Together with a restrictive shareholder agreement, a premarital agreement ensures that an ex-spouse will not be a family business shareholder. If the subject is raised far in advance of marriage, its less likely to result in arguments and hurt feelings.
A premarital agreement, also known as a prenuptial or antenuptial agreement, in conjunction with a restrictive shareholder agreement, is the best way to ensure that the wealth generated by a family business stays within the family. Raising the issue can spark tensions between the future spouses, and often their families as well, but there are ways of minimizing the situation to minimize the potential for conflict.
While premarital agreements can be a source of strife if not properly handled, it’s important to note that these agreements also can serve to prevent some common family business conflicts. When a shareholder signs a premarital agreement, the likelihood that a future spouse will gain an interest in the family business is minimized. With this extra level of comfort, members of the senior generation may be more inclined to begin or continue to transfer ownership shares to the family member about to be wed.
Similarly, premarital agreements for senior shareholders contemplating a second marriage serve to assure younger shareholders that the new spouse and his or her family won’t acquire a stake in the family business. This becomes increasingly important as the younger generation increases their investment of time, money and energy in operating the business.
PROTECTING PREMARITAL ASSETS
A premarital agreement is a legal contract designed to property acquired before and during marriage. These agreements generally focus on two contingencies: divorce and death. They are commonly used to waive or relinquish certain future spousal rights and interests. These spousal rights extend to retirement plan interests, income property owned before or acquired during the marriage, and other assets of the moneyed spouse – including ownership in a family business.
In the event of a divorce, a premarital agreement may provide protection for pre-owned, gifted or inherited assets. The agreement can also be used to exclude a spouse from receipt of maintenance, or limit the amount of maintenance awarded. Premarital agreements are often used in second or subsequent marriages to delineate what, if anything, a surviving spouse will receive upon the death of his or her partner. It is imperative to engage an experienced corporate and estate planning attorney who is familiar with family law, experienced in drafting and defending premarital agreements.
PROTECTING THE FAMILY BUSINESS FROM DIVORCE
A premarital agreement can ensure that an ownership interest in the family business won’t be transferred to the ex-spouse. A restrictive shareholder agreement can further limit the rights of a shareholder and ensure ownership control among existing shareholders. Without these types of agreements, ownership could confer certain legal rights upon the former spouse, including the right to attend shareholder meetings. The cost of purchasing an ex-spouse’s interest in the business can result in financial hardship to the family and to the business as well as being an emotional “thorn” in everyone’s side.
If a divorce occurs and the family business interest is matrimonial property, the interest must be valued. Each party will hire an appraiser to review the family business’s financial information, some of which may become part of the court record. Since court records are generally available to the public, the business’s confidential information may fall into the hands of competitors. To prevent this kind of debacle, it is wise to demand a “protective order” or another device designed to keep vital information confidential.
RAISING THE ISSUE
Because each family business, and each family unit, is unique, there is no single right time to discuss premarital agreements, however the earlier the subject is discussed the better. Generally, it is the senior family member who encourages a member of the younger generation to consider such an agreement. Although the senor family member often has the ability and the means to be very persuasive, one of the legal requirements for premarital agreements is that both parties enter the agreement voluntarily. The notion stands a better chance of being accepted if the premarital agreement is presented as a way of protecting the family business and, as such, the entire family.
It is often a good idea for the senior generation to raise the issue for a premarital agreement during a family meeting or a board meeting. If the topic is discussed before a marriage is contemplated, no specific family member feels singled out; it also avoids making anyone feel that his or choice of a mate necessitated the discussion of a premarital agreement. This can temper feelings and ultimately permit the process to proceed smoothly. Additionally, or alternatively, lawyers can lead the discussion about the need to consider a premarital agreement. Because the family attorney is an outside party, the potential for friction will be reduced. If friction does occur, the lawyer, who is not part of the family, should take the heat.
Because emotions run high when a wedding is close at hand, the family business shareholder should discuss the need for a premarital agreement with his or her intended spouse before the engagement is announced. The agreement should be negotiated and signed well before the wedding date. Although there is a tendency to wait until the nuptials are imminent, the process is much less stressful if the agreement is signed at least several weeks before the wedding.
OWNERSHIP TRANSFERS
The senior generation should carefully consider the manner in which a family business interest is transferred to the younger generation. It is wise to do so in a way that protects the business interest from subsequent division, dilution or redemption by compensating payment to an ex-spouse in the event of the child’s divorce. Care also should be taken to avoid involvement of the family business in a divorce proceeding. Ensuring that the share transfers are not on the joint names of the family member and the spouse, helps maintain a separation of ownership of shares.
Share transfers through the use of gifts, with proper documentation of those gifts, may keep the property separate and safe from non-family members. Generally, if a gift is made in trust, the business interest will not be treated as matrimonial property.
If the next-generation member is buying the business interest, care should be taken to avoid making the purchase with marital funds. Restrictive buy-sell agreements provide additional assurances that the business will remain in the family. Buy-sell agreements can prevent unwanted share transfers by allowing the company or the other shareholders to approve any proposed transfer.
Some family businesses create two classes of shares, voting and non-voting, and exercise greater care in the transfer of voting shares to decrease the likelihood that a non-family member will acquire voting rights. If the business interest is transferred at death, the interest is treated as the recipient’s separate non-marital property. Again, it is generally safest to transfer the interest to a trust created for the benefit of the desired family members.
To take advantage of these planning opportunities in a manner that minimizes family conflict and protects the family business, consult your corporate and estate planning attorneys and discuss these concepts with your children long before they enter into serious relationships.
Family Legacies www.family-legacies.com is a multidisciplinary family business consulting company. Our consultants are leaders in their respective fields including; Family Business Consulting, Strategic Planning, Financial Planning, Wealth & Risk Management, Corporate Finance, Business Transitions & Exit Planning - Buy, Improve, Grow & Sell Businesses, Commercial & Family Law, Executive Coaching, Leadership Development & Facilitation, providing our clients with a professional and integrated multi-disciplinary service.