Part 4 in an ongoing series about keeping your business assets safe in the event of divorce. Part 1 can be found here. Part 2 can be found here. Part 3 can be found
here.
If you have children, you may want to start thinking about your estate-planning goals in the context of protecting your business ownership interests (and any other assets) from a possible future divorce.
If you start gifting some of your ownership interests in your business (or any other assets) into a Discretionary Spendthrift Trust set-up for the benefit of your children, not only have you protected those ownership interests from your own future divorce (since you no longer legally own those interests), but you have also protected those ownership interests from your children's future divorce. That's because once assets are in a Discretionary Spendthrift Trust a trustee will control them and you and your children will no longer have any control over those assets. Therefore, no one can get at the trust's assets, including a divorcing spouse or any creditor.
When transferring assets to any trust, you need to be aware of your state's fraudulent transfer laws.
What is a Fraudulent Transfer?
For our purposes, once the possibility of a divorce is actually on the horizon, any transfer, gift or sale of assets (business or personal), which removes those assets from the reach of your future ex-spouse, or makes it difficult for him to access those assets, could be deemed a fraudulent transfer.
That would also include those instances where you might sell or gift an asset for an amount far less than what it's worth. For example, if you sell your house to your brother for $100, that would also be considered a fraudulent transfer.
In most states, the "look-back" period for fraudulent transfers ranges from 4 - 7 years.
So, for example, if you transferred, gifted or sold an asset (for less than its value) three years ago and now you and your husband are getting a divorce, that transfer, gift or sale could be deemed a fraudulent transfer and a judge could void that transfer and make that asset available for distribution in your divorce. This would hold true even if at the time of that transfer, gift or sale you and your husband were still happily married and neither one of you had any thoughts of divorce.
That's why it is absolutely imperative that you start divorce-proofing your business as soon as possible.
Why it's important to pay yourself a competitive salary.
This point is often overlooked. If you don't pay yourself a competitive salary and instead reinvest everything back into the business, your soon to be ex-husband might claim that he is entitled to more money or a larger percentage of your business because he did not derive the full marital economic benefit of your business (since you put too much of that money back into the business instead of the household).
Why you may want to think twice about hiring your husband or having him involved in your business.
In the absence of a prenup or postnup agreement, all or part of your business will probably be considered marital property, unless you were able to transfer your ownership of that business into a domestic or foreign asset protection trust while you were still single.
If your husband is or was employed by you or your company, helped run the company in any way or even contributed business ideas and advice during your marriage, then he may very well be entitled to a substantial percentage of your business. The greater his involvement in your business, the bigger that percentage will be. If your business has other owners in addition to you, then your husband would own a percentage of your share.
All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.
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My spouse says he has taken no salary at all for 5 years, investing it all back into the business. I derived no marital benefit and the houshold was severely neglected. I had no money for food (literally), for cleaning products, personal needs, for gas, the mortgage and taxes were not paid, the house short sold. He also invested all our community property into the business (stopped health insuraance, liquidated retirement accounts and college funds, pension plans etc). I filed for divorce 3 years ago and it is ongoing. He states his income is $0. He is a professional and works.
How does someone in my situation argue this in front of a judge?
What would a judge do in this situation?
Not taking a salary literally left me with no money for food, medical care, nonpayment of the mortgage, no car, no money for gas, no repairs done to the house left it in bad shape and we were forced to short sale.....he says his income is $0, yet he is paying the mortgage and taxes on the LLC.
Would this be considered a dissipation of martial assets to the detriment of his family?
Even if a business owner is uncomfortable transferring gifts or trust, it still makes good business sense to pay oneself a competitive salary (for your reasons stated) and to keep one's spouse as uninvolved with the business as possible.
It is beneficial to have the information in this article for different option possibilities and as a guideline for making decisions.
Cheryl Lazarus Divorce Coach
www.easiertransitions.com
For many, a business is the life insurance and retirement savings plan and it should be protected similarly with the next generation in mind. Divorce is one of life's risks, it needs to be acknowledged as a possibility. I do understand Laurie Israel's point about planning resulting in divorce, because it might generate an atmosphere of bad faith between the partners. As an optimist, I would argue that the majority of couples welcome proper planning, because they are thinking about the protection of assets for their children first.
I suppose the ball gets dropped in a number of cases because there is no 'team' to advise, but rather individual relationships. A pro-active, collaborative approach where attorney, financial advisor, CPA and others are involved at least at the level of awareness and recommendation seems to make much more sense.
With new collaborative software products available, the concerns of privacy etc. are far less than they used to be. It seems to me that inviting multiple disciplines to comment on the plans would also result in a far better solution than before. Spllt Partners addresses this issue by offering comprehensive referral network to professionals who commit to working with our clients in a collaborative manner, using our Internet collaboration tools.
If you read the rest of my series (Parts 1, 2 and 3), I repeatedly state, that all divorce-proofing of your business and/or other assets should ideally be done while you are still single. That is just smart planning and in no way engenders a future divorce.