Prenuptial agreements -- why you may need one

It is not unusual these days for marriages to break up. This often affects the family business, because even if both spouses did not work in the business, each is entitled to a portion of its value. This type of split could weaken the company because of one partner's absence, drain the company financially because of the settlement, or worse yet, necessitate its sale.

With the breakup of a marriage often comes a second marriage or even a third or fourth. While no one enters a marriage with the expectation that it will fail, the fact that it can should give pause to the family business owner. Although the emotional toll usually cannot be prevented, the financial toll can.

Marital rights

All states and individual jurisdictions within each state are different regarding a spouse's right to acquire property and income generated during a marriage. Most jurisdictions recognize that property acquired during a marriage belongs to both spouses. Anything brought into the marriage that was acquired before the marriage and still separately identifiable belongs to the spouse who brought it.

Any property such as gifts and inheritances going to one spouse, even though acquired during the marriage, belongs to the spouse receiving the property, as long as it's not commingled with other marital assets so that it can no longer be identified. The most common commingled asset is cash that is received and put into a joint bank account.

In addition to rights to the marital property, each spouse has rights to income generated by the family. The amount of income and the duration of the payments often depends on the length of the marriage. The computation for alimony varies by jurisdiction.

Usually the custodial parent will be entitled to child support payments for children (up to 18 years old and possibly including college expenses).

Altering marital rights

Although long seen as against public policy, antenuptial agreements, more commonly known as prenuptial agreements, have gained broad recognition in almost every state. They are contracts between individuals who intend to marry. They are becoming common for second marriages or first marriages in families with great wealth.

Prenuptial agreements often take the approach that what is mine stays mine and what is yours stays yours. When one spouse does not work, there is often a provision for that person providing a set amount or percentage of the estate if the working spouse dies prematurely.

Prenuptial agreements are an important tool for a family business owner who plans to remarry. Absent such an agreement, his or her premature death could be disastrous for any children from a previous marriage and for the business. The new spouse may suddenly become the business owner, either leaving out the owner's children or becoming an adversarial partner. It doesn't take much imagination to foresee potential problems.

When entering into a prenuptial agreement, the parties must follow certain formalities:

1. Sign the agreement with an attorney present. These agreements must be entered into willingly and with knowledge of the consequences.

2. Make full financial disclosure. Hiding any assets could contribute to the contract being declared null and void.

3. Specify what each is entitled to in case of divorce. Without such specifics, the longer the marriage, the more property the nonbusiness owner spouse may be entitled to.

Prenuptials for first marriages

Sometimes the greatest concern is for the children from the first marriage who are likely potential successors to the family business. The increasing divorce rate has shown many family business owners that no matter how much they trust their children's choices for spouses, a failed marriage could cause trouble for the child and for the business. For this reason, many successful family business owners are asking their children to have prenuptial agreements, even before the first marriage.

While this is a more difficult subject to approach than in a second marriage, it's important that this issue be considered before the marriage. It's also crucial that the parties not destroy the agreement at a later date.

Awkward but necessary

As you can see, prenuptial agreements can be quite contentious, but in may cases, can save you and your family business from disaster. If you or your children are considering marriage, see us before you send the invitations. We would be happy to help you in all tax and family matters involving your family business.

Melvin J. Van de Ven, CPA, CVA is a partner in the certified public accounting firm of Schott & Van de Ven in Cape Girardeau. He can be reached by email at mvandeven@schottvandeven.com.