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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.