No matter how hard we try to keep our laws universally applicable, there are always exceptions. In the case of dividing businesses during a divorce, there are some firm ground rules that generally apply to most spouses. However, these laws are not “written in stone,” and there are considerable exceptions. Although it might be rare to see these exceptions, they do pop up in divorces across America.
Using Inheritance Money to Start a Business During a Marriage
One exception to normal equitable distribution laws is if a spouse uses inheritance money to start a business during a marriage. Normally, only businesses started prior to the marriage would be classified as separate property. However, a spouse can theoretically start a business with only their inheritance money and still benefit from the protection of owning separate property.
This is of course because inheritance funds are always considered separate property, and so using those funds to start a business is simply transferring or investing the separate property. In most cases, the other spouse would not have access to the business or the income generated during the marriage.
When a Spouse Invests in a Business That is Separate Property
If a spouse’s business is considered marital property, the other spouse may still gain access to it under certain circumstances. If the other spouse invests marital property into the business, they may be entitled to profits generated from the business as a result. For example, let’s say a spouse owned a business prior to the marriage. During the marriage, the other spouse invests $50,000 into a Facebook Ads campaign that helps the business generate $200,000 in additional income. Since Facebook can provide the business with tracking information and relevant data, that spouse can realistically prove that their contributions directly resulted in considerable profits from the business. They would then be entitled to a portion of those profits via equitable distribution.
How Do We Define “Contributions?”
The exact definition of “contributions” in a legal sense is quite open to interpretation. Ultimately, the courts decide what this really means. Some raise the bar considerably, and only spouses who have contributed to the businesses in a meaningful way can be awarded portions of the business interest. For example, they might have worked at the business for years with little to no pay, or their unique skills may have helped the business succeed.
But what about the contributions of the title-owning spouse? What if the spouse who “owned” the business interest merely owned stock in the company, appearing “on paper” as a member of the board but contributing virtually nothing to the actual business? In this situation, the “lack of effort” on the part of the spouse might cause the pendulum to swing back the other way, raising the chances of the non-titled spouse receiving something from a separate business interest.
Prenuptial and Postnuptial Agreements
Last and perhaps most obviously, prenuptial and postnuptial agreements can create notable exceptions in which business interests can negate the established laws of equitable distribution. However, many states do not recognize these agreements under certain circumstances, especially in regards to postnuptial agreements.