are to be handled (i.e., who gets what) and also designates one or more persons who will be responsible for carrying out the instructions (i.e., an executor or trustee).
For a business owner, a key decision that must be made is who will receive ownership interests in the business. Potential recipients could include the owner's surviving spouse, children or grandchildren, or long-time employees. Generally, a person is free to structure their estate plan however they want.
Nevertheless, if the person is survived by a spouse and does not leave their spouse a large enough share of their estate, then under North Carolina law the surviving spouse can file a claim in the estate to receive that minimum share. The size of the share varies based on the length of the marriage. It starts at 15% and grows to 50% after 15 years of marriage. If a business owner wants to leave ownership interests to someone other than their surviving spouse, certain planning strategies can be implemented to ensure that the plan is not disrupted due to the surviving spouse's right to claim a share of the estate.
Commonly, a person's interests in their business represents the bulk of the value of their estate. If the owner wants to benefit several individuals in their estate plan but does not want to divide the business among them, then life insurance often can be incorporated in the plan so that some beneficiaries receive cash while the business interests go to one or more other beneficiaries.
If interests in the business will be given to multiple beneficiaries, then the owner might choose to condition the gifts on the beneficiaries entering into a shareholders' agreement with terms that the owner establishes as a part of their estate plan. This allows the owner to set parameters for how the company will be controlled and how the beneficiaries might transfer their ownership interests in the future.
Setting those rules in the estate plan avoids the beneficiaries having to negotiate those terms at what may be an emotional and stressful time due to the owner's death.
Ultimately, there is no one-size-fits-all estate plan. Every person's situation is unique. A thoughtful estate plan should consider the owner's goals, the relationships of the individuals involved, and the nature of the business and its operations.
Marriages that End due to Divorce
Not all marriages last the lifetime of the couple. Some marriages end because the couple decides to divorce. When spouses divorce in North Carolina, if the parties do not otherwise agree, the courts will determine how the couple's assets are divided in a process referred to as equitable distribution.
The court first classifies assets as either separate property or marital property. Separate property includes assets that one spouse owned before the marriage along with gifts or inheritances that a spouse received during the marriage. Marital property includes all of the property acquired during the marriage, other than gifts or inheritances.
Generally, each spouse is entitled to keep their separate property, and the marital property is divided starting with the presumption that each spouse is entitled to half of it. Equitable distribution proceedings often are acrimonious and can result in protracted battles over how property is divided. When family businesses are involved, the business may find itself being ordered by the court to turn over records or financial data or to refrain from transferring assets.
Certain agreements can help protect a business from the divorce of its owners. Pre-marital or post-marital agreements can establish each spouse's rights to ownership interests in the event of a divorce. For instance, the couple might agree that the interests will remain with the spouse who owns them and the value of the interests will not be taken into account when dividing other assets.
Buy-sell agreements also can help protect the business from a divorce. For example, all of a business's owners might agree that if any owner divorces, then the business would redeem that owner's interest for a set price, so that the sales proceeds would be subject to the divorce proceeding but not an actual ownership interest in the business.
Like with an individual's estate plan, there is no silver bullet agreement that is the right fit for every business. Rather the plan and associated agreements need to be tailored to fit the business and its owners' situation.
All marriages end. If a family business is involved, the end of a marriage has the potential to derail the business. However, owners who put the time and effort into considering how things might play out in the marriages of themselves and their business partners and who put agreements in place to address those outcomes stand a much better chance of seeing their business survive.
This is a part of our February series: "Love, Relationships, and the Law." For more insights, click here.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.