Jody A Miller, Attorney At Law

Parents need to be aware of the various child dependent exemptions and credits that are available to them on their tax returns and how they might be affected by a divorce settlement agreement.  Most parents consider only the child dependency exemption when negotiating a divorce agreement.  According to the IRS, in general it is the custodian of the child who is entitled to take the dependency exemption.  The custodial parent is the parent with whom the child resides for the greater number of nights during the year.  If a child spends an equal number of nights with each parent, the parent with the higher income would generally be considered the custodial parent.  A noncustodial parent may take the dependency exemption if the custodial parent waives the right to the exemption.  The noncustodial parent is required to attach a written declaration to their tax return from the custodial parent stating that the custodial parent will not take the child as a dependent for the taxable year.  Make sure to get expert tax advice on the rules regarding waiving the exemption – some agreements specify that the noncustodial parent is entitled to take the dependency exemption only if he or she is current on their child support obligation for that year; however, check the IRS rules and regulations to make sure as to whether such conditions or contingencies are allowed (they may not be).

A parent can take the Dependent Care Credit, Child Tax Credit, and College Tuition Credit ONLY if they are also claiming the child as a dependent on the tax return.  Therefore, a parent who waives the dependency exemption also waives the Dependent Care Credit, Child Tax Credit, and College Tuition Credit.  Parents must consider this when discussing waiver of the dependency exemption as a parent might unknowingly waive the rights to several tax credits when they thought they were waiving the right to only the dependency exemption.  Further, a noncustodial parent may agree to pay for a child’s college education thinking that they would be entitled to take the College Tuition Credit but if the child is not listed as a dependent on their tax returns they cannot take that credit.

Is is very important to consider all of the tax credits and exemptions regarding children when negotiating a divorce settlement agreement, and parents should seek competent and specialized tax advice from tax professionals regarding these matters.

Good Article I found on divorce-proofing your business with a buy-sell agreement:

Jeffrey A. Landers

Divorce Financial Strategist(TM)

How To Divorce-Proof Your Business: Buy-Sell Agreements

There are a number of things that you can do at the “entity” level of your business that could prevent your husband from keeping an ownership interest in your business.

Buy-Sell Agreements - Almost every business that has two or more owners has, or should have, a buy-sell agreement in place (if you don’t, you need to get this taken care of ASAP!)

A well-drafted buy-sell agreement will determine exactly how, and under what terms and conditions, the transfer of an ownership interest in the business will take place, if and when, certain “triggering events” occur, such as the death, disability, departure (quits, gets fired, retires) or, for our purposes, the divorce of one of the owners.

Since the ownership interests in a closely held business are fairly illiquid, a well-drafted buy-sell agreement should provide for:

• a market for the sale and/or purchase of those ownership interests

• a mechanism to determine the price, terms and conditions for the sale and/or purchase of those ownership interests

• the source of funds for the purchase of any ownership interests (life or disability insurance, a sinking fund, cash on hand, line-of-credit or a loan, a combination thereof, etc.).

In addition, a buy-sell agreement can (and often should) do the following:

• prohibit an owner (or his/her estate) from transferring and/or selling any ownership interests to third parties without the prior written consent of the other owners

• restrict the ownership of any interest in the business to an existing group

• automatically convert the ownership interest into a non-voting interest upon a triggering event

• provide the business and/or other owners with the mandatory right or right-of- first-refusal to buy the ownership interests from any departing owner, the estate of a deceased owner or the ex-spouse of a current or departed owner

• require all owners to have an acceptable prenuptial agreement in place before marriage or remarriage that would require that owner’s soon-to-be-spouse to waive any and all rights to any ownership interest in the business in the event of a future divorce.

Operating Agreement/Partnership Agreement/Shareholders Agreement - For our purposes, all of these agreements are synonymous. In general, Operating Agreements are used with Limited Liability Companies, Partnership Agreements are used with Partnerships, including Limited Partnerships and Shareholder Agreements are used for C and S Corporations.

The purpose of these agreements is to formalize the understanding between you and the other owners as to how the business will be owned and managed. Even though it is not a legal requirement for your business to have such an agreement, it certainly makes good business sense to do so. Without having some type of operating agreement in place, your business might be forced to operate in accordance with your home state’s default operating requirements. Wouldn’t you rather manage and operate your business the way you want to, instead of the way your state has pre-decided?

In addition, a well-drafted agreement will stipulate what is expected of each owner; how profits and losses are assigned; procedures for transferring, buying and/or selling ownership interests; and just about anything else you want it to say, including restrictions on the ability of ex-spouses of owners to have any ownership interests whatsoever in the business.

In most cases, the buy-sell language is either included in the operating/partnership/shareholders agreement or it is contained in a separate buy-sell agreement.

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Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to “divorce-proof” their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.

All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

Follow Jeffrey A. Landers on Twitter: www.twitter.com/Bedrock_Divorce

Good article I found on divorce-proofing your business with a prenup:

Jeffrey A. Landers

Divorce Financial Strategist(TM)

How To Divorce-Proof Your Business: The Prenup

So what is a prenup? A prenuptial agreement is a contract signed by both parties before their wedding that details what their property rights and expectations (including alimony) would be upon divorce. A well-drafted prenup can “override” both Community Property and Equitable Distribution State laws and the courts will usually respect such agreements (which is one reason why they are so powerful).

It is very important that each spouse-to-be is represented by their own separate attorney and that the prenup contain the following elements:

1. Agreement must be in writing (No oral prenups)

2. It must be executed voluntarily and without coercion (having your fiancé sign a prenup the day before the wedding is a good way to invalidate that prenup)

3. Full disclosure (no hiding of assets and/or liabilities) – this is another way to invalidate a prenup

4. The agreement cannot be unconscionable (the prenup could be invalidated if the agreement is too lopsided with one party getting almost everything and the other getting only a pittance)

5. It must be executed by both parties preferably in front of witnesses (or a notary).

6. It should be in a recordable format (such as a real estate deed).

Some attorneys even recommend having a judge witness the signing to make sure that no party was coerced into signing.

By using a prenuptial agreement, both parties can decide in advanced what property will be considered separate property and what property will be considered marital property and how that marital property should be divided.

You’d like a prenup but it sounds too legal and unromantic–you don’t even want to ask him.

Okay! Here’s another way to protect your assets:

If you are concerned that the terms of your prenup could be challenged and possibly not upheld in the future; or if your fiancée refuses to sign a prenup; or if you don’t even want to ask, then you should definitely consider setting up a Domestic or Foreign Asset Protection Trust.

In essence, you would transfer the ownership of your separate property into this trust, including your company (this would work for most entities–C Corporations, Limited Liability Companies, Limited Partnerships–but not necessarily for an S Corporation. Only certain types of trusts can own S Corporation stock, so this is something that would need to be discussed with a trust attorney that is experienced with asset protection trusts).

Without going into further detail about the various types of trusts and how they work, suffice it to say that using a trust could make the entire issue of separate property, and its appreciation, a moot point. The reason for this is that the trust, and not you, would legally own your separate property, including your company.

The transfer of your separate property into the trust should be done while you are still single and would not require any approval from your fiancée. The use of this trust would certainly not preclude you from also having a prenup. However, the prenup would no longer need to address the issue of your separate property and its appreciation. Instead it could focus on how marital property (and possibly his separate property) would be divided and who would receive alimony, in what amount and for how long.

What is a postnup? A postnuptial agreement is a contract between spouses. It is similar to a prenuptial agreement except that it is entered into and signed after marriage. In order to be valid, a postnup should include the same important elements as a prenup.

Having said that, a number of states still don’t recognized postnups and even when they do, postnups are challenged and invalidated much more frequently than prenups.

Here’s the reason why: Before marriage, the parties are entering into an agreement much like two business people entering into a contract and neither party has any legal family law rights on the other. Theoretically, if they don’t like the contract, either party can walk away. However after marriage, the situation is very different. The married couple now have very well defined legal rights regarding support and property division and they are considered to be in a fiduciary relationship with each other (meaning each party has to act in the best interests of the other party). Therefore, any transactions between them will be viewed with caution. By negotiating a postnuptial agreement, one party will typically be giving up some of those rights and that’s why postnups will usually be held to a higher standard of fairness than prenups on the theory that individuals have less bargaining power once married.

Nevertheless, if you don’t have a prenup, try to get a postnup. It’s better than nothing. Just understand that a postnup is not nearly as ironclad as a prenup and you never know how the courts would act if one spouse decides not to abide by the terms of the postnup.

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Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to “divorce-proof” their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.

All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

Follow Jeffrey A. Landers on Twitter: www.twitter.com/Bedrock_Divorce