Many assume prenuptial agreements that brides or grooms sign has to do with the immediate assets one or the other owns, but more often, families are insisting their daughter or son protect the family business prior to a walk down the aisle. It makes sense; the last thing a company founder wants is to pass down the business he built over the years only to have an offspring go through an ugly divorce and come out the other side with a huge loss to that business. With nearly half of all marriages ending in divorce, it’s not an unreasonable expectation. Creditors and former spouses have historically been a big problem for family owned businesses. A prenuptial agreement eliminates some of that problem.
PreNuptials and Estate Planning
These legal documents are designed for one specific purpose: to ensure that preexisting assets are completely protected in case of divorce. Recently, a client described these as “necessary evils”. The prenup that comes into play as part of a business model or the business owner’s own estate plan can be a bit restrictive, and even if it’s awkward and uncomfortable, to not agree to go along with it can mean there’s no walk down the aisle. There have been instances where the business owner’s daughter refused to play along, in which case, Dad rescinded the shares she would have received at the time of his death. There have also been instances when a fiancé was so insulted, the wedding was called off.
Even when the marriages are solid for a number of years, and even after the business has been handed down, there could be problems after the original owner’s death. That’s where solid estate planning comes into play.
That’s not to say that a mother in law can’t leave to her daughter in law any number of assets; this is completely different. It’s about protecting the family business. The prenup serves a purpose and the estate plan cements that purpose.
Family limited partnerships are the obvious choice for successful business owners. It allows them the option of receiving earnings, which will surely benefit the in-law, but it also protects the operations by preventing any efforts of taking over.
Limited Liability Companies
In many instances, a successful protective mechanism can be provided via a limited liability company. The company’s owner maintains the majority of limited partner ownership, and at the time of his death, a predetermined portion will then be transferred to a surviving spouse if one exists, with the shares being gifted into a trust that provides a solid income moving forward.
There are a number of financial tools that can help make the most of a prenuptial agreement and all are designed to protect the family’s business. With so many step- relationships, it’s important to keep in place the integrity of the company’s mission. When emotions are involved, it’s always challenging, but with the right tools, even the messiest divorce doesn’t mean the end of a company you worked hard to build.
Call us today to learn more about prenups and estate planning.