Divorce Protection in Estate Plans

>One of the most common concerns I see nowadays among estate planning clients is protecting inheritances from divorce. The recent Tannen case gives us the ability to protect inheritances using a “testamentary trust” contained within a will.  Outside of the will context, many families are using LLCs to either operate a family business, to hold family investments, to save on estate taxes, or to protect assets.  LLCs also provide opportunities for divorce protection.

Many clients have hesitation in gifting ownership interests in the family business or investment LLC to children for a variety of reasons, despite the fact that such gifts can be a great tool for reducing taxes and protecting assets.  There are many valid reasons for this hesitation.  The good news is that we can usually address all of these concerns through a properly drafted operating agreement for the LLC.  One concern that comes up often is a divorcing spouse of a family member getting ahold of that family member’s ownership interest.

Like most of the aforementioned concerns, the key to dealing with this is a properly drafted operating agreement and a knowledge of the law.  The way I like to protect ownership interests from divorce is through use of a buyout provision.  Such a provision states that if one member of an LLC gets divorced and the divorcing spouse is awarded any interest in the LLC, the other members of the LLC have an option to purchase the divorcing spouse’s interest at a predetermined price.  In Estate of Cohen v. Booth Computers, 421 N.J.Super. 134 (2011), it was held that said buyout price does not even need to be a fair price.  Including such a buyout clause with a predetermined price that is far less than fair value can make an LLC ownership interest very unattractive to a divorcing spouse.

If you are interested in learning more about uses of LLCs or protecting inheritances from divorce, feel free to contact me.

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