The question of prenuptial agreements comes up often in multi-generational family-owned businesses. The question is typically raised by mom or dad, or maybe grandmother or grandfather, and goes something like: “We’re all very excited about [daughter’s/son’s] upcoming wedding. Do you (i.e., family lawyer) think you should talk to [daughter/son] about signing a prenup? We think it would be a good idea.” Note that the question is rarely raised by the glowing bride or groom to be.
What should you do? Here are some basics to consider:
A prenuptial (or antenuptial) agreement is an agreement made before a marriage, typically to resolve issues of support and property division if the marriage ends in divorce or by the death of a spouse.
How can a prenuptial agreement be useful?
- It allows the marital parties (as opposed to a court) to define the division of assets and debts between the parties if the marriage ends either by divorce or death.
- It allows issues of business ownership and control to be handled prior to any potential problems that may arise.
- It can be used to provide a method of valuation for the Company’s stock in the event of a death or divorce of a shareholder.
- It ensures that both spouses will have adequate support if the marriage ends and will help uphold each spouse’s estate plan.
Prenuptial agreements have been recognized and upheld in all 50 states.
If challenged under Alabama law, a prenuptial agreement will be carefully scrutinized by a court. The agreement will be deemed valid in Alabama if one of the following conditions are met:
- Consideration must be adequate and the entire transaction must be fair, just and equitable; or
- The agreement is freely and voluntarily entered into with competent independent advice, full knowledge of interest in estate and approximate value.
What do these requirements mean?
- There can be no fraud or duress at the time of entry.
- Both parties must voluntarily enter into the agreement.
- The agreement must be in writing.
- Each party must know what rights he or she is relinquishing and have a general knowledge of the estate of the other.
Thus, the circumstances surrounding the preparation for and execution of the agreement are the key to its enforceability. We also recommend that each party be advised by independent counsel.
So, how should the topic be raised with a bride or groom to be? Answer: Very carefully. Each option discussed should be addressed with care, as these are very sensitive issues.
Some good reasons for a prenuptial agreement include:
- Family history of ownership of the Company and desire to maintain family ownership
- Importance of the family’s control of the Company to pursue long-term plans and preserve value and the threat of disruption caused by a minority shareholder who is not aligned with the family’s objectives
- Best interests of the soon-to-be spouses (i.e., both agree in advance that they will receive sufficient support in the event of divorce or upon death)
- Creates an environment of trust and financial openness
- Valuable estate planning tool
- “Marital Insurance”
However, there are also potential downsides:
- Others may view the suggestion of a prenuptial agreement as a manifestation of one’s distaste for the potential spouse, or as meddlesome, greedy or unromantic.
- Finding an appropriate time to approach the topic can be difficult.
- It can be a challenging conversation for the parties involved.
- Lawyers are involved.
We recommend that older generations begin educating the younger generation on the subject of protecting the family business, including techniques such as prenuptial agreements, early–preferably before the engagement.