Divorce in the Family Can Kill A Business

National Financial Legacy Group
National Financial Legacy Group teams with Spardata and your legal and tax advisors to provide coordinated estate planning for the business owner. In the right situation, we may be able to assist you in finding ways to save on your taxes; retiring when you're ready; ensuring that your business continues in the event of your death or disability; and attracting and retaining valuable employees. Visit our website to learn more. Joe Flood is insurance-licensed in Maryland, Virginia, D.C., and New York and a registered representative of Equity Services, Inc.
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The emotional and financial turmoil incident to a divorce easily can spill over into the family business. Whether it is the founder of the business or the next generation that faces the division of assets with the departing spouse, management operations can be disrupted and any succession planning is jeopardized. With the statistical probability of divorce, estate planning must anticipate such events, just as management succession must anticipate a transition between generations.

Gifts or inheritances typically are not "marital property", but appreciation in value realized during the marriage often is. While ownership in the business gifted to a child may not be marital property, the increase in its value realized after the gift may have to be shared. This can cause a dilemma in that the equity itself may nominally not be in jeopardy, but finding the means to cash out the shared portion may force drastic measures. Doubly disruptive is where the owner has brought the child's spouse into management of the business. Even without actual ownership in the hands of the divorcing couple, the courts use equitable division as a guiding principle and this can make the niceties of title ownership secondary to the historical flow of wealth during the marriage.

By having the transfers of ownership to the next generation being in trust rather than outright, the ownership as well as the appreciation is prevented from being marital assets. In addition, the ownership interests can be protected from the beneficiary's creditors. By drafting the trust so that the beneficiary is one of the trustees and possibly have access to invasions of principal, it is possible for the trust beneficiary to be comfortable with the trust arrangement.

The garden variety buy-sell agreement functions to force a sale of ownership back to the company or to the other owners rather than allow it to pass outside of the family. The agreement sets the terms of sale; estate tax valuation can be set by the agreement; otherwise, low valuations, extended payouts, restricted voting rights, et al. can address each family's situation. Nonetheless, if not provided for, the financing can be disruptive to the business' prospects and strain banking relationships.

Another fundamental tool to address the prospect of divorce is the pre-nuptial agreement. If it is possible to get over the emotional hurdles of addressing business terms with love birds, the agreement works to keep ownership within the blood line. It is critical that the pre-nuptial agreement address the business ownership, including valuation and terms of payment, and it is essential that each spouse have separate counsel and not have the opportunity to argue ignorance or unfairness.

An expert appraisal of the company is essential for any arrangement leading to a transfer of ownership. Without fairness, the divorce court will do what it deems appropriate. An expert appraisal gives the opinion of value the cache to withstand dispute and intimidate possible objection.