When Division of Property Gets Crazy: LLCs vs. the Law

Division of property as part of a divorce gets pretty hairy in even the best of cases. But what happens when the process is complicated by a antenuptial agreement and several limited-liability companies? As it turns out, according to the Michigan Supreme Court, you can actually end up with a martial estate worth zero dollars.

A Crazy Antenuptial Agreement
In the case of Allard v. Allard, a couple got married, and shortly thereafter, they submitted an antenuptial agreement (basically a prenup that was made after the marriage was formalized). The agreement said that the two would maintain as separate property “[a]ny property acquired in either party’s individual capacity or name during the marriage[.]” This isn’t terribly abnormal in and of itself; quite frequently, two wealthier people each fully economically capable in their own right will make an agreement like that.

But what happened afterwards was chaos.

Six LLC Later, the Couple Owns Nothing
The couple lived together for years, purchasing quite a bit of stuff and making quite a bit of money — but because the husband did literally everything in the name of one of six different limited liability companies (each of which he was the sole owner and shareholder). The wife didn’t think anything about this was particularly worth objecting to, because having your life run through an LLC has some extraordinary tax benefits — not realizing that she didn’t technically own anything they had purchased…and neither did he! Every single thing the couple purchased was assigned to an LLC, including the home they lived in.

So when the couple divorced, the husband said (with a straight face) that there were absolutely no marital assets. Every dollar they made went into their individual bank accounts (they never had a joint account), and every object they purchased was purchased by an LLC and merely used by the couple.

So Is an LLC’s Property Divisible as Part of a Divorce?
It might seem like the intuitive result here is that the LLC’s property should be divided between the two people who used it — but the law is often unintuitive. The legal response here is that the LLC’s shares themselves are the property that would be divided. Because all six LLCs were created by the husband only and only he held any shares in them, they were entirely his property given the antenuptial agreement. Thus, the only property that stands to go to the wife are the bank accounts she came into the marriage with, an IRA in her exclusive name, and some stocks she had purchased directly. In total, she looks to be walking away with about $95k — and the husband with over $900k in assets, including every single object the two had shared for years.

It’s Not Quite Over
Allard v. Allard was complex enough that the case was heard by the Michigan Supreme Court at the end of last month. But the Supreme Court didn’t decide every aspect of the case — they remanded back to the Court of Appeals a single question. That question being, “Does the law actually allow an antenuptial agreement to override the Family Court’s discretion in fairly separating property during a divorce?” The answer is, unfortunately, unclear — there are precedents in both directions. If the Court of Appeals rules (as we opine they should) that one cannot prevent the court from exercising its discretion, Mrs. Allard might just achieve some level of equitability. If not…