Although prenuptial agreements are now common, mi-conceptions about their purposes and effectsare widespread. If the negotiation of an agreement is handled indelicately, relations between the twofamilies of the couple may be damaged, particularly if the agreement is viewed by any parent orspouse-to-be as an expression of distrust, disapproval, or lack of confidence. The owners of a familybusiness usually face a real dilemma: Raise the issue and risk an immediate family disruption, oravoid the issue and risk a future business disruption.
An unfortunate result of the dilemma is the tendency to delay addressing the issue until a member ofthe next generation becomes engaged to marry. It then becomes apparent that, if the issue is to beaddressed at all, it must be handled promptly. The pressure to get this done, combined with the normalpressures involved in planning a wedding, produces unnecessary tension and risk.
The alternative is to deal with the issues at an early date, well before the question is raised inrelation to any one member of the next generation. Deal with it proactively, despite its obvioussensitivity. Create a policy and process for the family that becomes a part of the family and business“ground rules.”
What follows are general considerations and guidelines for contemplating and forming prenuptialagreements. One model is also presented for a company called Kane Industries. It is not a “boilerplate” solution for every family, but raises good points.
Typically, a prenuptial agreement deals with property rights in the case of marriages terminated bydeath or divorce. For example, under the laws of most states, if a husband or wife dies and thesurvivor is dissatisfied with the provisions made for him or her under the estate plan, the survivormay elect to take from the estate a share determined by statute. This share may be as large asone-third of the estate. Any attempt by the surviving spouse to take this share may undermine thedecedent’s estate plan, in particular plans for disposing of interests in family businesses or assetsowned prior to the marriage.
Under a prenuptial agreement, each spouse often agrees to relinquish the right to take a statutoryshare of the other’s estate and, instead, will accept a specified amount of property or income to bepaid from the decedent’s estate.
The couple also may specify the property rights and obligations they each have in a divorce, with thepurpose of avoiding a lengthy, expensive, and angry battle over rights after a marriage has failed.Another purpose is to ensure financial security to each party, with assets protected from claims bythe other. Alternatively, when there is a significant disparity in the couple’s wealth, the agreementcould ensure the less wealthy partner of a property settlement or continuing income to maintain anagreed-upon standard of living, while protecting the rest of the wealthier partner’s property.
Enforceability.Historically, U. S. courts were reluctant to enforce prenuptial agreements. They were widelyperceived as a device by which a wealthy husband would impose unfair arrangements upon his lesswealthy wife. However, such agreements are now honored throughout the country, subject to rulesimposed in each state.
In almost all states four conditions are imposed. First, each party must make complete disclosure tothe other of his or her assets, liabilities, sources of income, and any other facts likely to affecthis or her financial position. Second, each party must be represented by independent legal counsel (ormust have made a voluntary decision to waive such counsel). Third, the terms of the agreement must be“fair” at the time the agreement is entered into and, in some states, the effect of the agreement mustalso be fair upon death or divorce. Finally, the agreement may be set aside by the courts ifenforcement would impoverish either party and create a risk that either would require publicassistance. Furthermore, the terms of the agreement may not affect the rights of third parties,particularly the children of the marriage.
Effect on family relationships. Prenuptial agreements are far less likely to damage relationships betweencouples and their families when they are negotiated for people who have been previously married andhave children. Here, each party has loyalties to third parties, typically their children, and each hasa legitimate interest in protecting the right of their children to inherit his or her estate.Protecting these rights does not imply disapproval or lack of confidence in the other spouse sincesuch arrangements apply equally to both families.
Often, parties stipulate that the agreement will return each spouse to the same financial position heor she would have had if the marriage had not taken place. This result can be achieved only ifsubstantial restrictions are placed on each person’s right to receive any property or alimony from theother at the end of their marriage.
Finally, negotiation of such an agreement may strengthen the relationship between the two. It assuresthat the property rights of each are protected, including rights to transfer assets to children orother beneficiaries upon death. It also avoids misunderstanding of the other’s intentions andexpectations.
The first marriage. A more difficult case arises when two people have never been married before and have nochildren. In such cases, the agreement is often negotiated at the suggestion of the parents, whoseunderstandable concern is to minimize any financial risk to their child. Particularly in a firstmarriage, a family’s suggestion to create an agreement can be construed as distrust or hostility. Whatcan be done to minimize ill will between the families?
One option growing in popularity is to limit the scope of the agreement so it protects only the assetseach party owns at the date of the marriage and any assets either later acquires by gift orinheritance. In addition, certain limited categories of assets, such as interests in familybusinesses, may be protected, even if the interests are purchased rather than received through a giftor inheritance.
Such an agreement may protect assets acquired without any effort or contribution on the part of theother spouse. It also recognizes the legitimate interests of parents or other family members makinggifts or bequests to benefit their own children.
The disadvantage of this agreement is that it leaves unprotected other assets which may be ofsubstantial value, including assets acquired from income earned by either party after the marriage. Tothe extent that assets remain unprotected, their disposition may provoke difficult negotiations in adivorce.
A second alternative, used less often, is creation of a family compact or agreement which has moralsuasion but may not be legally enforceable. All of the children and the parents pledge—before any ofthe children are married or have found a prospective spouse—that, if any of them marries, that personwill try to negotiate a prenuptial agreement protecting his or her assets from the claims of aprospective spouse (one such policy appears in the Kane Industries case).
A third alternative is to include in the prenuptial agreement a so-called “sunset” provision, by whichthe agreement lapses after a specified period of time after marriage (say, five years). Sunsetprovisions are more popular when the agreement is protecting assets other than those owned before themarriage or acquired subsequently by gift or inheritance. This agreement may strengthen relationsbetween a couple by ensuring that, in a reasonably long marriage, neither person’s financial bestinterests would be undermined by limiting those interests to assets accumulated during theirmarriage.
KANE INDUSTRIES’ Prenuptial Policy
Background. At the time of adoption of this policy in 1994, theownership of Kane Industries had been in the Kane family for three generations. The second and thirdgenerations, consisting of Douglas, Jeffrey, and Arthur Kane, their spouses, and their adult children,have collaborated in the creation of this policy for the purpose of perpetuating that ownership withinthe Kane bloodline. This goal was extremely important to founder Gordon Kane and is seen as animportant aspect of his legacy to the family.
The desired policy will apply to all family business assets and all inherited assets owned by familymembers (both real property and personal property), as well as to the proceeds from the sale of anysuch assets. However, it will have no application to the personal assets or estate of any member ofthe second or third generation (or beyond), either before or during marriage.
The policy is intended to deal only with the question of ownership of such assets. It is not intendedto negate or in any way undermine the sense of spousal loyalty and support which is integral to thefamily’s value system and to the nature of the marital relationship. [Comment: An early statement of the family’s values about relationships andresponsibility helps balance any initial reaction of “cold-bloodedness” in adopting thepolicy.]
The policy is intentionally created prior to the subject of marriage arising in the third generation,to make clear it is not being adopted because of concern about any particular individual who may marryinto the family.
Policy. We thesecond- and adult third-generation members of the family hereby declare it to be the policy of thefamily that, prior to marriage, each family member that has an ownership interest in assets of thenature described above enter into a prenuptial agreement with his or her prospective spouse. Theagreement will provide that the spouse will have no right to, or interest in, such assets. A proposedform of agreement will be provided to the significant other at an appropriate time in the process.That form will deal with the circumstances of both death and divorce, and the proposed consequences ofeither event.
Besides controlling the future ownership of these assets, the agreement may make provisions regardingfinancial support and the ownership of other assets. Examples: 1) The agreement should provide that,in the event of death, adequate provision will be made for support of the surviving spouse, while atthe same time providing for retention in the family (including by the decedent’s children) of titleto the assets used for such support. 2) The agreement may allow a gift or bequest of covered assets,but only if that gift or bequest is accompanied by a form of buy-sell agreement that provides forreversion of ownership to the family. [Comment: Theexamples address common concerns expressed in response to the proposed agreement. Other examples couldbe substituted.]
We acknowledge that the third generation and their children cannot be legally required to abide bythis policy. However, we are hopeful that all will do so in the interest of achieving an importantfamily goal, and out of loyalty and responsibility to other family members.
Process.Recognizing that this subject can be sensitive, and that complex legal documents will be required aspart of the process, we offer the following suggestions to each family member:
- Raise the subject with your significant other early in the discussion of possible marriage. Considergiving the proposed spouse a copy of this policy, and describe when, how, and why it was adopted.Possible hurt feelings should be viewed as normal, and dealt with openly and respectfully.[Comment: Some statement validating a young couple’sanxiety about such an agreement will help them deal with it.]
- Arrange a meeting with your intended spouse, his or her parents, and your parents. View this as anopportunity to explain the history and purpose of this policy, and the fact that it was not createdspecifically for your marriage. Reassure the proposed spouse’s parents that the agreement will notundermine the marital financial relationship nor deprive the children of the marriage of their fullrights as members of the Kane bloodline. [Comment: A prospective spouse’s parents may have a difficult time feeling that an agreement is not areflection on their child. A face-to-face meeting should help to dispel concerns and hurtfeelings.]
- Before beginning the legal process of disclosure, discussion, and drafting documents, hold a meetingwith your significant other, his or her attorney, and your attorney to acknowledge the delicacy of thesubject and to make clear to the professionals the way in which they can be most helpful. Use this asan opportunity to learn about the steps and timetable of the process. [Comment: In most states, it is essential for each party to have his or her ownattorney. Encourage the attorneys to approach their role in the process collaboratively notadversarially.]
- Sign the agreement well in advance of your wedding, so the normal tension associated with weddingplanning will not complicate, or be complicated by, this strictly business issue.
- At the time the agreement is signed, also agree on the terms of wills for you and your fiancÈ. Signthose wills immediately following your marriage.
- Dealing with the issue can be anxiety-ridden for the young family member. It is very important thatother family members remain close at hand and offer their support and advice.
Michael L. Fay is a senior partner at Hale and Dorr, a Boston-based law firm, where he is co-chairmanof the Family Business Practice Group.
Stephen B. Swartz, author of the Kane Industries case, is alawyer and co-founder of the McGladrey & Pullen Family Business Group.
Reprinted by permission fromFamily Money: A Commentary on the Unspoken Issues Related to Wealth, in Napa, CA. �(c) 1993 by Judy G.Barber.