Council Post: Business Owners: Understanding Spousal Support In Prenuptial Agreements

Julia Rodgers, CEO of HelloPrenup, champions collaborative prenups and promotes financial communication in marriage.

Most of us are familiar with the party faux pas known as double dipping, where someone uses the same chip for multiple dips into the shared bowl of salsa. In the context of divorce, double dipping takes on a more complex meaning, especially to a business owner.

The concept of double dipping in a divorce case is one every business owner should be familiar with because the negative consequences of it can be avoided through a number of tools, such as a prenuptial agreement or trust. Being the CEO of a platform that provides prenups, I’ve seen that brushing over important conversations about spousal support and how business assets will be divided in the event of a divorce can lead to significant challenges down the road.

What is alimony?

The financial assistance one spouse provides to the other during or after a divorce is known as “alimony,” or spousal support. The primary purpose of alimony is to help the lower-earning spouse maintain their standard of living for a certain length of time, dependent on the length of the marriage. Spousal support can be temporary or permanent, and its duration and amount can vary depending on a number of factors, such as the length of the marriage, the financial disparity between spouses and the ability of the receiving spouse to support themselves.

A business relationship can endure significant upheaval in a divorce, which is why meticulous planning and strong legal foundations are important. This resilience is often built on clear, formal agreements between business partners, including well-defined roles, responsibilities and financial arrangements. By maintaining transparent financial records and keeping personal and business finances separate, you, as a business owner, can help mitigate potential disruptions.

What is double dipping, and how can it impact business assets?

In the complex landscape of divorce proceedings, business assets can become a significant point of contention and financial strain. In some jurisdictions, courts may double count business assets when calculating alimony by treating them both as divisible property and a stream of income. This is often known as “double dipping” (paywall). In my experience, double dipping is typically encountered when the more monied spouse does not take a regular form of compensation from the business or when the compensation is not at market value.

This dual consideration can lead to a situation where the business owner faces a double financial hit:

• First, by dividing their share in the value of the business assets by potentially transferring a portion to the spouse;

• Second, by using the income generated from those same assets as a basis for ongoing spousal support payments.

Essentially, this means your spouse could have two bites at the apple, receiving both a share of the business and a portion of its income stream. Here is an example: Imagine a business owner going through a divorce, whose company is valued at $2.5 million. This number is then used to divide the marital assets. The judge also orders the business owner to pay spousal support based on an income level of $500,000, derived from the business profits. This means the business owner is effectively paying twice—once through the business value in the asset division and again through spousal support payments based on the same income.

It’s possible that double dipping could impact the financial health of the business and its owner, as it could create a strain on cash flow and operational stability.

A well-crafted prenuptial agreement can preemptively help avoid the issues of double-dipping by explicitly defining how business assets will be treated in the event of a divorce. You can stipulate in a prenup that the business will remain the sole property of the owner and that its income will not be used to calculate alimony, thus preventing the scenario of double dipping. This legal foresight can help preserve the business’s financial integrity and ensure the owner retains full control over their business.

Putting business shares into a trust is another way business owners can protect their assets. A trust can help by providing a structured mechanism for managing and safeguarding the shares. This can better ensure continuity and stability in the business.

How can you address both your and your spouse’s needs?

If you choose to have a prenup drafted, spousal support provisions can offer security for both you and your spouse. For the higher-earning spouse, it sets clear limits on future obligations. For the lower-earning spouse, it ensures a degree of financial stability. This balance fosters fairness and reduces the likelihood of disputes, which I’ve observed contributes to a healthier post-divorce relationship.

Including spousal support in your prenup also allows you to account for potential changes, such as shifts in business performance or significant life events. This flexibility ensures your agreement remains relevant and fair over time, regardless of how your circumstances evolve.

The Bottom Line

As a business owner, you understand the value of proactive planning and risk management. If you’re planning to draft a prenuptial agreement, addressing spousal support and asset division is a critical step in protecting your business and personal finances. By establishing clear, fair and customized provisions, you can better ensure financial stability, avoid litigation and provide financial security for both you and your future spouse. Remember, a well-drafted prenup is not about anticipating divorce but about building a solid foundation for a transparent and equitable partnership.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

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