Planning ahead for the potential tax and financial consequences of a divorce.
When business owners divorce, their companies can easily wind up on the casualty list if they haven't paid careful attention to tax and other financial consequences. "When my wife and I decided to divorce, one of the first things I did was ask my accountant to research the subject," confides Ron Parks, owner of Millard Manufacturing, in Omaha. "We wanted to structure our financial plans to protect the company's, as well as our personal, interests."
The best way to protect your company against divorce fallout is to act early -- ideally, while you're still happily married. "Set up a buy-sell agreement that spells out what would happen in the event of a divorce or any other event that could jeopardize your business," advises Thomas Drouin, a certified financial planner at IDS, in Seattle. "Be specific about who would be required to sell his or her stock; who would remain in control of the company; how stock shares would be valued if sold during a divorce; and how the stock purchase would be paid for." You want to avoid uncertainties that could tie up your corporate assets in court or, as Parks puts it, "traumatize your employees."
Some contingencies cannot be planned for. "The transfer of stock between divorcing spouses -- ultimately resulting in one spouse's stock sale -- may or may not be free of capital-gains taxes, depending on whether the transfer takes place before or after the divorce," Drouin explains. "That can be decided only once you evaluate the financial state of the company and both spouses. If your company is worth much more when you split up than the cost of your initial investment, you might want to transfer stock before the divorce is finalized -- which would save your spouse a capital-gains-tax liability.
Parks and his former wife considered a range of options before deciding that their best strategy involved making use of Millard Manufacturing's employee stock ownership plan (ESOP). "Using the ESOP allowed us to finance the buyout of my ex-wife's stock through a tax-advantaged bank loan," explains Parks, who adds that corporations may be able to deduct both principal and interest payments on loans to finance ESOP purchases. "It was by far the best financial strategy we considered." -- Jill Andresky Fraser