Divorce Primer on Small Businesses for the Corporate Attorney

By Charles M. Goldstein

THE ISSUE

It is important for the corporate attorney to recognize the overlap between corporate and family law. The corporate attorney who has minimal or no involvement with family law should have at least some understanding of the potential ramifications of the divorce process for his or her client. While referral to a family law specialist will often be appropriate when a client is facing divorce-related issues, it is helpful to be cognizant of how your client may be impacted by matrimonial law.
A comprehensive treatment of all corporate law issues affected by a divorce is beyond the scope of this article. The following is a selective discussion of possible ramifications of the divorce process for your client’s business interests, particularly when parties to a divorce jointly own shares in a corporation or wholly own a corporation.

BEFORE MARRIAGE

Planning Ahead with a Prenuptial Agreement

While it may be difficult, even uncomfortable, for your client to contemplate divorce before marriage, statistics indicate that between 40 and 60 percent of married couples will divorce. The reality is that, unless your client plans ahead, he or she will have little or no control over the effects of divorce on his or her business. Having an enforceable prenuptial agreement in place is probably the single most effective way to protect your client’s property interests in a business.
A prenuptial agreement is a contract, signed before the marriage, that fixes spousal rights in nonmarital and marital property in the event of divorce. Minn. Stat. § 519.11, subd. 1 (2010); see also In re Estate of Aspenson, 470 N.W.2d 692, 696 (Minn. Ct. App. 1991) (noting that the purpose of a prenuptial agreement is to “define and limit [each spouse’s] claims and demands . . . against the other.”). Specifically, and perhaps most importantly, a prenuptial agreement can establish the cilient’s nonmarital interest in property as of the date of the marriage and the value of property as of the date of the marriage. Minn. Stat. § 519.11, subd. 1. Nonmarital property can be allocated between the parties only if the court finds that a spouse’s resources, after allocation of the marital property, are so inadequate that it works an unfair hardship on that spouse. Minn. Stat. § 518.58, subd. 2 (2010). Additionally, a prenuptial agreement may establish the treatment of a business in the event of divorce.
If the prenuptial agreement is to be valid and enforceable, certain requirements must be met. A prenuptial agreement which provides for the disposition of nonmarital property will be valid and enforceable only if procedurally fair. Procedural fairness requires that “(a) there [be] a full and fair disclosure of the earnings and the property of each party, and (b) the parties have had an opportunity to consult with legal counsel of their own choice.” Minn. Stat. § 519.11, subd. 1(a)-(b); see, e.g., Rudbeck v. Rudbeck, 365 N.W.2d 330, 332-33 (Minn. Ct. App. 1985) (concluding that the parties’ prenuptial agreement was unenforceable under the common law because the husband did not make a full disclosure of his assets and the wife lacked a meaningful opportunity to consult an attorney).
Prenuptial agreements that establish rights to marital property must comply with these procedural fairness requirements and must also be substantively fair. McKee-Johnson v. Johnson, 444 N.W.2d 259, 265-68 (Minn. 1989), overruled on other grounds by In re Estate of Kinney, 733 N.W.2d 118 (Minn. 2007) (holding that the prenuptial agreement at issue was procedurally fair and remanding for the district court to determine whether it was substantively fair). The burden of proving the enforceability of an antenuptial agreement rests upon the proponent of the antenuptial agreement when the agreement is not supported by adequate consideration. Kinney, 733 N.W.2d at 127. On the other hand, the burden of proof is on the party challenging the antenuptial agreement when the district court finds that the agreement is supported by adequate consideration. Id. Substantive fairness of an agreement depends on the facts and circumstances of each case; the substance of the agreement must be fair both at the time of its execution and at the time of its enforcement. Id. at 267. If the enforcement of the agreement would be unfair in light of the circumstances at the time it was entered into or would be “oppressive and unconscionable” at the time of the marital dissolution, a court would probably not enforce the agreement. Id.; see also Aspenson, 470 N.W.2d at 696 (holding that the prenuptial agreement at issue was substantively fair where there had not been a drastic change in circumstances from the time of execution to the time of the enforcement of the agreement).

BUSINESS TOOLS AND INTERESTS DURING MARRIAGE THAT MAY AFFECT PROPERTY DIVISION IN THE EVENT OF A DIVORCE

Premarital Business Interests

The prenuptial agreement, which addresses business value as of the date of marriage, can be an invaluable tool in resolving the division of a marital estate. Scholle v. Scholle exemplifies the importance of memorializing a spouse’s interest in business at the time of the marriage. 411 N.W.2d 912 (Minn. Ct. App. 1987). In that case, the trial court did not find a partnership agreement or other reliable evidence, such as a prenuptial agreement, of the husband’s alleged 50 percent ownership of a law firm at the time of the marriage. Id. at 914. Instead, the trial court relied on the firm’s 1972 partnership tax return to find that the husband held a 29.7 percent interest in the firm at the time of the marriage. Id. at 913-14. Despite this finding, the trial court determined that the husband’s present interest in the law firm was marital because the husband did not adequately trace his nonmarital interest in the firm through changes that resulted in a new business entity. Id. at 915. The court of appeals affirmed. Id. “Tracing” such an interest for the court is a complex and costly challenge, with unpredictable results.
Whether the increase in the value of a business, originally the nonmarital property of one spouse, should be equitably divided upon divorce was the issue presented by Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987). In this case, the husband alleged to have purchased—in 1949, prior to the parties’ marriage—a 50 percent interest in the parties’ fire protection equipment business for $2,500. Id. at 186. The parties did not enter into a prenuptial agreement. In 1956, three years after the marriage, the parties purchased the remaining interest in the business for $12,500 and incorporated it. Id. Over the course of the marriage, the husband managed the business and called on customers and the wife assisted periodically with bookkeeping but was primarily a homemaker. Id. At the time of the divorce, the corporation had retained earnings of $563,598 during the course of the marriage. Id. at 195.
The Minnesota Supreme Court, considering whether the business’s increase in value was nonmarital or marital property, held “that the increase in the value of nonmarital property attributable to the efforts of one or both spouses during their marriage, like the increase resulting from the application of marital funds, is marital property” but that an increase “attributable to inflation or market forces or conditions, retains its nonmarital character.” Id. at 192. Because both parties worked for the corporation, and therefore contributed in part to the increased earnings of the corporation, the Court held that “[n]early the entire present value . . . should be apportioned as marital interest.” Id. at 190, 195. Had the parties entered into a valid and enforceable prenuptial agreement that established the husband’s nonmarital interest as of the date of the marriage, or specified the treatment of the business in the event of a divorce, the court likely would have divided the business’s value according to the parties’ agreement, saving substantial legal costs and lending predictability to the divorce process.
The Minnesota Court of Appeals applied the holding in Nardini to reach a different result in Duffey v. Duffey, 416 N.W.2d 830 (Minn. Ct. App. 1987). In Duffey, the husband owned a minority interest in seven closely held corporations owned by his family. Id. at 831. He was an officer and director of several of the corporations but was not a key person and played a “minor role” in the businesses. Id. at 831-33. The court concluded that because the increase in the value of the businesses was attributable to appreciation, rather than to the husband’s efforts, the increase in value was nonmarital property. Id. at 832-33; see also Olson v. Olson, No. A08-0171, 2009 Minn. App. LEXIS 155, at *3 (March 31, 2009) (holding that the appreciated value of wife’s nonmarital shares gifted to her from a family business, where the increase was properly attributed to the wife’s father’s efforts, was properly characterized as nonmarital property). Again, a valid prenuptial agreement could have alleviated the need to litigate the issue and provided an arrangement to divide equity in the business.
In order to avoid court valuation and apportionment of your client’s business, determine your client’s interest in that business before marriage and negotiate how the business should be treated in the event of divorce. Encourage your client to consider a prenuptial agreement implementing those terms. The agreement’s characterization of your client’s interest in the business, the valuation of that interest, and the plan for ownership and management upon divorce, will likely be upheld by a court where the agreement is both procedurally and substantively fair at the time it is made.

Avoiding Financial Statement Inflation

Financial statements may present special problems for clients going through the divorce process, particularly with property division. Assume your client completed preparing a financial statement to use in securing a business loan, which you have reviewed. The client inserted figures at the high end of the market value range, not considering possible ramifications in a divorce proceeding. If your client divorces, that financial statement could be used to his or her detriment if the Court uses those values to determine property values to be divided.
In Otte v. Otte, 368 N.W.2d 293, 294-95 (Minn. Ct. App. 1985), the husband operated a custom farm work business. In 1975, he used a financial statement indicating his property’s net worth of $20,000 to obtain financing to purchase a tractor. Id. at 295. Shortly after the parties’ marriage, a financial statement indicated that the net worth of the husband’s property was $51,000. Id. Financial statements prepared in conjunction with a 1982 loan application indicated that the husband owned $372,000 worth of machinery; those prepared for the 1983 loan application indicated a value of $338,250. Id. at 295-96. Despite testimony that the value of the machinery was significantly less than the estimates presented in the financial statements, the trial court valued the machinery at $331,250. Id. at 296. The Court of Appeals affirmed, holding that the trial court “properly relied upon the [1983] financial statement to find the market value of the implements.” Id. at 298. Thus, a financial statement can be a determinative factor for the court in valuing business assets.

Credibility is King and Honesty is the Best Policy

Additional issues arise if a financial statement is not credible. Encourage your client to be honest—attempts to circumvent the validity of business value are typically unhelpful and are likely to backfire.
If the financial data is not credible, the court may ignore it and adopt a business valuation that excludes the suspect data. See, e.g., Lee v. Lee, No. C7-99-1269, 2000 Minn. App. LEXIS 103, at *2-*3 (Minn. Ct. App. Feb. 1, 2000) (adopting wife’s valuation where wife’s expert used a capitalization-of-earnings-approach, the husband’s expert valued the business at zero but admitted that his valuation would be inaccurate if it was based on inaccurate financial information, and the 1997 financial data presented by the husband was not credible).
Moreover, where one party intentionally misrepresents or fails to disclose assets, the court may vacate a judgment and decree. Maranda v. Maranda, 449 N.W.2d 158, 166 (Minn. 1989) (listing factors supporting the trial court’s determination, including: the wife had no access to information regarding the parties’ finances, the husband “willfully misrepresented and failed to disclose the existence and value of marital property”, the fact that the wife was induced to accept the stipulation because the husband promised to be fair for the sake of the children, and the fact that the husband concealed hundreds of thousands of dollars). The result is a tremendous waste of attorney fees and time, not to mention a likely award of attorney fees to the opposing party.
To help avoid these problems, always advise that property be valued accurately in documents produced by your client and his or her business. Insist that your client not withhold financial data requested during the dissolution.

Separating Personal and Business Expenses

In addition to premarital business interests and financial statements created before and during the marriage, there may be instances when your client’s expenses could be characterized as either personal or business expenses, especially if your client owns a small business or part of a family business. However, in the event of divorce, a mischaracterization of expenses in the corporate ledger or income on tax returns may result in costly litigation and recharacterization of expenses or imputation of income by the court, thereby affecting support obligations and valuation of business interests. See, e.g., Johnson v. Johnson, 533 N.W.2d 859, 864 (Minn. Ct. App. 1995) (affirming district court’s use of the husband’s 1993 tax return to calculate his current income for the purposes of setting child support); Gully v. Gully, 371 N.W.2d 63, 66 (Minn. Ct. App. 1985) (remanding for the district court to determine which items paid for by the husband’s corporation should be included in his personal income).
In Hansen v. Hansen, No. C8-96-729, 1997 Minn. App. LEXIS 24, at *3 (Minn. Ct. App. Jan. 14, 1997), the wife appealed the child support and spousal maintenance awards, arguing that the court should impute additional income to her spouse in determining the respective awards, specifically certain amounts that the husband declared as law practice expenses, incurred for the husband’s personal benefit. Id. at *1. The wife presented testimony through an expert witness that law office expenses personally benefited the husband as much as $47,369 per year for four years, but the trial court disregarded the wife’s claim. Id. at *3-4. The court of appeals concluded that the district court’s findings regarding the husband’s personal income were “inadequate” and remanded for specific findings regarding each of the business expenses. Id. at *4.
Such additional proceedings, which may include expert testimony, add unnecessarily to dissolution-related expenses and give the court the opportunity to participate in valuing the parties’ assets, which consequently may affect support obligations or other property awards. Advising clients to keep clear and detailed records that indicate whether certain expenses are personal expenses (and may be attributed to the client for purposes of spousal maintenance or child support) or business expenses may help to alleviate potentially costly litigation.

Spouses Who Co-Own a Business

As your client may know from experience, co-owning a business with a spouse raises several potential problems. Divorce only exacerbates management and ownership issues.
For example, in Propper v. Propper, 221 N.W.2d 566 (Minn. 1974), the wife owned a 10 percent interest and the husband owned a 90 percent interest in the family corporation during the marriage. Upon dissolution, the trial court awarded the wife an additional 35 percent interest, for a total of 45 percent of the stock, and left the husband with 55 percent. Id. The husband appealed, arguing that the court had, in effect, made the wife his business partner who would “harass and interfere with [the business’s] operation.” Id. at 567. The Minnesota Supreme Court affirmed, noting that the award was regrettable but that, because the parties were not willing to compromise, “the court had no choice but to make the disposition which it did.” Id.
Similarly, in a later case where the husband was one of nine stockholders in a closely held corporation, the trial court ordered that half of the husband’s shares be transferred to the wife. Castonguay v. Castonguay, 306 N.W.2d 143, 144 (Minn. 1981). In this case, however, the court was more sensitive to the fact that “forced admittance of an unwelcome ex-spouse to the affairs of a closely held corporation may be disruptive” and agreed to place the shares transferred to the wife in a voting trust to facilitate management of corporate affairs. Id. at 146.
The key to advising clients who own or operate a family business with a spouse is to anticipate problems and develop a plan for dealing with them before they occur. Once the parties decide to divorce, working together in the business or making joint decisions may be difficult if not nearly impossible—especially when a court’s property award requires the parties to do so.

The Buy-Sell Agreement as an Evaluation Tool

Buy-sell agreements typically give the corporation or other shareholders an option to buy a shareholder’s closely held stock when he or she wishes to sell and control the sale price of the stock or allow for a buyout of corporate stock from the surviving spouse of the deceased shareholder. While they are an important business tool, but they may be used for an unintended purpose, as buy-sell agreements may contribute to the determination of the value of a business in the event of divorce.
Whether the buy-sell agreement conclusively determines the value of a business was the issue raised by Rogers v. Rogers, 296 N.W.2d 849 (Minn. 1980). In that case, the district court determined that the husband owned 85 percent of the company stock and valued the husband’s interest in the business at approximately $600,000. Id. at 851. On appeal, the husband contended that the purchase price of $254,000, established by the buy-sell agreement, should have been dispositive of the value of his stock. Id. at 852. The Minnesota Supreme Court held that a trial court is not required to accept the purchase price as established by the buy-sell agreement. Id. Nevertheless, the Court concluded that a buy-sell agreement should be a factor in calculating the amount of the spouse’s property award. Id. Thus, the Court remanded to the trial court to award the wife her share of the stock, as determined by the buy-sell agreement, and provide for a future upward adjustment if the husband “lives out his expected working life, or if he sells [the business] or modifies the buy-sell agreement.” Id. at 854.
The court applied the Rogers rule—that “the buy-sell agreement is not dispositive on value, [but] the valuation of stock ‘should in some way reflect the unique contingencies’ of the transfer restrictions”—in Lyon v. Lyon, 439 N.W.2d 18, 20 (Minn. 1989), despite the fact that the husband in Lyon owned only a 21.7 percent interest in the company stock. See Rogers, 296 N.W.2d at 852 (stating the Rogers rule). Even though the husband’s interest was “arguably not enough to exert any appreciable influence to obtain a change in the [buy-sell] agreement,” the Minnesota Supreme Court affirmed the district court’s decision to value the husband’s stock above the value set according to the buy-sell agreement where the shareholders could modify the agreement and the fair market value had been discounted. Lyons, 439 N.W.2d at 20; see also Berenberg v. Berenberg, 474 N.W.2d 843, 847 (Minn. Ct. App. 1991) (concluding that “the trial court’s rejection of the buy-sell formula was not an abuse of discretion”); but see Petterson v. Petterson, 366 N.W.2d 685, 688 (Minn. Ct. App. 1985) (affirming the district court’s use of the buy-sell agreement to set the stock value where husband owned a 15 percent interest, the agreement only allowed a sale back to the corporation, husband determined the price of the stock, and the buy-sell agreement could not be modified).
It is prudent to remember that the stock value indicated in a buy-sell agreement is often reached without any reference to actual market value of the business. Thus, when drafting a buy-sell agreement, note in the buy-sell agreement whether a premium was included to close negotiations or whether any other factor influenced the values set forth in the agreement.

WHEN THE MARRIAGE BREAKS DOWN

Family Law Basics to Impart as Wedded Bliss Disappears

The first principle of divorce, perhaps well-known but one that bears repeating due to common misconceptions, is that a finding of fault is unnecessary in Minnesota for dissolution—Minnesota law requires only the “irretrievable breakdown of the marriage relationship” as grounds for divorce. Minn. Stat. § 518.06, subd. 1 (2010). Further, fault rarely affects property division (but it may influence an award of attorney fees).
A second, important principle is that spouses may not dissipate or waste assets in anticipation of divorce. Bollenbach v. Bollenbach, 175 N.W.2d 148, 155 (Minn. 1970); Hortis v. Hortis, 367 N.W.2d 633, 636 (Minn. Ct. App. 1985). Dissipation of assets is the “frivolous, unjustified spending of marital assets.” Volesky v. Volesky, 412 N.W.2d 750, 752 (Minn. Ct. App. 1987). Wasting of assets may include selling business assets in contemplation of divorce, particularly if the sale is not an arm’s length transaction.
The consequence of dissipating assets is that the court will compensate the other party by placing both parties in the same position that they would have been in had the dissipation not occurred. Minn. Stat. § 518.58, subd 1a; Volesky. 412 N.W.2d at 752. To compensate the non-dissipating party, then, the court may impute the entire value of an asset and a fair return on that asset to the party who dissipated the asset. Minn. Stat. § 518.58, subd 1a. In Volesky, the Court clarifies that spending marital assets to meet routine financial obligations and to properly maintain the parties' marital property does not constitute dissipation, Volesky 412 N.W.2d at 752. However, to avoid a finding of dissipation, practitioners may want to advise clients to obtain court approval before spending marital assets when the intent is to meet the parties’ routine obligations. Id.
During the course of the dissolution proceeding, the rules governing family court procedure allow for broad discovery, including discovery permitted under the Minnesota Rules of Civil Procedure, mandating that parties cooperate in the exchange of documents and in the valuing of property, and allowing for the use of subpoenas for the attendance of witnesses or for the production of documents. Minn. R. Fam. Ct. P. 361.02-361.03, 361.06. Such witnesses could include any individual with relevant information regarding a business, including partners and even customers.

Property Division Fundamentals in the Event of Divorce

In regards to property division, including division of business and corporate interests, courts have broad discretion in valuing and apportioning marital property equitably. C.f. Ronnkvist v. Ronnkvist, 331 N.W.2d 764, 766 (Minn. 1983) (holding that while the trial court has “broad discretion. . . exercise of that discretion is not unlimited and should be supported by either [clear evidence] or by comprehensive findings issued by the court”); Bogen v. Bogen, 261 N.W.2d 606, 609 (Minn. 1977). However, “equitable” does not necessarily mean “equal.” Ruzic v. Ruzic, 281 N.W.2d 502, 505 (Minn. 1979); see, e.g., Kramer v. Kramer, 372 N.W.2d 364, 367 (Minn. Ct. App. 1985) (upholding award to wife of 60 percent of marital estate because she had limited vocational skills whereas husband had skill and experience to rebuild his business). Furthermore, the court may not consider marital misconduct in making a just and equitable division. Minn. Stat. § 518.58, subd. 1; see also Peterson v. Peterson, 242 N.W.2d 103, 106 (Minn. 1976) (precluding consideration of marital misconduct in dividing property before enactment of statutory language).
The court, using its discretion to value property, may accomplish the equitable apportionment of property in one of three ways:

(1) If the asset is readily divisible, the court can divide the asset and order just and equitable distribution in kind;

(2) the court can order the sale or liquidation of the asset and make a just and equitable division of the proceeds of sale or liquidation; or

(3) the court can determine the value of the asset, order distribution of the entire asset to one of the parties, and order the recipient to pay to the other spouse a just and equitable share of the value of the asset.

Nardini, 414 N.W.2d at 188. Thus, where one spouse holds an interest in a closely held corporation, a court generally orders that spouse to pay the other spouse an amount equal to an equitable percentage of the value of the business interest. Rogers, 296 N.W.2d at 852 (considering the buy-sell agreement value in addition to “unique contingencies” affecting the value of appellant’s stock). In Castonguay, 306 N.W.2d at 144, 146, the court affirmed the transfer of half of the husband’s shares in a closely held corporation to the wife, notwithstanding corporate restrictions on the transfer of stock, holding that “a transfer of stock ordered by the court in a marriage dissolution proceeding is an involuntary transfer not prohibited under a corporation’s general restriction against transfers unless the restriction expressly prohibits involuntary transfers.”
Title to property does not necessarily determine the property award. Any property acquired during the marriage, other than traceable premarital holdings, inheritances, or gifts received by a specific party (which can also be divided in part if unfair hardship will otherwise result), is subject to division by the court. Minn. Stat. § 518.003, subd. 3b (2010) (providing that property acquired by any spouse during the marriage is presumed to be marital property regardless of title); Minn. Stat. § 518.58 (2010) (providing for the division of marital property and for an award of nonmarital property in the event of unfair hardship). However, property excluded from the marital estate by a valid prenuptial agreement may not be apportioned to the other spouse. Minn. Stat. § 518.58, subd. 2 (2010). Thus, the fact that title is in the name of only one party may be inconsequential. See, e.g., Fritz v. Strouth, C3-00-899, 2001 Minn. App. LEXIS 10, at *2-4, 7 (Minn. Ct. App. Jan. 30, 2001) (looking beyond title given the short duration of the parties’ marriage in affirming district court’s property classification as marital or nonmarital).
Finally, in making a just and equitable division of marital property, a court is to consider “all relevant factors.” Minn. Stat. § 518.58, subd. 1. Such factors include: “the length of the marriage, any prior marriage of a party, the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, needs, opportunity for future acquisition of capital assets, and income of each party.” Id. Any contribution made by the spouses toward “the acquisition, preservation, depreciation, or appreciation in the amount or value of the marital property, as well as the contribution of a spouse as a homemaker” is also considered. Id. Furthermore, the court “conclusively presume[s] that each spouse made a substantial contribution to the acquisition of income and property while they were living together as husband and wife.” Id.

Dividing Corporate Assets and Debt

When dividing marital property that includes corporations and property owned by the corporation, such division may have considerable tax consequences. In a recent decision by the Minnesota Court of Appeals, the court clarified that corporations are a separate entity from those that have a stake in the corporation and if a corporation is not a party to the action, then the court does not have the authority to divide property belonging to a corporation. Archer v. Archer, No. A10-1465, 2011 Minn. App. LEXIS 676 at *3 (July 11, 2011). In Archer v. Archer, the parties wholly owned four corporations that each own real estate. Id. at *1, *5. The district court ordered that the parties’ marital property be divided equally. Consequently, the Court awarded the husband all the shares of the four corporations (among other property) and the wife received, in addition to an equalizer payment from the husband, ownership of commercial property owned by one of the parties’ corporations (whose shares were wholly awarded to the husband). Id. at *3.
The Minnesota Court of Appeals held that the district court erred in awarding property owned by a corporation to wife because the corporation was not a party to the action and therefore the court did not have personal jurisdiction over the corporate entity. Id. at *5; see also Danielson v. Danielson, 721 N.W.2d 335, 339 (Minn. Ct. App. 2006) (holding that a court lacks personal jurisdiction over a nonparty). Additionally, the court held that the district court erred in its failure to consider the tax consequences associated with such property award to the wife. Id. at *8. By awarding the commercial real estate to wife, and not considering the tax consequences of such award upon the corporation (that was solely awarded to husband), husband would be personally liable for such significant tax consequences of selling real estate owned by the corporation. Id. Therefore, because the district court failed to consider the significant tax consequences that would make the property division between the parties unequal upon learning of such consequence, the court remanded this issue to the district court to equitably divide the parties’ property. Id. at *12.
When courts apportion marital debt to the parties, the court will likely apportion debt incurred as a result of a business to the party that will enjoy the profits of such business venture. In Plaster v. Plaster, the Minnesota Court of Appeals held that the lower court properly assigned the debt of the wife’s travel business solely to the wife, reasoning that it “would not be equitable to require [husband] to share in that debt since he will receive none of the profits expected to result from the [upcoming] travel season.” 373 N.W.2d 604 (Minn. Ct. App. 1985). Moreover, wife expected to recoup the investment.

CONCLUSION

Absent a valid and enforceable prenuptial agreement, the family court has broad discretion in valuing and apportioning property. Because the court determines each case based on the unique facts and circumstances, it is difficult to predict how a court may divide a client’s marital business entity in the event of divorce. A prenuptial agreement is probably the most effective way to protect a client’s interest in a business. Avoiding financial statement inflation, separating personal and business expenses, making, recognizing the unintended use of the buy-sell agreement, and advising clients of basic family law principles will also help you to advise your client during marriage or when the marriage breaks down. Above all, remind your client to keep things honest, as attempts to subvert the system are likely to prove the old adage—crime does not pay. If your client mischaracterizes business expenses or reports an artificially low business value, your client’s credibility with the court may not be salvageable.

[1] See Alan J, Hawkins, Will Legislation to Encourage Premarital Education Strengthen Marriage and Reduce Divorce?, 9 J. L. & Fam. Stud. 79, 80 (2007) (stating that “between 40% and 50% of first marriages and about 60% of second marriages end in divorce in the United States”).

[2] Generally speaking, nonmarital property is defined as property acquired before marriage, the increase in value of that property, and property acquired by inheritance before, during, or after the marriage. Minn. Stat. § 518.003, subd. 3b(a)-(c) (2010).

[3] Marital property is all property acquired during the marriage by either spouse. Minn. Stat. § 518.003, subd. 3b. Property acquired during the marriage is considered nonmarital property if it is acquired during the marriage and excluded by a valid antenuptial contract. Id.

[4] A prenuptial agreement may also determine a spouse’s rights to property in the event of death—notwithstanding probate law, which provides surviving spouses with statutory rights in the property of the decedent, spouses may decide to contract away those rights in a prenuptial agreement. See generally Estate of Serbus v. Serbus, 324 N.W.2d 381 (Minn. 1982); In re Appleby’s Estate, 111 N.W. 305 (Minn. 1907).