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Considerations with the In-Law's Family Business
June 10, 2015

When a couple marries, if one of the spouses is deeply involved in his or her family's very successful business, it's only natural for the other spouse to eventually also become deeply involved in his or her in-law's business venture. However, when the married couple's finances are not property handled, this situation can prove disastrous for the son-in-law or daughter-in-law should the marriage end.

Let's use the fictional example of John and Joan. Joan's parents own a chain of very profitable dry cleaners. Joan has been involved in her parent's business since she was a teenager, and after college, Joan began helping her parents run the stores. As additional investments, Joan's parents own several homes, and Joan lives in one of the homes rent free. Joan collects a salary, but it's not very much considering how hard she works and her management position in her parent's company. Joan doesn't mind though. She expects to inherit the family business when her parents pass away, and when she needs something expensive, her parents just get it for her. By way of example, Joan's parents bought her a new Mercedes for her last birthday.

Joan and John are now both 26 and get married. Joan's parents throw a lavish wedding for the couple and pay for a honeymoon to Tahiti. Once the honeymoon is over, Joan's family is more than happy to have John help Joan run the stores because John is now family and a smart guy with a business degree. Over the next 3 years, John and Joan do a great job with the stores. They double the amount of stores, and Joan's parent's company has never been more profitable. Just like Joan, John takes a small salary. Initially, John was a little worried about being paid so little, but with Joan's help, John eventually comes around. After all, he doesn't pay rent and bills, and Joan's parents are so generous and more than happy to buy the couple whatever they need. Joan's parents even bought the couple another car so John would have something to drive. It doesn't even feel like charity to John because he and Joan are working so hard to build the family business.

Now what happens to John in year 4 of the marriage if Joan files for divorce?

First, John may likely be out of a job. Joan's parents may not want their soon to be ex-son-in-law still running the family business. This could leave John in the position of dealing with a divorce case without any immediate source of income to hire or pay a lawyer. Since Joan has always earned a small salary, it will also be hard for John to prove that Joan has enough resources to pay for John's attorney's fees. Meanwhile, Joan's parents will cover her attorney's fees.

Second, the divorce court can't keep a roof over John's head. Normally, when parties are divorcing, the divorce court can temporarily award use of the parties' residence to one spouse because the couple has the legal right to be in the residence, either through ownership or a lease. However, in John and Joan's case, neither has a legal right to be in the home, and the divorce court can't order Joan's parents to let John stay in their home. Joan's parents are not parties to John and Joan's divorce case. So if Joan's parents want John out, then as a guest, he'll need to leave. Also, John has no chance of getting the home at the end of the divorce because neither he nor Joan owns the home.

Third, John may not have a car. John can't get Joan's Mercedes. It is Joan's separate property from before marriage. What about the car Joan's parents bought for John to use? Well, in whose name is that second car titled? If the title is in Joan's name, then that second car is also Joan's separate property because the paperwork shows it's a gift from Joan's parents to Joan. The court may allow John to drive the car while the divorce case is pending, but once the case is over, Joan will get the car.

Fourth, what about all that effort John put into Joan's parents' business? Can he get something back for that? The answer is no. Normally, when a spouse puts in a lot of time and effort into building up the other spouse's business but doesn't get paid for that effort, a divorce court can reimburse the uncompensated spouse for that toil and time. However, in John's case, the business doesn't belong to Joan. It belongs to Joan's parents. So once again, John is out of luck.

The only real thing John can get at the end of his divorce is whatever savings he and Joan managed to have during their marriage. Based on John's unfortunate circumstances, the court may award him a disproportionate amount of those savings, but if there isn't much savings, such an award won't compensate John for all he's done for Joan and her family.

The example of John and Joan is a worst-case scenario for John. However, many people who've married into a family with its own business share some aspects of their lives with John. So what are the lessons to be learned from John's example?

First, because neither John nor Joan owned the home in which they lived, they at least should have had a lease with a fixed term. It doesn't matter if their landlords would have been Joan's parents. A lease would have given John the legal right to be in the home for a fixed period of time. If John had a lease, the divorce court could have at least awarded John use of the home during the term of the lease.

Second and most importantly, John should have insisted that he and Joan be compensated fairly by his in-law's business. Not doing so was John's biggest mistake. Now the compensation doesn't have to be salary. It can be ownership interests in Joan's parent's business. However, without fair compensation, John is taking the risk that he will never be fairly compensated for his efforts if Joan decides to divorce him. Let's say that John and Joan are fairly compensated in salary. Then that salary and the savings from that salary are community property, in which John has a stake. If John and Joan are compensated in ownership interests, then those ownership interests are also community property in which John has a stake.

Third, John should have had the second vehicle titled in his name or in both his and Joan's name. Gifts a spouse receives during marriage are that spouse's separate property. Gifts given to both spouses are the separate property of both spouses. If John had been on the title to the second car, he would have had a separate property ownership interest in the car. This applies to all property received as a gift during marriage.

What can John do if he asks for fair compensation, a lease and title in his name and his in-laws say no? Nothing except weigh his options. If John's in-laws won't work with him on these issues, John should consider whether he should invest his time and effort into Joan's family's business or instead build his own career and income stream. John has to find a balance with which he can live. John can't and shouldn't go into the marriage assuming there will be a divorce, but neither should John be naive about his rights should the marriage end.

If you are actively involved with your in-law's family business and need assistance with a divorce, contact Sugar Land divorce attorney Chikeersha Puvvada at 832-317-6705 or online today to schedule a free 30 minute consultation.

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