Everyone knows of someone that gets divorced or becomes a widow(er) and then remarries. In situations where the remarried individual is an employee of a business or has a business that is not a family business, his/her passing or divorce from the new spouse is an unfortunate circumstance. However, when the remarried individual is the owner of the family business, the passing or divorce of that individual is challenging and very complicated.
For this discussion, let’s say that ‘Mom’ has passed away and ‘Dad’ owns the family business that both his son and daughter work in and they expect to be the next generation of owners of the business. Dad then finds a new partner and decides to get remarried. What happens then if Dad passes away or gets divorced?
The Passing of Dad
If Dad dies without a will, the laws governing ‘intestacies’ would (in Alberta) grant Dad’s spouse the greater of 50% everything owned by Dad (including shares in the family business) or $150,000, with the remainder of his estate divided equally between his spouse and his children with his spouse also entitled to proper ‘maintenance and support’ from the estate. Potentially having their step-mother as the majority owner of the business and dependent on income from the business is probably the son’s and daughter’s worst nightmare.
If Dad has a will at the time of his passing, he could direct the executor to pass his shares in the family business to his son and daughter to ensure the continuity of the family business. Unfortunately, while Dad had great intentions, his spouse continues to have a claim to those shares (and anything else he may own) as a number of jurisdictions have will legislation that grants spouses the right to inherit at least as much property of Dad’s estate as his spouse would have obtained had they divorced. In this case, Dad’s spouse could become the owner of at least 50% of the business.
But it could be even worse for his children as other jurisdictions have “adult interdependent partner” legislation. If Dad’s spouse is determined by a court to have been both financially dependent on Dad and his “interdependent partner” with the business being the sole source of income for Dad and his ‘partner’, the court could award the entire business to Dad’s ‘partner’.
If Dad’s spouse looked to enforce her rights to Dad’s estate and the business, it’s hard to imagine how this matter doesn’t end up in court and any ‘unjust enrichment’ claims to the business that the son and daughter may have are probably limited.
A Future Divorce
A similar result would occur if Dad got divorced as Dad’s spouse would be entitled to 50% of the growth in the business from the date of their marriage. In that case, hopefully Dad, son and/or daughter could raise the funds necessary to address this payout. If not, Dad may have to sell various assets, including the business, to pay out his former spouse.
What Can Be Done?
To avoid the costs of estate or divorce litigation, there are steps that Dad could take to limit any future claims by his spouse. Having a will is much better than not having a will so that is a good place for Dad to start. Dad could also enter into a ‘pre-nuptial agreement’ with his spouse. From the perspective of his son and daughter, they will have to hope that Dad doesn’t have a change of heart and elect to rewrite his will and/or rip up his pre-nup.
Dad could also advance shares to his son and daughter and create a family trust to deal with his remaining shares. Under the family trust, Dad could decide who is included as a beneficiary of the trust understanding that the list of individuals may include more than just his son and daughter.
A completely different approach would be for Dad, his spouse, son and daughter to engage in conversations concerning the business, the eventual transition to the son and daughter, and the establishment of any related processes. These discussions might prove difficult but could be managed if they were facilitated by a Family Enterprise Advisor. In using an FEA, the parties can better understand the others’ goals and concerns and negotiated agreements can be put in place.
For more information about FEA’s, or to find a FEA to work with your family, go to https://family-enterprise-xchange.com.
If you have a question or issue that you would like to read about in future columns, please feel free to email me at firstname.lastname@example.org. If you want to revisit past columns, they are all online at www.yourfamilybusiness.ca.
Until next time.