DISCLAIMER: THE INFORMATION CONTAINED HEREIN IS SOLEY FOR EDUCATIONAL PURPOSES. IT IS NOT LEGAL ADVICE OR LEGAL AUTHORITY AND IS ONLY THE AUTHOR’S INTERPRETATION OF DIVORCE LAW WITH A FAMILY BUSINESS.
Divorcing when a family business is involved adds layers of complexity to an already challenging process. The intertwining of personal and business assets can make negotiations more intricate and emotionally charged. Whether you are a spouse directly involved in the business or the non-involved spouse seeking a fair share, understanding key considerations is essential for a smoother divorce process. Here’s what you need to know:
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- Tax Implications: Dividing a family business in divorce can have significant tax consequences for both spouses. Capital gains taxes, transfer taxes, and other tax liabilities must be carefully considered when structuring the division of business assets. For instance, suppose the husband and wife each own a business 50/50 worth $20 million, and each has a $500,000 basis. The wife no longer wants to be involved in the business and wants bought out or otherwise credited for her share. At first glance, the quick answer is she is either going to get a $10 million payout or a $10 million credit. Hold on. The payout of $10 million pursuant to 26 U.S. Code Section 1041, results in no tax for the wife as it is considered a gift between spouses for tax purposes and the husband takes the wife’s basis. So, although the husband’s real basis is now $10.5 million, he only has the basis of $1 million, which is the husband’s $500,000 basis and the wife’s $500,000 basis. The wife avoids any tax and if the husband turns around and sells the business 6 months later for the same $20 million, in Nebraska, the husband pays 20% federal and 6.64% Nebraska capital gains taxes. Although the husband bought the wife for $10 million giving him a combined $10.5 million basis, for tax interest purposes under 1041 he only has a $1 million basis making his tax on the sale $5,061,600 instead of $2,530,800 or twice the amount of tax. This needs to be considered in the division of assets and, more importantly, many judges will not consider or understand built in capital gains. Attorneys must strategize to minimize tax consequences and maximize their client’s net worth post-divorce. Collaborating with tax professionals can help minimize tax burdens and optimize the financial outcome for both parties.
- Business Valuation: Before anything else, the business must be accurately valued. This process involves assessing tangible assets, such as equipment and property, as well as intangible assets like intellectual property and goodwill. Hiring a professional valuator experienced in business valuations is crucial to ensure a fair assessment.
- Ownership Structure: The ownership structure of the business plays a significant role in divorce proceedings. Is the business solely owned by one spouse, or are there multiple owners, possibly including family members? Understanding the legal and financial implications of the ownership structure is essential for determining each spouse’s entitlement to the business assets.
- Income vs. Reinvestment: In many family businesses, profits are often reinvested for growth rather than distributed as income. This can complicate matters when determining each spouse’s income for alimony or child support calculations. Attorneys must carefully analyze the business’s financial records to accurately determine each spouse’s financial standing.
- Buyout Options: If one spouse wishes to retain ownership of the business post-divorce, they may need to buy out the other spouse’s share. Determining a fair buyout price can be challenging, especially if the business’s value is being disputed. Attorneys may need to negotiate creative solutions, such as installment payments or asset swaps, to facilitate a smooth buyout process.
- Business Continuity: Divorcing couples with a family business must consider the business’s future viability. Will the divorce negatively impact the business’s operations or profitability? If both spouses are actively involved in the business, can they continue to work together effectively post-divorce? These questions must be addressed to ensure the long-term success of the business.
- Legal Agreements: The existence of prenuptial or postnuptial agreements can significantly impact the division of the family business in divorce. These agreements may outline specific provisions regarding business ownership, valuation, and distribution of assets. Attorneys must thoroughly review any existing agreements to determine their enforceability and implications for the divorce settlement.
- Alternative Dispute Resolution: Given the complexities involved, divorcing couples with a family business may benefit from alternative dispute resolution methods such as mediation or collaborative divorce. These approaches prioritize communication and cooperation, allowing couples to reach mutually beneficial agreements outside of court.
In conclusion, divorcing when a family business is at stake requires careful planning, negotiation, and legal expertise. By understanding these essential considerations and seeking guidance from experienced professionals, you can navigate the divorce process more effectively while safeguarding your interests and the future of the business.
It is important to consult with a legal professional to understand how Nebraska’s specific laws and recent developments may apply to your individual case, especially with high asset divorces and those involving the family business. Laws evolve, and legal advice tailored to your situation is crucial when dealing with divorce and property division. This blog is a general discussion only and is not legal advice or legal authority.
About the Author
C.G. “Dooley” Jolly
Adams & Sullivan, PC, LLO
C.G. “Dooley” Jolly attended Creighton University School of Law under a Dean’s Merit Scholarship, graduating in May 1997. He earned a Bachelor of Science degree from the University of Nebraska and graduated, cum laude, in 1994. Mr. Jolly was honorably discharged from the United States Marine Corps, as a reservist, after serving from 1986 until 1992.
Mr. Jolly’s practice is primarily in the areas of divorce and family law, with extensive experience in business and asset valuation; asset and debt division; custody/paternity; financial support; and other issues attendant to proceedings of this nature. He has trial experience in civil and criminal cases in the federal and state courts in Nebraska. He has practiced in the United States Court of Appeals (8th Cir.), the U.S. District Court of Nebraska, the Nebraska Supreme Court, the Nebraska Court of Appeals, and numerous Nebraska state district courts.