Gifting interests in a closely held business can be an effective estate planning technique. It can save on estate taxes and reward family members for their hard work in running the family business, while transitioning ownership to the younger generation.
A couple who owned a small family business was thinking about giving interests in the business to their married son over time. However, they were worried about the “what if” scenario of a possible divorce in his future. If their son divorced, they didn’t want to be in business with his ex-wife. One has to be careful when gifting business to family.
Forbes’s recent article, “What Family Businesses Need To Know About Gifting Business Interests,” explains that prior to the couple transferring some of their business to their son, they asked their attorney to draft a shareholder agreement with restrictions on to who the stock can be transferred in the future. The parents’ goal was to keep the stock from being transferred as part of a potential divorce. In our scenario, the parents want their daughter-in-law to sign a consent agreeing that she would be bound by the shareholder agreement and that the stock would never be transferred to her. If their son and his wife later divorced, she’d be bound by the agreement and the stock would remain with the son.
While the parents’ plan sounds like a great idea, it is in theory. However, the reality is that there’s a good chance of a far different and less desirable result. Let’s examine three ways this type of agreement gifting business to family could become a big headache.
An alternative might be the use of a marital agreement, like a prenuptial or post-nuptial agreement. The family business may be better protected with the son having an agreement that states that the stock is outside the marital estate and not subject to division, in the event of divorce. Of course, the parents can’t force their son to enter into the agreement, but they can stop the gifting spigot if he doesn’t.
Speak with your attorney and look at all your options to find the strategies that will work best for your business and for gifting business to family.
