November 26, 2009

Structuring Personal Transactions: A Case Study in Marriage

I like to think of personal interactions as corporate transactions. It's less emotional that way. Bid, negotiate, sign, withstand regulatory scrutiny, and close (or in my case, fail at one or more of the above). Who wouldn't rather talk in terms of intercreditor agreements than feelings, right? But, as much as that should be obvious to all except the most steadfastly stubborn, alas, it is not. For the sake of those for whom silly emotions still rank supreme, I now undertake a brief example of how this brilliant approach to life can reap rewards far greater than delusional obsession with sentiments.

The easiest place to begin is with the most costly personal transactions in which people engage—marriage. Now, as long time readers are well aware, I have often focused on this topic, first in considering ways to (legitimately) avoid taxes; then in discussing criteria for tying the proverbial noose; and finally in categorizing potential partners in terms of tax benefits. Today I take it to the next logical step: having established criteria and categorized partners, how does one structure said entanglement to maximize one's personal utility?

That last statement might have caused some of you to pause in your tracks. What is this utility business? Isn't the holy sacrament of marriage supposed to be about idyllic notions of love and happiness, not base considerations of tax avoidance and value maximization? Wrong, assholes! Everything is about utility, and there is no such thing as love. But while dual income is great (indeed, the most important consideration!), existing laws do not allow us enough ability to protect for the downside. Prenuptial agreements are incomplete, and susceptible to voiding for unconscionability. Even ironclad agreements of this nature between sophisticated parties cannot bring the protection of the corporate veil.

So, the natural question is (or ought to be), why not? Why cannot we structure marriages as we structure mergers and acquisitions? Is anything stopping us but a blind (and patently misguided) fealty to such foolish concepts as tradition, or worse, emotions? Because that would be a damn shame.

The nearby deal diagram demonstrates how this might work. Though it speaks for itself, let me tell a little story. The circles represent two spouses looking to tie the noose. Rather than make the fatal error of going to the courthouse, getting a license, and then dropping thousands of dollars on getting their friends drunk while they embark on a lifetime of staid misery and inevitable divorce, our venerable Spouse 1 and 2 decide instead to each promote a Special Purposes Vehicle (SPV) for marriage. The SPVs are C corporations and using the magic of IRC § 351 now own all of the future spouses' respective personal assets while Spouse 1 and 2 own 100 percent of the stock of each of their respective SPVs.¹

Next, the SPVs are directed to form Marriage LP, the entity that will represent the marriage. Both SPVs (and the Spouses through them) are general partners, and Marriage LP owns all the joint assets of the marriage (e.g., cars, homes, children, etc.).² Why a limited partnership and not a general partnership? Well, that dear readers, is the true beauty of employing a corporate structure for marriage—investment opportunities!

With a limited partnership structure, spouses can seek private equity infusions in their marriage by granting LP interests in Marriage LP. Let's face it: some marriages are much more likely to be successful (that is, produce high-earning assets children) than others; why not let capital markets access to this wealth generation engine? And if we're allowing investments in marriages, why stop there? Synthetic swaps? Securitization of assets? The possibilities are endless!

The corporate structure for personal transactions, and in particular marriage, also brings a wealth of other benefits, a comprehensive account of which I could not hope to provide in one blog post. I, therefore, defer rigorous discussion of these benefits to another day. But I leave you with one thought: outsourcing. Until next time, dear readers!

^ ¹ Note that I am ignoring notions of corporate governance that follow from promotion of a C corporation, such as a board of directors and the like. But this need not occupy us long. For instance, the spouse's parents or members of their wedding party could serve on the board.
^ ² An added bonus of using corporate structures for marriage is that it eliminates pesky issues of gender; corporations have no gender.