Can a Spouse Sell a Business Before a Divorce?

By Wayne Thomas

The sharing of assets between spouses is a fundamental part of most marriages. When a couple decides to get divorced, the court is tasked with dividing their marital property. This can result in the retitling of any jointly held property to sole ownership and, if necessary, offsetting these awards with other property or support paid to the other spouse. To ensure a proper valuation of the marital estate, state law prevents certain transfers made in anticipation of divorce, which can limit a spouse's ability to convey good title to a business.

Preserving the Marital Estate

Although most states allow a couple to come to agreement on dividing marital property as part of a divorce, this may not be possible in a highly contested case. In that instance, the court will make the division after first classifying the property as marital or separate. Separate property includes property acquired before the marriage, and is not subject to division. All marital property will be divided according to the principle of fairness or equally between the parties, depending on the state. However, in order to do this effectively, there must be full disclosure of each spouse's property and the manner in which title is currently held.

Role of Title

A couple may take on joint ownership of all kinds of property during marriage. It is not uncommon for couples to have an automobile or home titled in both names. Further, if the couple starts a business together, it could be set up with both spouses listed as co-owners. On the other hand, for convenience, these assets may be titled in only one spouse's name despite shared usage or equal involvement in the business. However, in terms of valuing the marital estate, the manner in which property is titled becomes less important than when and how it was acquired.

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Automatic Injunctions

As a general matter, the selling of an asset requires the consent of only those holding legal title to the property. This means that if both spouses are on the title, it cannot be transferred against the wishes of either spouse. However, in some states, even if only one spouse is on the title, an automatic injunction goes into effect restricting that spouse's ability to transfer title while a divorce is pending. As a result, transfers made in violation of these provisions are often deemed void.

Fraudulent Conveyance

Even in states where an automatic stay does not go into effect upon a filing for divorce, property transferred with the intent to reduce your spouse's share of the marital assets may be considered a fraudulent conveyance. This is particularly true if you received far less than fair market value for the exchange. For example, assume you ran a hog farming business purchased during your marriage that listed you as the sole owner. Let's say you took out a loan on the business from a family member and stopped paying on the loan after you started having marital difficulties. Then, to satisfy the debt, you transferred ownership of the business to the family member, but the value of the company far exceeded the debt. In this case, your spouse could petition the court to disregard the transfer and subject the business to property division in the divorce.

Limitations

Most states specify that only assets falling under the category of marital property are subject to automatic injunctions. Further, in the divorce context, any transfer of separate property likely does not qualify as a fraudulent conveyance with respect to your spouse. This is because your spouse has no legal claim to a business owned solely by you and purchased before the marriage.

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How to Safeguard a Business During a Divorce
 

References

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