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Divorcing business owners: options for property settlement

We have previously written on this blog about steps one should take in an effort to protect one’s business assets in the event of a divorce. The advice we have given comes from a 5-part series written by Jeffery Landers, a Divorce Financial Strategist.

While it is possible, with careful divorce planning, to avoid splitting business assets with one’s spouse during a divorce, not everybody will be able to avoid it.

There are a number of approaches to property settlement in the event of divorce. One can pay one’s spouse using one’s own share of marital assets, including cash, stocks, real estate, and retirement funds.

Another option is to draw up a Property Settlement Note, in which a long term payment is made with interest, of the amount owed to one’s spouse for their share of one’s business assets.

Yet another option is to set up an Employee Stock Ownership Plan (ESOP), which raises funds through the sale of part of one’s business to one’s employees. What this would essentially do is sell of a minority interest in one’s business to one’s employees. An ESOP is, according to Landers, a “tax-advantaged, qualified employee retirement plan,” and is designed to give one’s employees an ownership interest in the business.

The benefits of an ESOP are that otherwise illiquid business ownership interests can readily be sold on an already existing marketplace. An ESOP is also a good way to give employees a greater personal investment in the business, which brings positive effects to the business itself.

An ESOP would allow a business owner to raise money needed to pay-off their spouse during a divorce rather than having to give them a percentage of the business itself. A further point is that the part of the business sold to the ESOP, set up as a trust fund, is no longer owner by the business owner, and so it is protected against creditor claims including those of one’s spouse.

A final option for paying off a spouse is to sell one’s business and divide the proceeds with them. According to Landers, this is not the preferred method, but is nevertheless not uncommon. Particularly where one’s business constitutes the majority of one’s assets, selling it off may be the only way to pay off one’s spouse.

Source: Huffington Post, “How To Divorce-Proof Your Business: The ESOP Or Property Settlement,” Jeffrey Landers, 13 April 2011.