Barry Shanoff

October 1, 1996

4 Min Read
Prenups End Divorce Cleanups

A happily engaged couple, Dawn and Jeffrey, were squeezed between love and money - their love and his family's money. The solution: a pre-nuptial agreement that preceded their marriage three years ago.

Jeffrey owned 25 percent of a waste hauling business controlled by his father who was concerned about safeguarding the business in the event the couple divorced.

After procrastinating for months, Jeffrey finally mustered the courage to ask his fiancee to sign such an agreement. "We had a choice between protecting the family business and preserving the romantic side," he said. When the marriage dissolved earlier this year, Jeffrey was happy he had the agreement.

Economists say that over the next decade the United States will experience the greatest intergenerational transfer of wealth in its history. Much of the $10 trillion expected to change hands will be stock in family-owned businesses.

As a result, lawyers are seeing a surge of interest in prenuptial agreements that remove business interests from give-and-take divorce settlements. Successful business owners who contemplate a new marriage are signing these agreements themselves and insisting that their children do the same - or else disavow or relinquish any interest in the family business.

A messy divorce can threaten company assets when one spouse claims a stake in the family enterprise of the other spouse, say matrimonial lawyers. Even when these efforts fail, a hotly-contested divorce case can ex-pose unflattering details in company operations, such as relatives who draw salaries but don't do any work. Accordingly, increasing numbers of "prenups" contain confidentiality clauses, which prevent divorcing spouses from disclosing family or business secrets.

Soaring divorce rates, together with tax laws that encourage wealthy parents and grandparents to make gifts of stock to their heirs, make prenuptial agreements the key to safeguarding a business.

These days, it's rare when wealthy business owners don't require their sons and daughters to sign prenups, said a New York attorney who each year draws up some 300 marital contracts. A third of them, he estimates, involve business heirs. "Most times, there's great resentment on the part of the child," he said.

Lawyers are increasingly turning to videotaping couples signing prenuptial agreements in an effort to avoid a later undoing of the agreement. Such a contract can be invalidated if a divorcing spouse can prove that it was signed under pressure.

Some children of wealthy business owners are very happy with prenuptial contracts. When she got married, Janet, whose father and uncle own a hugely successful recycling business in Pennsylvania, signed one. "Of course, you love your fiancee and think you'll be together forever, but what you're really doing is combining estates," she said. If you divorce, she adds, "you don't want to destroy the family business over a personal failing."

Meanwhile, some wily heirs are using prenups as bargaining chips. When the owner of an Illinois waste hauling firm decided to withhold a gift of stock unless his son signed a marital contract, the son told the father, "Fine, I'll do it. But you must agree to step down at 65."

In states where stock given to children is not treated as marital community property, a divorcing spouse can still seriously hurt a family business. Here's how it works: The father gives stock in the business to his son. In return, the son accepts a reduced salary. When the couple divorces, the wife claims that she is entitled to a stake in the company because the husband relinquished a higher salary (in which the wife has a community property interest) for stock (in which the wife has no such interest). To avoid the situation, matrimonial lawyers advise clients to specify in a prenuptial contract that any reduced salary is acceptable.

A California lawyer recalls how, where no prenuptial agreement existed, a divorce tied up a family business in court for more than a year. The company owner's daughter-in-law claimed that her husband had received ownership interests in various subsidiary firms and, in exchange, had taken a lower salary. Although the case was settled for about $250,000, the process totally disrupted the business.

If prenuptial agreements are freely signed by both sides who fully disclose their respective holdings and interests, the pacts are generally tamper-proof - even where payments overwhelmingly favor one spouse. "Just because a [prenup] is unfair doesn't mean it can be broken," said a Los Angeles attorney.

In a new twist, matrimonial lawyers are increasingly writing prenuptial agreements for couples in their 60s, 70s and 80s whose children insisted the parents sign such contracts. The object: to protect their inheritance.

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