What Family Businesses Need To Know About Gifting Business Interests

Retirement

Gifting interests in a closely held business can be an effective estate planning technique. It can save on estate taxes and reward family members for their hard work in running the family business while transitioning ownership to the younger generation.    

Recently, I worked with a couple who owned a small family business. They were considering gifting interests in the business to their married son over time, but were concerned about the “what if” scenario of a possible divorce in his future. If their son divorced, they did not want to be in business with his ex-wife.  

Before the couple transferred some of the business to their son, they wanted to create a shareholder agreement containing restrictions on who the stock could be transferred to in the future. Their goal was to prevent the stock from being transferred as part of a potential divorce. They wanted their daughter-in-law to sign a consent agreeing that she would be bound by the shareholder agreement and that the stock would never be transferred to her. If the son and daughter-in-law later divorced, she would be bound by the agreement and the stock would stay with their son. 

While the business owners’ idea might have been great in theory, the reality of this approach could easily yield a far different – and less desirable – result. Here are three ways this type of spousal consent could go south real fast. 

•   Opening a can of worms. Do you really want to ask your daughter-in-law (or son-in-law) to sign this type of agreement? It may be opening up the proverbial can of worms. If she did not think there was anything of value in the business, she may very well change her mind when you put an agreement in front of her to sign. Also, the atmosphere at holiday meals may not be as warm and fuzzy as it used to be. This may solidify her feeling that she was always an outsider.  

•   Is it legal in your state? Your attorney needs to analyze how effective the agreement would be under the laws that apply to the agreement and in the state where the couple may divorce. Would the divorce court uphold the agreement? According to Robin Lynch Nardone, a Boston family law attorney, “a Probate and Family Court Judge in Massachusetts cannot override restrictions on stock that is owned by a party and transfer that stock to the other, though the stock is still a marital asset and there are ways for the value to be divided as part of the marital estate.” 

•   Less protection than you think. In states like Massachusetts (and others), it certainly would not remove the stock as a marital asset. Even if the stock stays on the husband’s side of the balance sheet, its value would still be subject to division and the wife could then receive a greater amount of other marital assets to balance things out.

A better approach may be the use of a marital agreement such as a prenuptial or post-nuptial agreement. The family business may be better protected with the son having an agreement that states that the stock is outside the marital estate and not subject to division in the event of divorce. The stock and its value would be off the table, not to be divided up in the event of divorce. This is why a lot families require marital agreements when then they gift business interests to their children. Obviously, the parents cannot force their son to enter into the agreement, but they can certainly turn off the gifting spigot if he does not.  

There are lot of options to consider in gifting business interests. Protecting against a future divorce is just one of them. Speak to your attorney and analyze all your options to find the techniques that will work best for your business and your family.  

Products You May Like

Articles You May Like

IRS Issues New Guidance On The Tax Treatment Of Cryptocurrency
Hourly Planners Directory
China threatens countermeasures in response to US bill supporting Hong Kong protesters
How To Avoid Taxes When Giving Big-Dollar Gifts
Chicago’s West Town Arts District New Home For Major Contemporary Art Gallery

Leave a Reply

Your email address will not be published. Required fields are marked *