Prenups are for everyone, especially owners (or future owners) of a family business
Prenups have a bad reputation: they hint that one member of an engaged couple doesn’t expect the marriage to last. Some may even believe that asking for a prenup signals that the marriage is only about money.
A marriage is about more than money, but we can’t forget that a marriage is a legal contract. A prenup, or prenuptial agreement, is a legal agreement signed by two individuals before they enter into a marriage contract. A prenup predetermines how assets will be divided in the event that the contract dissolves…which is divorce. The divorce rate in the US exceeds 50% (when factoring in second and third marriages), and only about 20% of married couples in the US have signed a prenup according to a recent Harris Poll. (Trends are changing, though, and more Americans are now open to the idea.)
Without a prenup, state laws govern how marital property is divided in a divorce. There are two legal frameworks for dividing property in the United States: equitable distribution and community property. The majority of states (41) are equitable distribution states where assets are divided equitably, but not necessarily equally. It depends on state statutes and judicial discretion. The other nine are community property states, including my state of Texas. In these states, spouses are the joint owners of all assets and debts acquired during the marriage. In the case of a divorce, everything is split 50/50.
If you are an owner of a family business (or will inherit ownership), this is problematic! Getting divorced without a prenup could result in the split of the business ownership, which could alter the structure of the business. The negative effects would be felt beyond the divorcing spouses. Not only would the other owners be affected, but the business’ additional stakeholders – employees, suppliers, and customers – could be, as well.
Do prenups work…what about the state laws? Prenups work by overriding state laws and clearly articulating asset ownership in the case of a divorce. If the marriage dissolves, ownership of the business assets doesn’t have to change if the prenup is written properly, and the business won’t get disrupted by divorce proceedings. (It is important that both parties to a prenup enter it willingly and have access to all information about the other party’s assets ahead of time. Prenups can be challenged if one party can argue that they didn’t have full knowledge of that which they were giving away claim.)
While asking for a prenup can be a sensitive topic, it is good policy for everyone to speak about assets and ownership before a marriage. For families with a business, we recommend that family policy require prenups as part of the family and business governance plans. It can appear personal if you wait until one of your children announces their engagement to require a prenup. Policies are best when they are not personal…they are best when they are based on principal.