Thinking of Making Your Kid a Stockholder?

March 1, 2008

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Are you thinking of transferring stock to your kids, or does one or more of your kids already own stock in your closely held business? Beware. You, your family and your business could be starting on a dangerous journey—dangerous to your economic and tax health. But take heart. This article shows you how to have a safe and rewarding trip.

Let’s set the scene: A typical owner (we’ll call him Andy) of a family-owned business (Taylor Co.) called me to consult about transferring his business to one or more of his children. For our purposes, Andy can have three kinds of children: 1) married or single, 2) own stock of Success Co. or don’t, and 3) work for Success Co. or don’t. Let’s start with Joe’s oldest child, Barney, who is single, works full time for Taylor Co., but owns no stock of Taylor Co. As long as any stock that Barney will eventually own is nonmarital property, the stock is safe from Barney’s spouse-to-be (let’s call her Thelma Lou). Thelma Lou can only have an interest in marital property, which can only be created after Barney and Thelma Lou marry.

Now you are ready to learn the rules that will keep Andy’s stock out of the reach of the divorce devil. After Barney marries Thelma Lou, he acquires stock in Taylor Co., and divorce rears its ugly head.

When is stock or any other property nonmarital property? Burn these rules into your mind: 1) when Barney owned the stock prior to marriage; and it makes no difference how he came to be the owner; 2) when Barney received the stock after marriage by gift, 3) or by inheritance; and 4) when Barney bought the stock with his own money after marriage (earned by Barney before marriage or received as a gift or inheritance before or after marriage). The fourth may be tough to prove in court if Thelma Lou sues for divorce.

Actually, you must learn only one simple trick. Do not create marital property. For example, you would create marital property by giving Barney a stock bonus of Taylor Co. stock after he married Thelma Lou. The best advice is to show the Andys of the world how to make sure that every share of stock their kids own is nonmarital property and stays that . Start on the first day the kid becomes a stockholder, and continue every day thereafter, whether married, single or divorced.

But what happens when Andy calls and tells me that he has kids who are married and own stock of Taylor Co. that is already marital property? Then, divorce usually means an expensive valuation war, followed by a court order to pay the court-fixed price to your ex- son-in-law or daughter-in-law. What to do? A properly worded buy/sell agreement that fixes the stock price for all stockholders and protects shareholders from ex-spouses is essential.

Transferring stock to your kids is smart and safe if the stock is nonmarital property. Just follow the four rules given in this article. And the same rules apply to you and your spouse, too. As far as I know, the four rules are the law in all 50 states (except Oregon, where we must use special strategies involving trusts).

Never transfer stock in your family business to anyone for any reason without first checking with a competent and experienced advisor. Then, although you may lose a daughter-in-law or son-in-law, you won’t lose even one share of stock in your business.

Want to learn more about protect ing your family without losing a bundle of taxes to the IRS? Spend time browsing my website, www.estatetaxsecrets.com, or call Irv at 847/674-5295. MF

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