How Business Owners Can Protect Assets in Property Division

Whenever a party in a divorce thinks about the property division process, it is imperative to bear in mind this core principle: only marital property is subject to division via equitable distribution. Maryland is an equitable distribution state, which basically means that courts will not start off with a presumption that marital property be divided equally, and instead will focus on ensuring maximal fairness. Sometimes, a fair division is not an equal division, and there might be any number of reasons as to why this is the case. But, the critical thing to always keep in mind is that Maryland will only divide property classified specifically as marital property, it will not divided separate property. When business owners begin to plan for the preservation of their business related assets, understanding this core principle regarding the division of marital property is the logical starting point.

Naturally, business owners are quite concerned about the preservation of business assets in a divorce. Just about every person has heard stories about people being deeply impacted in the property division phase of a divorce in Maryland. If business owners approach this matter intelligently, they should be able to minimize the potentially negative consequences of a divorce.

‍

Private Agreements / Pre or Post Nuptial Contracts

As we’ve stated clearly, only marital assets will be eligible for division in a Maryland divorce. This means that whatever business capital has been built up prior to the marriage itself is ineligible for division, as a matter of default. If, for instance, a Marylander creates a business which has a substantial valuation prior to marriage, this will be considered separate property and will not be divided in a future divorce. When a business owner creates a business during marriage, or continues operations into a marriage, this is the point at which business assets may be considered marital property and eligible for division.

‍

Without a doubt, one of the best ways – if not the best way – to protect business assets in property division is with either a prenuptial or postnuptial agreement. These agreements are essentially the same, the only significant difference being the timing of the agreement. In a prenuptial or postnuptial agreement, parties can privately agree that certain assets will be exempt from division in the event of divorce; in other words, a business owner can use these agreements to specifically exclude his or her business assets from division.  

‍

A prenuptial agreement might hold that “all income generated by business entity A, and all assets held by business entity A, will remain the separate property of spouse C, including all income and assets generated during the marriage.” Obviously, this is a very useful tool to protect business assets.

‍

Hold Assets in a Business Entity

When assets are held in a business entity, such as a C corporation, this may be useful in shielding assets from division in some cases. The reason for this is because, in Maryland (and other jurisdictions as well), the key determination with respect to assets held in a business entity is the property characterization of the entity itself. If, for instance, the business entity is characterized as the separate property of one spouse, then the characterization of assets held within that entity follow directly from this characterization of the entity. In other words, if the business entity is considered separate property, then the assets held by that entity will likewise be classified as separate property. Income and assets acquired during a marriage, but held by a separate property business entity, can complicate the property division phase of a divorce, and so investing in a qualified accountant or financial expert might be wise in these circumstances. But, as a general matter, if a business entity is characterized as separate property then its assets will also be characterized in the same fashion, and this is a crucial principle for readers to understand.

‍

Contact the Murphy Law Firm for Additional Information

Readers who want more information on business entities in a Maryland divorce, shielding assets, property division in general, or any other related topic, contact one of the family law attorneys at the Murphy Law Firm today by calling 240-219-5243.

‍