Using LLCs and Partnerships to Hold Assets in Divorce

Broken Heart

Dividing property in divorce can be one of the most complex aspects of dissolving a marriage. Some property is difficult or impossible to divide. Other kinds are difficult to sell or value. In these cases, it may make sense to move the property into a limited liability company (LLC) or partnership that both spouses own after the divorce goes through.

For instance, creative properties are notoriously difficult. While some experts claim to be able to predict the value of a stream of license payments, royalties or book sales, the creators are often not comfortable with the number. If both spouses participated in writing the book, making the movie or developing the app, then they both may feel proprietary toward the property, which would make giving it up that much harder. Holding the property in an LLC that splits the income stream can be a good solution.

Similarly, alternative investments are often troublesome. While some hedge fund interests can be redeemed, a secondary market exists for others and still others can be split, it may not make sense for particular investments. Interests in private equity funds and venture capital funds, particularly those held by employees, are rarely possible to divide or sell without negative consequences. Creating an LLC or partnership to hold the assets works for many couples in this situation, if the details can be worked out.

Even some stock that one spouse holds as an employee may benefit from this kind of arrangement.

For the LLC or partnership concept to work, it is often best for one of the divorcing spouses to be the primary manager. Asking both of them to participate in day to day decisions is difficult; they may not have communicated well about financial matters during their marriage, so it is not always wise to ask them to communicate about financial matters afterwards. Sometimes, the particular asset itself requires one former spouse to maintain control, like employee-held alternative investment funds and stock.

It is possible to split the income stream in interesting ways to address the parties’ notions of fairness. Consider a couple that has written two books, each of which has one party listed as an author but which was really written by both. The parties can divide up the income so the named author gets 75% of the proceeds and the other gets 25%.

Finally, using an LLC or partnership can help for estate planning purposes. People often want to leave specific pools of money or creative properties to their children, and want to make sure any subsequent spouses or children have no claim. While a separation agreement can address these concerns, it is often easier, clearer, more flexible and much more private to address the issue in a document that does not get filed with the court.

While they are not for all couples, in the right circumstances limited liability companies and partnerships make sense as tools to untangle a messy property division.