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A prenuptial agreement, also known as a antenuptial or premarital agreement, in conjunction with a restrictive shareholder agreement, is the best way to ensure that the wealth generated by a family agribusiness stays within the family.
Raising the issue can spark tension between the future spouses, and often their families as well, but there are ways of managing the situation in such a way as to minimise the potential for conflict.
While prenuptial agreements can be a source of strife if not handled properly, these agreements can also serve to prevent some common family business conflicts. When a shareholder signs a prenuptial agreement, the likelihood that a future spouse will gain an interest in the family farm is minimised.
With this extra level of assurance, 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, prenuptial agreements for senior shareholders contemplating a second marriage, serve to assure younger shareholders that the new spouse and his or her family won’t automatically acquire a stake in the family agribusiness.
This becomes increasingly important as the younger generation increases their investment of time, money and energy in operating the business.
Protecting prenuptial assets
A prenuptial agreement is a legal contract designed to define the rights of the two parties to property acquired before and during marriage. These agreements generally focus on two contingencies, namely 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 and property owned before or acquired during the marriage, and other assets, including ownership in a family business.
In the event of a divorce, a prenuptial 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.
Prenuptial 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, and experienced in drafting and defending prenuptial agreements.
Protecting the family farm in the case of divorce
A prenuptial agreement can ensure that an ownership interest in the family farm 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 for the family and 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 other 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 prenuptial agreements. However, the earlier the subject is discussed, the better. One of the legal requirements for prenuptial agreements is that both parties enter the agreement voluntarily.
The notion stands a better chance of being accepted if the prenuptial agreement is presented as a way of protecting the family agribusiness and, as such, the entire family.
It is often a good idea for the older generation to raise the issue of a prenuptial 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.
This can soothe feelings and ultimately permit the process to proceed smoothly. Additionally, or alternatively, lawyers can lead the discussion about the need to consider a prenuptial agreement. Because the family attorney is an outside party, the potential for friction will be reduced.
As emotions often run high when a wedding is close at hand, the family business shareholder should discuss the need for a prenuptial agreement with his or her intended spouse before the engagement is announced. The agreement should be negotiated and signed well before the wedding date.
Ownership transfers
The older generation should carefully consider the manner in which a family agribusiness 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 should also be taken to avoid involvement of the family business in divorce proceedings. Ensuring that the share transfers are not in 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 a member of the next generation 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 minimises family conflict and protects the family business, consult your corporate and estate planning attorneys and discuss these concepts with your children well before they enter into a serious relationship.
Trevor Dickinson is CEO of Family Legacies, a family business consulting company.
Visit family-legacies.com.
