How To Divorce-Proof Your Business: The ESOP Or Property Settlement

If, for whatever reason, your husband is entitled to an ownership interest in your business and you don't want to be partners after the divorce...
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Part 5 is the final installment in an ongoing series about keeping your business assets safe in the event of divorce. Part 1 can be found here. Part 2 can be found here. Part 3 can be found here. Part 4 can be found here.

If, for whatever reason, your husband is entitled to an ownership interest in your business and you don't want to be partners after the divorce, you have a number of ways to pay him off, including:

A - Using your share of other marital assets including cash, stocks, real estate, retirement funds, etc.

B - Property Settlement Note - this is a long-term payout with interest of the amount you owe your ex-spouse for the value of his share of your business.

C - Using an ESOP (Employee Stock Ownership Plan) to raise funds by selling a portion of your business to your employees.

An ESOP is a tax-advantaged, qualified employee retirement plan similar to a stock bonus plan except that it is designed to provide your employees with an ownership interest in your business.

In essence, you are selling a minority interest in your business to your employees. With an ESOP in place, you have a ready-made marketplace for the sale of your otherwise illiquid business ownership interests. In addition, many studies have shown that employees that are part owners of the business they work for are better employees because they now operate with an owner's mentality.

Here's a brief description of how an ESOP would work.

•Your business makes tax-deductible cash contributions to a special trust fund that you have set-up.
•The trust fund uses that cash to buy a portion of your ownership interests based upon its value at the time of purchase
•Each employee receives an ongoing, small ownership interest based on his or her annual earnings. The employee receives this ownership interest without making any cash outlay, any reduction in pay or losing any other employee benefits.
•Your employees can cash in their ownership interests (at its then current value) when they retire or leave the company, thus allowing them to participate in the increase in value of your business.

Using an ESOP would allow you to raise the cash you need to pay-off your husband, instead of allowing him to own a percentage of your business. In addition, the portion of your business that has been sold to the ESOP trust fund is no longer legally owned by you and is now protected against all creditor claims including those of your husband. Of course, the cash that you received from the sale of your ownership interests is up for grabs, unless you were able to otherwise divorce-proof or creditor-proof those assets.

D - You could sell the business and divide the proceeds with your husband. This is obviously the least preferred method, but all too common. When the business represents the vast majority of all assets, there just may be no other way to pay-off your husband.

Protect Yourself and Your Business Before It's Too Late

Due to various other priorities in their lives, people tend to put things off that don't need to be dealt with right away - that's only human.

However, if you procrastinate and wait until you are actually faced with divorce, it may be too late to implement many of the measures that we outlined in this series. As we previously mentioned, to be legally effective, many of these protections must be in place years before the possibility of divorce is even on the horizon.

Please don't assume that a divorce can't happen to you, even if you are happily married--or not married--now. Just as you buy insurance hoping that you'll never need it, preventive action today can protect your business from a future divorce that hopefully will never happen.
Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (, 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

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.

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