On this blog, we sometimes discuss ideas people may want to consider in planning for a divorce. Divorce planning is particularly important for business owners who stand to lose a lot of money in a divorce. This post suggests that gifting some of your business interests to your children in a trust may be an excellent tool to accomplish several goals at the same time.
To do this, you could gift a portion of your ownership interest in your business assets (or other of your choosing) to a Discretionary Spendthrift Trust for the benefit of your children. In this setup, you relinquish legal ownership of these interests and place them in the control of a trustee. Neither you nor your children would have legal control of the assets.
This move accomplishes three different things. It protects your business interests from your spouse in the event of a future divorce. It also prevents your children from frittering away the trust assets. In addition, it protects the assets in the event your children are divorced.
One thing to keep in mind, however, is the potential of fraudulent transfer in setting up such a trust. This can happen when a transfer, gift, or sale of business or personal assets takes place when divorce is in sight. Such a transfer is one which removes the assets from the grasp of your spouse or at least makes it hard for them to access them.
In most states, the “look-back” period for these transfers is between four and seven years. If a judge determines that you have made a fraudulent transfer, the gift or sale could be voided and the asset made available for distribution in divorce proceedings. A judge may determine that a transfer was fraudulent even if there were no plans of divorce at the time the transfer was made.
Included within the umbrella of fraudulent transfer are sales or gifts of assets for an amount significantly less than what it is worth.
This is one idea among various techniques available to persons wishing to protect their business from significant divorce losses.
Source: Huffington Post, “How To Divorce-Proof Your Business: Creating A Trust,” Jeffrey Landers, 16 Feb 2011.