Although a prenuptial agreement may not be on the marriage checklist, family business owners – and their children who may own or participate in the business – are often advised to prepare one in the part of the marriage process.
To begin with, a prenuptial agreement is a contract between future spouses that establishes the division of their property in the event of divorce or death and preserves the character of the property brought and acquired during the marriage. In some cases, appreciation in the value of a business may be considered marital property if the appreciation occurs during the marriage. This may be the case if the other spouse does not directly contribute to the business and even if the property is separately owned by one spouse.
A prenuptial agreement is a way to protect a family business, its income, resources and assets. For example, the agreement can be used to prevent a non-owner spouse from accessing business finances, acquiring part of the entity, and obtaining child support based on income generated by the business. .
Another important consideration is the matrimonial regime in which the parties find themselves. For example, Washington and California are communally owned states while Oregon is a separate owned state. If the character of the property as common property or private property is not clear, a change of domicile of the parties may modify the treatment of the property in the event of death or divorce.
The purpose of a prenuptial agreement is not to assert control or dominance but to prevent catastrophic conflict, preserve the family business, and respect the contributions each spouse makes to the business. Ultimately, it prepares the family and their business for disruptive events.
When is a prenuptial agreement enforceable?
The validity of prenuptial agreements in divorce proceedings is often disputed, so it is important to ensure that general administrative requirements are met. The specific legal requirements regarding the applicability and validity of prenuptial agreements differ by state. That being said, the following considerations are key to drafting a successful prenuptial agreement:
- 1. A separate and independent attorney for each party is an absolute necessity in a prenuptial agreement to avoid a conflict of interest or the appearance of undue influence.
- 2. Provide sufficient financial information, including revenues and liabilities. In most cases, the prenuptial agreement will not be public unless there is a dispute, so the parties must make full disclosure in the document. Failure to properly disclose assets and liabilities could result in non-enforcement of the agreement.
- 3. Use of carefully worded and explicitly detailed language that defines each party’s rights, obligations and waivers with respect to the marriage.
- 4. Provisions that go too far or encourage divorce should be omitted.
- 5. The proposed agreement should be presented to a future spouse well before the wedding. Most practitioners advise the parties to sign the agreement at least 30 days before the marriage becomes official.
- 6. The agreement must be entered into by both parties freely and voluntarily, without any pressure, influence or coercion.
- seven. The agreement should not be so one-sided as to be unconscionable or grossly unfair or unfair to one party.
What should a prenuptial agreement contain?
Prenuptial agreements vary and each is unique, but an ideal agreement will include a concrete method of dividing property in the event of death or divorce and should also specify how property is characterized before and after marriage. These substantive provisions include the following:
- 1. Characterization of property brought into the marriage, for example, which property remains separate property and which property may become joint property under certain circumstances.
- 2. Characterization of assets acquired during the marriage and treatment of any income, rents, dividends or distributions from such assets.
- 3. Payments for housing and living expenses and whether payments for a party’s separate property are a gift or equity establishment in that property.
- 4. Characterization of income, compensation, bonuses, or other gains as community property (usually default in community property states) or separate property.
- 5. Treatment of contributions of funds and/or services by one spouse or by the marital community to the property of another spouse.
- 6. How the property acquired in common during the marriage by the parties should be characterized.
- seven. Treatment of pre-marital life insurance and pension plans and future plans or policies obtained by the parties.
- 8. The division of property in the event of divorce or death, including the treatment of alimony or alimony, is part of a divorce decree.
- 9. Filing status of joint or separate tax returns.
Although there is emotional thought involved in entering into a prenuptial agreement, it is crucial to recognize that the decision will affect not only you but also your family business. A prenuptial agreement can contribute to the long-term success of your family business by preventing split sales and buyouts to satisfy divorce judgments, and it can help keep management decisions within the immediate family.