Protecting one’s business from the repercussions of divorce

Not many business owners know that their spouses may be entitled to as much as a fifty percent share in their businesses after the dissolution of their marriage by way of divorce. This is especially the case in marriages in community of property (which is the default marital property regime in South Africa).

This is a scary thought as their businesses are probably the most valuable financial assets that they own, in which they probably invested capital and long hours to build. In most divorces, the parties aim to break all bonds. There is therefore a real chance that business owners will end up paying out their ex-spouses for their 50% share in the business, leaving the business in a financial lurch.

The problem is that by the time business owners realise they are heading towards a divorce, it might be too late to keep the business out of it. So how do business owners go about divorce-proofing their business?

1. Antenuptial contract

An antenuptial contract (“ANC”) is a cost-efficient and reliable pre-marital contract that can be entered into to protect a business in the event of a divorce.  An ANC regulates precisely what happens to one’s assets upon death of a spouse or divorce.

When entering into an ANC, the marital property regime will be one out of community of property, meaning each spouse’s estate stays completely separate and there is no creation of a joint estate, as there is when you are married in community of property. An ANC will ensure that spouses have no claims against each other’s assets or businesses.

Another option is to enter into an ANC with the application of the accrual system. This means that even though the marriage is out of community of property, there will a sharing of growth in the spouses’ estates during the marriage, depending on how it is drafted. The ANC could then exclude the sale of a business or the sale of shares in a business in the future from the accrual system, however this would need to be explicitly stated. The accrual system does not mean that a spouse has a claim against the actual asset, being the business, but any value derived from the business will form part of the business owner’s estate for accrual purposes if not excluded, and the spouse will be entitled to a share in this.

Remember if an ANC is not signed before the date of marriage, the marriage will automatically be in community of property, which will entitle a spouse to half of the business.

2. Postnuptial agreement

A postnuptial agreement may be entered into after the date of marriage, if a business is acquired or started during the course of the marriage. This will effectively change the marital property regime from in community of property to out of community of property, i.e. the same effect as an ANC.

This is not the preferred option, as the court’s consent will need to be obtained in order to change the marital property regime. This involves bringing a costly High Court application involving numerous requirements to be adhered to before the application can succeed.

3. Trust

A trust can be registered in order to purchase a business ensuring that it is not held in one’s personal capacity but as one would still be a trustee one would have some control over the business. This will keep the business from being considered as a marital asset at the time of divorce. Under South African law a trustee of a trust does not become the owner of trust property but merely holds the property for the benefit of third parties (the beneficiaries in this case).

It is best to create a trust before purchasing or starting a business as transferring an asset into an existing trust will have adverse tax consequences.

When considering this option, be wary that transferring an asset into a trust with the intention of deceiving or defrauding a spouse out of his/her potential claims in an approaching divorce, may result in a court declaring the transaction as invalid. A court will also consider whether the trust is merely a person’s alter ego and will then deem the assets to be part of their personal estate to be shared with the spouse in a divorce.