How safe is your family wealth if your child divorces?
Let's start with a question: Would you fly my airline if I crashed 50% of the time? Well, depending on whose statistics you read, about 50% of every new marriage ends in divorce.
Even worse, after the nuptial couple exchanges vows, the law kicks in giving each rights to the other's assets. Like it or not, the bride and groom along with their folks — and the family assets —just boarded the "Maybe Divorce Airlines."
Should the divorce devil start to do its dance, the family asset problem surfaces. BIG TIME!
Is there a way to protect your family wealth?... Yes!.. A prenuptial agreement (PA). Sorry, but in real life, the oh-so-much-in-love couple refuses to sign one.
So, they become man and wife. No PA. You (and your kid, either now or someday) have the wealth. Your new in-law has your kid, and should the divorce devil raise its ugly head, experience proves will go after a portion of your family wealth.
Beware: You, your family and your business could be starting on a dangerous trip ... Dangerous to your economic and tax health. But take heart. This article shows you how to have a safe and rewarding (economically and taxwise) trip. Every time!
Note: Every estate plan should have two parts:
- A lifetime plan
- A go-to-heaven plan.
What follows is an essential part of your lifetime plan:
Let's set the scene: A typical owner (Joe) of a family-owned business (Success Co.) calls me to get a second opinion about transferring his business to one or more of his children. For our purposes, Joe can have three types of children: (1) married or single, (2) owns stock of Success Co. or don't, and (3) works for Success Co. or don't. Let's begin with an example, using Joe's oldest child, Sam who is single, works full-time for Success Co., but owns no stock of Success Co. As long as any stock that Sam will eventually own (or owns now) is nonmarital property to start with, the stock is safe from Sam's spouse-to-be (let's call her Sue). Sue can only have an interest in marital property, which can only be created after Sam and Sue marry.
Okay, you now have enough background knowledge to learn the rest of the rules that will keep Joe's stock out of the reach of the divorce devil. After Sam marries Sue, Sam acquires stock in Success Co., and ultimately divorce becomes a certainty.
The question you must always ask is when is stock (or any other property) nonmarital property? Here's the answer. Burn these four rules deep into your mind: (1) when Sam (just substitute your own child's name) owned the stock prior to marriage; (2) when Sam received the stock after marriage by gift, (3) or by inheritance, and (4) when Sam bought the stock after marriage with his own money (earned by Sam before marriage or received as a gift or inheritance before or after marriage). A little warning: The fourth way may be tough to prove in court when Sue sues for divorce.
Actually, you must learn only one simple trick... Do not create marital property. For example, you would create marital property by Sam receiving a stock bonus from Success Co. after he married Sue. Most of my consulting/second opinion advice (in this area) is to show the Joes of the world how to make sure that every share of stock (or other property) their kids own or will own is nonmarital property. On the first day your kid becomes a stockholder... And every day thereafter.
But what happens when Joe calls and tells me that he has kids who are married and own stock of Success Co. (whether the kids work for Success Co. or not is immaterial) that is already unfortunately marital property? Divorce usually means an expensive valuation war followed by a court order to pay the court-fixed price to your ex-son-in-law or daughter-in-law. What to do?... A well-drawn buy/sell agreement that fixes the stock price for all stockholders (current or future) and protects shareholders from spouses, who might become ex-spouses, is essential.
Let's summarize. Transferring stock to your kids is smart (to save taxes) and safe (avoids divorce problems) if the stock is nonmarital property in the hands of your kids.
Just follow the four rules in this article. Yes, the same rules apply to you and your spouse. As far as I know, the above rules are the law in all 50 states (except Oregon, where we must use special strategies involving trusts). One caution: Never transfer any stock in your family business to anyone for any reason without first checking with a competent and experienced advisor.
One final hint to help your professional advisor create the perfect estate plan (must include a lifetime plan) ... use strategies listed below.