Before taking that heady trip to the gift registry, many couples are making a more humble trip to their lawyer’s office at the behest of their wealthy parents, to establish a prenuptial agreement. With divorce rates at historic highs, smart parents aren’t taking any chances – especially when it involves the family business.
The estate planning industry has estimated that over the next decade, the greatest intergenerational transfer of wealth in history will occur as aging baby boomers pass along an estimated $10 trillion to the next generation. Their research indicates that the majority of this wealth is in the form of closely held family-business stock.
Corporate and family law attorneys are experiencing an increase in families researching and requesting the use of prenuptial agreements that are specifically designed to keep businesses from becoming another marital asset subject to division in divorce cases. Often precipitated by the family’s personal and professional advisors, many wealthy business owners are not only signing these agreements themselves, but also insisting their sons and daughters do so – or else relinquish their share in the family enterprise.
The protracted acrimonious divorce of a major shareholder can create numerous problems for a closely held family business. In addition to creating an atmosphere of uncertainty and tension that can disrupt business continuity, the company’s assets could be lost when one party claims an interest in a spouse’s family concern. To determine the spouse’s potential interest, the business would be subject to valuation by experts on both sides, and that valuation process can be invasive, hostile even. It can also expose otherwise private practices through lengthy due diligence and discovery processes.
With the divorce rate hovering north of 50 percent and tax codes that encourage wealthy parents and grandparents to grant stock to their heirs prior to death, prenuptial agreements are gaining credence as one of the most effective methods of protecting a family business for future generations.
Well-conceived agreements contain confidentiality clauses barring divorcing spouses from revealing any family or corporate secrets, and offer a prescribed exit strategy that clearly outlines everyone’s position in the event of divorce.
In Massachusetts, many divorcing spouses have successfully made claims that their prenuptial contract was signed under pressure, and had them overturned. In an effort to avoid subsequent claims of duress, it is becoming rather common for attorneys to videotape prenuptial discussions and signings.
As its name suggests, a postnuptial agreement is entered into after a marriage has already taken place. These agreements are commonly employed by parents who have become wealthy during the marriage of their son or daughter, by couples who are on their second marriages who wish to protect individual assets from becoming marital assets and the interests of their separate children, or if one spouse inherits a family business during the course of a marriage. Also, if a spouse rises to a key position in a family business, a postnuptial agreement can provide a prearranged financial settlement for the other spouse while protecting the business for other family members. Further, any spouse who starts and grows a successful business should seek to protect outside partners (and the business itself) from any potential divorce.
Though they are less common than prenuptials, nearly 50 percent of attorneys polled by the American Academy of Matrimonial Lawyers reported an increase in the number of postnuptial agreements between 2002 and 2007. One reason for the increase is that investment firms and other equity holders are compelling new partners to assure the firm that a divorce won’t mean any dilution of ownership. Some private firms are even requiring that their senior executives enter into these agreements as a condition of employment.
So while it seems an insult to romance, prenuptial agreements can go a long way to ensuring the longevity of any family business, and can bring peace of mind to concerned stakeholders. If you missed your chance to sort through these issues before getting married, fear not – the postnuptial agreement can possibly bring all of the same protections. Now there’s just the small matter of bringing it up at the dinner table. •
Gabrielle Clemens, is a lawyer and a certified divorce financial analyst in the New England area.
