Tying a better knot
As a child’s spouse is welcomed into a successful family, these steps may help pave the way for the new marriage to be a happy one—and lessen the impact if it’s not.
Authored by the Merrill Center for Family WealthTM
Like most marriages, this one started with joy, hope and promises of a lifetime of devotion. The daughter of a successful businessman and her fiancé shared many common interests, including a passion for human rights causes, the outdoors and travel to exotic locations. While the marriage lasted a few years, the couple found themselves falling out of love soon after the honeymoon.
As the couple careened toward divorce, their relationship became more acrimonious. They soon were embroiled in a confrontational settlement process, during which the husband threatened to seek a share of the successful privately held manufacturing business that the young woman’s parents and grandparents had built from scratch with the intent to pass the business down to future generations.
“The nature of the business made it very difficult to value,” explained Valerie Galinskaya, managing director at Merrill Center for Family Wealth™.
“Establishing the value of the business in a court of law would have been time-consuming and expensive.” Worse yet was the prospect of having a decidedly hostile outsider, who had never worked in the family business, as a partial owner.
Fortunately for the young woman and her family, they didn’t have to worry about any of those unsettling scenarios. A strong prenuptial agreement (“prenup”) ensured that the family enterprise was off-limits in the case of divorce. “It was crystal clear,” Galinskaya says. “The business was to stay entirely within the wife’s bloodline at either divorce or death.”
While “happy ending” may not quite apply, the resolution to the story of the heir of a family business and her now ex-husband underscores how important it can be for families, even amid the excitement of an approaching wedding, to consider the financial implications of both a marriage and the dissolution of that marriage.
“Everyone worries about whether an investment will have a positive return,” says Arlene Dubin, a Manhattan-based matrimonial attorney and author of Prenups for Lovers: A Romantic Guide to Prenuptial Agreements. “But a marriage is an investment that can cost 50% of a person’s wealth. So naturally parents are concerned when their children marry. Divorce is the quickest way I know to lose half of what you have.”
CONSIDER IF A PRENUP IS RIGHT FOR YOU
A prenuptial agreement, sometimes called an “antenuptial” agreement, is meant to be a legally binding agreement in which the parties who intend to marry purport to modify or waive their rights that would otherwise arise at the time of the dissolution of the marriage (or at the death of one of the spouses) under the default laws of a particular state. Like any legal contract, it should be executed with all the formalities required under state law. The contract becomes effective at marriage and requires no additional consideration other than the marriage itself.
Some of the rights that are typically spelled out in prenups include:
- Rights and obligations of each of the parties in any of the property of either or both of them, whenever and wherever acquired or located
- Right to buy, sell, use, transfer, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of or otherwise manage and control property
- Disposition of property upon separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event
- Modification or elimination of spousal support
- Making of a will, trust or other arrangement to carry out the provisions of the agreement
- Choice of law governing the construction of the agreement
- Any other matter, including their personal rights and obligations, not in violation of public policy or a statute. For example, most prenups will not be enforced if doing so adversely affects a minor child’s right to support, limits remedies available to victims of domestic violence or penalizes a party for initiating a divorce proceeding.
It is admittedly hard to warm up to prenuptial agreements. Many couples worry that such contracts raise the possibility of failure before a marriage has even had a chance to succeed. What most couples fail to recognize is that their state already has a set of default rules that are set out in statutes and case law should they divorce. Essentially, the question boils down to this: In the event of death or divorce, do you want a judge or state law to divide your property, or do you want to agree as a couple, before entering the contract of marriage, who will receive certain property should the marriage end? To help ensure that an agreement will hold up in court, it’s important to be able to show that both parties entered into it freely and not under any type of duress. Here, timing can be everything. Executing a prenup days before a wedding can create a fact pattern that a judge may decide was unfair to one of the parties. “It’s a good idea to have the agreement negotiated and signed before the caterer is booked” explains Galinskaya.
Just as crucial, each must fully disclose their assets, liabilities and sources of income before signing. It is also generally recommended that each spouse independently select separate counsel to remove any inherent conflicts of interest. Often one party’s lawyer will draft the agreement and the other party’s lawyer will make edits so both sides are fully represented. This means each party needs to spend time reviewing the document in tandem with their respective balance sheets and expected earnings sources with their respective attorneys, hardly the most romantic way to spend the months before a wedding. (Some states require a certain waiting period between when the document is presented to a spouse-to-be and when it is signed.)
Entering the prenup process with a lens of fairness (versus simply protection of assets) can safeguard the couple’s relationship.
People marrying for the first time tend to be especially resistant, Galinskaya says. She estimates that, among the wealthy families she works with, only about 65% of first-time newlyweds (representing the rising generation of a family of wealth) take the precaution of a prenup, compared with approximately 85% of those entering a marriage in which at least one partner has already been divorced.
But prenups can be much easier to accept, Galinskaya notes, if broaching the topic is seen as an extension of a family’s overall approach to money and communication. “More and more, families are recognizing the value of being up front with their children about the family’s wealth and the responsibilities that go along with it,” she says. “Children who have been exposed to that kind of philosophy are going to have an easier time bringing that same level of transparency and straightforwardness to their new spouse.”
In this context, then, a prenup becomes just one part of a broader discussion about how the new spouse is going to fit into the family dynamic. It can lay the groundwork for effective communication and flush out issues that each future spouse holds dear in order to prevent them from being blindsided in the future should these issues arise. Frank and honest discussions around the reasons and content of the prenup should be viewed as a tool to strengthen the couple’s relationship. Handled effectively and with a lens of fairness (versus a focus only on protecting family assets), it’s a meaningful way to build communication skills, as a couple, in navigating most future marital conversations, especially where money and wealth expectations are concerned.
More than ever, couples are spearheading their own prenup process — talking, researching and deciding on their strategy —before writing anything down. Recently, a couple decided on a version of this collaborative process. For both partners, the process required a time commitment, budget planning and a close reading of two books: Prenups for Lovers and The Hard Questions: 100 Essential Questions to Ask Before You Say “I Do.”
LAYING THE GROUNDWORK
Ideally, the process begins long before prospective spouses are even in the picture. Teaching children about the meaning of wealth may be the surest way to make them better stewards of their own money and could ultimately improve the chances that they’ll seek a spouse who shares their views on wealth. “We’re not suggesting you tell an 8-year-old your net worth,” says Jeralyn Seiling, a managing director with Merrill’s Strategic Wealth Advisory Group. “But communicating with your children about finances does suggest that as they grow and demonstrate personal responsibility, you will share more and more over time.”
To help formalize the process, families should consider planning meetings in which members of all ages gather to discuss such issues as philanthropy, budgeting, confidentiality and resisting peer pressure to overspend. As children mature and become involved in serious relationships, the family wealth conversation expands to include the potential role that spouses might play, including the degree to which a spouse might be included in family meetings.
“Every family deals with this issue differently,” Seiling says. “In general, we think the more open you are, the less chance there is of driving wedges in relationships and creating problems where none existed.” More important, though, is having clear, consistent standards. When a child can articulate his or her core values to a prospective spouse, it can help soften the discussion around why a prenup is necessary.
Some families have taken to segmenting the family meeting, making part of the proceedings accessible to all while limiting certain discussions to direct descendants. That way, even if spouses aren’t immediately offered access to the most sensitive family financial information, they are still being included in a way that makes sense for the family.
Long-term trusts can provide added security, either in conjunction with a prenup or on their own.
“The goal is to share the right amount of information at the right time,” Galinskaya adds. “It’s okay to tread carefully, and when information is shared, to ask family members to develop a policy on confidentiality.” Keep in mind that certain financial disclosures will be required in order to execute a valid prenup that will be upheld in court. This requirement can be a hurdle for families who have not yet disclosed the full amount of their wealth to their adult child. In order for prenups to be upheld, courts generally require that each party fully disclose all of their assets and liabilities, their income and sometimes their expectations as to inheritances. Reviewing your state’s disclosure requirements with your attorney is therefore critical.
LET YOUR CHILD BE THE DRIVER
Although parents play a crucial role in establishing these structures, ultimately the child getting married has to take the lead in communicating the family’s point of view to his or her prospective spouse. With goodwill, such discussions can become just one part of the natural process by which the couple begin to define the roles of their future life together.
“This should be an exercise in mutual discovery,” Dubin says. “What does the couple want out of life? Do they want to have children? Do they both intend to keep working, or will one of them stay home? The degree to which the family’s money should and shouldn’t figure into their plans is all just part of that.”
Still, such weighty discussions can be difficult to initiate, and parents should resist the temptation to get heavily involved at this stage for fear of undermining the bond of trust the couple must build on their own. Even if parents have reason to mistrust a prospective spouse, they should be careful not to overstep their bounds, says Dubin. “Ask your daughter what she knows about her partner,” Dubin suggests. “Empower her. Share your concerns and let her know you will help her in any way you can, but let her be the driver.”
THE USE OF TRUSTS
For an added layer of protection, there are long-term trusts.1 There’s a larger trend in the past 20 years of creatively using trusts to encourage financial responsibility, says Steven Lavner, of the National Wealth Planning Strategies Group of Bank of America Private Bank. Whereas a traditional trust may distribute wealth when a child reaches a generic milestone (age 30, for example), some trusts are tailored to distribute funds at more value-driven milestones, such as earning an advanced degree or buying a first home.
According to Lavner, long-term trusts can provide added security, either in conjunction with a prenup or on their own. “Some parents forgo pressing their children into seeking prenups and instead leave everything in a trust for their children and their lineal descendants (meaning in-laws are not included in the class of permissible beneficiaries). Alternatively, some parents create trusts for their children with the condition that no distributions are allowed to married children unless the child has an existing prenup or postnup.”
He sees more and more parents using long-term trusts that withhold control of the money until their sons or daughters turn 50 or even 60. Beneficiaries may still receive distributions at the discretion of the trustee before reaching that age. But since they don’t control the money, it’s generally safe from claims by a spouse during divorce proceedings, as well as from creditors.
“It’s another way of parents trying to protect their kids,” Lavner says. “When they’re little, you protect them by holding their hand. When they’re older, you protect them by encouraging them to get a prenup or putting their assets in a long-term trust.”
How do you bring intention to action?
See below for three family approaches to establishing guidelines around prenuptial agreements based on defined family principles.
|Family A—Informed choice||Family B—Collaboration||Family C—Stipulated in trust document|
|Define the "why"||We value providing opportunities for the family members to make informed decisions and not letting money get in the way of relationships.||We value a spirit of collaboration in our family and a focus on stewarding family wealth, benefiting not just ourselves, but other family members current and future.||We value protecting inherited wealth within the family line.|
|Set clear policy requirements||The following actions are required of individual family members prior to marriage:
||Prenuptial agreements are required of individual family members prior to marriage.
Collaborative prenups are encouraged.
If an alternative approach is desired, family member will present his/her case to the rest of the family for consideration.
|Prenuptial agreements are required of individual family members in order to receive trust distributions, as written into the provisions of the trust.|
|Outline outgoing actions||Family members will meet up as a group to share insights and lessons learned from individual experiences and to discuss their decision to(or not to) implement a prenup.||Family members will read Prenups for lovers by Ariene Dublin(2001) and engage in a group discussion to share reflections and insights.||Each family member will meet with an attorney well in advance of engagement/marriage to discuss and plan for future actions.|
|Source: Content developed by Merrill Center For Family Wealth, 2020.
For Illustrative Purpose only
What is often seen as an “us vs. them” scenario can and should be seen as a “win-win.” That is, a prenup can be a marriage plan instead of a divorce plan, focusing on the couple rather than the individual (with lawyers, likewise, working together). It can be a thoughtful collaboration between people who care about the future. And that discussion goes best if both parties feel educated and empowered, rather than forced or threatened.
Seeing the prenup process as a positive collaboration is a new idea that’s not always shared by everyone — yet. “Most attorneys approach a prenuptial agreement backwards,” says Jennifer Jackson, a family attorney. “They use templates written from a ‘separate property is the ideal’ perspective. My template does not assume that everything has to be separate property from the start. And, having said that, we don’t usually start with a template. We start with a discussion: of their goals (for the marriage, themselves and for the other person), of existing community property law, and what changes they might want to make in order to accomplish their goals.”
There are some key questions that should be addressed in these discussions like:
- What am I hoping to accomplish with a prenup?
- Do I understand what is important to my partner in this process?
- How long should it last, and should its terms change over the length of the marriage?
- Should it take into consideration the couple’s future children? Future inheritance?
- Should it specify discrete assets or simply designate a percentage division of asset?
- Should it specify that the spouses carry a certain amount of life insurance?
- Should it require that each spouse maintain certain provisions in their estate planning documents?
Once the discussions start, differences of opinion between generations can impede progress. Issues may arise, especially in families where both sets of parents are paying for the attorneys and want to control the prenuptial process. Since attorneys can only communicate with their clients—the couple getting married—problems can arise. However, as more couples broach a subject that their parents were hesitant to address, more attorneys are seeing the mutually positive aspects of a collaborative prenup.
Finally, it’s worth mentioning that postnuptial agreements, the lesser-known cousin of the prenup, made after the wedding, can be planning tools as well. “While such agreements are generally not given as much weight as prenups in court, if they are fairly drafted and meet the criteria of your state law, they can work,” explains Galinskaya.
CRAFTING THE AGREEMENT
If a prenup is called for, keep in mind that there are almost as many varieties of them as there are wedded couples. An agreement might specify how the couple will provide for pre- and post-marital debts; what will happen to post-marital property and family business interests in the event of death or divorce; and the status of gifts, inheritances and trusts that benefit either spouse before or after the marriage.
A prenuptial agreement can be an opportunity to have a productive conversation about money.
“The agreement should avoid containing anything a judge might deem ‘unconscionable,’ or she may invalidate it later,” Dubin says. “Though that’s a somewhat nebulous term, common sense can alert you to provisions that are patently unfair.” For example, if one spouse has multiple millions at the time of the wedding while the other has only a few thousand dollars in a checking account, a prenup that leaves nothing to the poorer partner and that waives spousal support and equitable distribution of assets accumulated during the marriage would likely be rejected in court, she explains.
Indeed, a prenuptial agreement can do much more than just provide protection in case of divorce, says Galinskaya. A couple can use the prenuptial agreement as an opportunity to have a productive conversation about money — discussing money philosophies, working through financial concerns, and setting clear boundaries at the start of their marriage.
A family with a closely held business might use the document to stipulate the degree to which an in-law will participate in the ownership of the family enterprise. “It could state that only family members can be partners, or that the family has the right of first refusal to purchase back a spouse’s partnership interest,” Galinskaya says. Over time, as the new family members show that they’re loyal, supportive and on board with the family’s overall mission and goals, the agreement can be amended to permit a deeper level of involvement.
“Because new spouses play a big role in developing a family’s future, and that value is essential, “says Galinskaya, “you want their buy-in.”