Marjorie Jobe, J.D.

If you have a high individual net worth or you are working toward a high individual net worth, you need to understand the power of a marital property agreement, both before and after marriage. It is my position as a business attorney with family law experience and as a business owner myself that marital property agreements are like Cinderella: mistreated and overlooked in their real value to business owners and their families. Cinderella was a gorgeous, sweet step sister hidden and mistreated by her stepsisters and stepmother. Once she was discovered, she blossomed into an accepted and loved Princess. The same is true of marital property agreements in the arena of family and asset legal protection. Most individuals and their spouses think that marital property agreements are primarily divorce planning documents and they are regarded with suspicion and negativity. However, the divorce planning benefits are only a secondary result of these essential agreements. But, like Cinderella, the divorce planning consequences of marital property agreements are the ugly and mean step sisters overshadowing the incredible benefits of these asset protection tools. The true worth of marital property agreements is their ability to protect your family and personal assets from legal predators, lawsuits and legal disasters.

Another genuine benefit is that they can increase the borrowing capacity of some families who need increased capital for expansion, acquisitions or other business objectives. If your husband owns a business that borrows a great deal of money for a large expansion or acquisition, the lender may restrict the company's future borrowing capacity until the large loans are paid down. As a result, you may not be able to obtain a loan for your own line of credit needs or other capital requirements because your spouse is restricted contractually from increasing his liability or debt load. With a marital property agreement defining separate property issues of the two independent businesses, these lending restrictions can be avoided.

There are two kinds or marital property agreements: Premarital and post marital.

Premarital Agreements. The most common form of marital property contract is often called a "prenuptial agreement." The contract recognizes and separates ownership interests in both the property owned before marriage and the property owned post-marriage. This is important because it can shelter the non-business owner's separate property from creditors and liability of the business owner spouse. Future property and income can also be addressed in these agreements. Post-Marital Agreements. The same kind of separation of assets and income can also be achieved after the marriage is entered into should the parties agree to the property separation. The primary reason to do so would be the protection of property from liability flowing from either spouse's activities or businesses.

To illustrate the importance of marital property agreements, consider the following two case illustrations.

Case One: Successful Businesswoman marries Successful Businessman A year ago, Mary finally accomplished her lifelong dream of opening a gourmet chocolate shop that makes fresh, delicious premium chocolates for regular or special gift occasions. Her location is upscale and her product is high-end and considered the best in the city. She achieved positive cash flow within six months of opening her doors and achieved an impressive profit above her projections within twelve months. She is now planning to franchise her business and expects to achieve her lifelong dream of becoming a multimillionaire. Just after the launch of her business, she fell in love with a customer named Mark and her life became even further enriched. Mark owns a successful construction company building commercial warehouses. Mark and Mary eloped to Aspen on a whim. They never discussed premarital property planning, because they were both confident their love will last forever. Two months after their happy marriage, one of Mark's customers and five of Mark's hard-working employees were killed when the warehouse Mark's company was building exploded from a gas leak that caught a welding spark. Four weeks after the heartbreaking funerals, Mark was served with a legal petition filed by his customer's wife seeking $10,000,000 for the death of her spouse, who was a high-income earner and the sole source of support for their young family of six. And four weeks after that, he was served with a second petition suing for the wrongful deaths of the five workers by their families, seeking another $10,000,000. The petitions named both Mark and Mary as defendants because he operated his construction company as a sole proprietor. His liability insurance has a maximum policy limit of $2,000,000 per occurrence.

In this scenario, Mary and all of her assets may be liable for any execution of a judgment in excess of the $2,000,000. However, if she and Mark had entered into a prenuptial agreement in most states they could designate his business as separate property that she has no right to or liability in, and the same for her business operation. Thus, in the same tragic situation, but with a marital property agreement in place, Mary's business, future business plans and assets named as separate property would for sure not be at risk.

Case Two: A Criminal Business Legal Disaster Puts the Entire Family at Risk In 2007, Dynamic Building Solutions, Inc. was the largest contractor for the construction of schools in the Albuquerque public school system. The gross income for the 25-year-old company exceeded $250,000,000 in its last year of operation. The company was family-owned and -managed by the original founder, Franklin Smith, and his son, Michael Smith. Franklin, the family patriarch, passed away in the summer of 2007 and Michael, who had been the president of the corporation for several years, carried on the family company. All of the Smith children and grandchildren were employed by and involved with the business. At any given time, the company had multiple projects, sometimes exceeding twenty, under construction all over the state of New Mexico. In early 2008, after what had been a three-year federal criminal investigation into public corruption associated with school board members, a federal indictment of Michael Smith was handed down. Within weeks, school districts and a state university terminated contract after contract with the contractor. Dynamic's bonding company had to step in and take over the ongoing and unfinished projects. Dynamic could not make its payroll or its expenses and closed its doors for good.

Just months after the indictment, Dynamic, Michael Smith, his wife, and his mother were forced into bankruptcy by the bonding company. All generations of the family were doomed to lose their assets and fortunes because the husband and wives had all signed personal guarantees on loans and bonding instruments. Regardless of whether the business operators were convicted or were acquitted, the indictment in and of itself sank this growing and productive business, as well as four families in the Smith clan.

Had marital and family asset protection and planning been implemented years ago when the company began its prosperity and success, the families could have been spared their financial ruin. Marital property agreements, retirement programs, trusts, and annuities could have all worked together to insulate much of their wealth. A legal and financial disaster and a sad story indeed.

Conclusion: Marital property agreements should be seen and treated first and foremost as versatile, sophisticated and responsible business planning tools that insulate your family from lawsuits and legal disasters. They protect you, and your family from any and all of the following:

Legal liability arising from your spouse's profession or business.

Lending restraints of your spouse or a spouse's business or credit problems.

Claims by your spouse's creditors.

Divorce dangers of co-owners or partners in your business or your spouse's business.

Criminal liability or asset forfeiture in a criminal context.

Bankruptcy of your spouse or spouse's business.

Claims of your spouse in the unfortunate event that your marriage ends.

Likewise, these agreements can protect your spouse or your spouse's business from similar threats arising from your company and operations and the volatility of relationships. Finally, they bring a measure of comfort and stability to all relationships that should be embraced and promoted. With adequate planning, the assistance of a good lawyer and the right marital agreement, you can protect yourself, your spouse, your family, and your business from liability and unexpected circumstances arising from business, professional, or personal legal disaster.

Marjorie Jobe, J.D. Business Attorney and Author of Business Law Battle Plan for Entrepreneurs: Protect Your Company From Lawyers, Lawsuits and Legal Disasters. www.marjoriejobe.com