Structured Payouts and Promissory Notes When Dividing a Business in Divorce

A house can be sold. A retirement account can be split by formula. A privately owned business resists both of those easy solutions, and that is what makes dividing one in a divorce a tricky problem. When the marital estate includes a company, how does one spouse actually pay the other for their share, particularly when the business itself holds little liquid cash?

Why a Lump Sum Payout Often Isn’t Realistic

Florida divides marital assets pursuant to Section 61.075 of the Florida Statutes, generally calling for an equitable distribution of property acquired during the marriage. A closely held business frequently makes up a large portion of that marital estate, but its value often sits in equipment, receivables, goodwill, and future earning potential rather than cash in an account. A company worth several million dollars might have almost none of that value sitting somewhere accessible for division. That gap explains why a clean, one-time buyout, however appealing, often is not practical.

Structuring the Buyout as a Promissory Note

When cash runs short, spouses often turn to a series of payments backed by a promissory note instead of one large check at closing. The retaining spouse agrees to pay the departing spouse an agreed amount over a fixed schedule, commonly three to ten years, with interest built in to account for delay and risk. A workable note usually addresses these points directly:

• The down payment, typically somewhere between twenty and fifty percent of the total buyout figure;
• The interest rate on the remaining balance, set to reflect the real risk that the departing spouse is absorbing;
• Whether the note is secured by the business, its assets, or some other form of collateral; and
• What happens if a payment is missed, since default remedies need to be spelled out rather than left vague.

Security Cuts Both Ways

This is where these notes get genuinely difficult to draft. Give the departing spouse the right to seize business assets on default, and you have added real protection, but you may also have destabilized the very business that is supposed to generate the payments if a lender or vendor gets nervous. Leave the note unsecured, and the departing spouse carries the risk if the business later struggles or fails. Most workable notes land somewhere in the middle, with partial security and clearly defined remedies, rather than an all-or-nothing approach.

Tax Treatment Is Its Own Conversation

Promissory notes tied to a divorce settlement bring their own tax complications. Transfers incident to divorce generally receive favorable treatment under federal tax rules, and specific treasury regulations exempt these notes from certain original issue discount calculations that would otherwise recharacterize part of each payment as taxable interest. Getting this piece wrong can create tax consequences neither spouse expects, sometimes long after the case closes.

Dividing a business that lacks the liquidity for a simple buyout takes more than a standard settlement template. Our Miami high net worth divorce attorneys at Hamilton O’Neill work alongside forensic accountants and valuation experts to structure buyouts that protect both spouses and the business. If your Florida divorce involves a business like this, talk to our attorneys about the structure that actually fits your situation.

Source:

flsenate.gov/Laws/Statutes/2023/61.075