Divorce and succession planning

Wealth Management Insights

Divorce can have a significant impact on the family business, possibly leading to the sale of all or part of it. This article answers some of the key questions around this topic.

How will the divorce of a family member affect my succession plan?

The courts have ruled that no concessions can be given in a property settlement to allow for the continuance of the family business.

How does the family court determine a property settlement?

The decision is based on contributions made by each party and the needs of the parties involved. What matters are taken into account when deciding upon contributions made in a property settlement?

The following matters would be taken into account by the courts regarding contributions:

  • any financial contribution made directly or indirectly to the marriage (e.g. property inherited/owned prior to marriage)
  • any non-financial contribution made directly or indirectly to the marriage (e.g. assisting in business operations)
  • any contribution made by a party to the marriage for the welfare of the family including that of the home maker or parent
  • the effect of any proposed order upon the earning capacity of either party

On what basis are the needs of the parties taken into account in determining a property settlement?

The courts would take into account the following factors:

  • the age and state of health of the parties
  • the income, property and financial resources of each party and the physical and mental capacity of each of them for gaining employment
  • whether the party has care or control of a child of the marriage who has not yet attained the age of 18
  • commitments of each of the parties that are necessary to enable the party to support himself or herself and a child or another person that the party has a duty to support
  • the responsibility of either party to support any other person

What happens where a wife has acted as the home maker only and has not contributed financially to the marriage?

The Family Law Act views both the financial and non financial contributions to marriage as important aspects when considering an equitable property settlement and consequently a spouse who has stayed at home to be the home maker and parent is viewed equally with a spouse who is the bread winner.

Are business assets treated differently in a divorce settlement?

The Family Law Act does not differentiate between business assets and other types of assets. All assets of the divorcing couple are taken into account when arriving at a property settlement.

Is a property settlement based on a business’s ability to raise or pay the property settlement?

No, there have been a number of court rulings on this matter. The Family Law Act does not differentiate between business and non-business assets and it does not consider the business’s ability to raise the money to pay the settlement, or whether the business has the capacity to meet the funding requirements to pay the settlement out.

It has been held that if an asset is required to be sold to overcome inequity in a property settlement then it must be sold. As the courts have viewed that there are no differences between business and non-business assets, this may result in the sale of part, or all, of the assets, including the family business.

What about inherited business property?

The Family Law Court views inherited property acquired before marriage, especially where it was worked and developed by a party prior to marriage, as a contribution. However, the significance of this contribution at the beginning of the marriage is gradually eroded through the passage of time, by the offsetting contribution of the spouse.

Can family discretionary trusts be used to “hide assets from the family law court”?

The family law court not only views the legal ownership of assets but also the control of those assets. Where one party controls the family discretionary trust through the office of appointor/guardian then the court views that the assets of the trust will be taken into account when deciding upon a property settlement.

In relation to jointly controlled trusts, in some cases the courts have deemed the business not to be an asset of the marriage settlement.

Can one transfer assets to avoid a property settlement via the family law court?

Any transfer of property in anticipation of avoiding a property settlement via the family law court will be overturned by the courts.

However, if assets have been transferred for reasons other than the intention to avoid a property settlement under the Family Law Act then those transfers would not be brought to account in the property settlement.

Would a prenuptial agreement safeguard the family business?

Due to recent legislation, pre and post nuptial agreements (now called binding financial agreements - ‘BFA’s) are now law. Providing they are correctly structured, with full disclosure of all assets of both parties, they can go a long way to ‘quarantining’ certain assets from a property settlement in the event of a divorce or separation.