Pre-Nups: Promoting or Undermining Sound Family Relations?

Pre-Nups:
Promoting or Undermining
Sound Family Relations?

Family Money
by Michael L. Fay

Introduction

Frequently couples contemplating marriage are urged to negotiate a prenuptial agreement.Although such agreements are now commonplace, misconceptions about their purposes and effects are also widespread.Relations between the couples’ families may be damaged if negotiation ofagreements is handled indelicately, particularly if the agreement is viewed by the parents (or children) of one party as an expression of distrust, disapproval or lack of confidence in the other.

Couples planning a prenuptial agreement and their professional advisors may benefit from the following analysis of, the purposes and benefits of such agreements, and the means of negotiating the agreements to protect the financial interests of each party and promote mutual interest in strengthening their relationship with each other and with their respective families.

Limited Purposes of Prenuptial Agreements

A prenuptial agreement is not intended to regulate the day-to-day details of married life.Instead the agreement has a more limited function of protecting each party’s interests in his or her own property and in defining or limiting each party’s rights to the property of the other.Typically, an agreementdeals withproperty rights in the case of marriagesterminated by death or divorce.

For example, under the laws of most (if not all) states, if a husband or wife dies and the survivor is dissatisfied with the provisions made for him or her under the estate plan of the deceased spouse, the survivor may instead elect to take from theestate a share determined by statute.This share may be as large as one-third of theestate.Therefore, any attempt by the surviving spouse to take this share may undermine the decedent’s estate plan, including, in particular, plans for disposing of interests in family businesses or assets owned prior to the marriage.

Under a prenuptial agreement, the couple often agrees that each will relinquish the right to take a statutory share of the other’s estate and will, instead, accept a specified amount of property or income to be paid from the decedent’s estate. Thus, each can then plan with certainty for the disposition of the balance of his/her property.

Also, under such an agreement, the couple may specify the property rights and obligations of each in a divorce, with the purpose of avoiding a lengthy, expensive and potentially angry battle over rights after a marriage has failed.Another purpose is to ensure financial security to each party, with assets protected from claims by the other.Alternatively, when there is a significant disparity in the couple’s wealth, the agreement could ensure to the less wealthy a property settlement or continuing income to maintain an agreed upon standard of living, while protecting the balance of the property held by the wealthier spouse.

Enforceability of Prenuptial Agreements

Historically U.S. courts were reluctant to enforce prenuptial agreements, for they were widely perceived as a device by which, typically, a wealthy husband would impose unfair arrangements upon his less wealthy wife.However, the applicable law has evolved during the past 30 years, and such agreements are now honored throughout the country, subject to rules imposed in each state that are intended to ensure the fairness of each agreement.

Although the standards applicable to any agreement may vary from state to state, in almost all states four conditions are imposed.First, each party must make complete disclosure to the other of his or her assets, liabilities, sources of income, and any other facts likely to affect his or her financial position.Second, each party must be represented by separate and independent legal counsel (or must have made a free, voluntary and well considered decision to waive such independent legal counsel).

Third, the terms of the agreement must be “fair” at the time the agreement is entered intoand, in some states, the effect of the agreement must also be fair upon death or divorce.Finally, the agreement may be set aside by the courts if enforcementwould impoverish either party and create a risk that eitherwould require public assistance.Furthermore, the terms of the agreement may not affect the rights of third parties, including particularly the rights of children of the marriage to receive adequate support.

The Effect of Prenuptial Agreements of Family Relationships

The Second or Subsequent Marriage

Prenuptial agreements are far less likely to damage relationships between couples and their families when they are negotiated for people who have been previously married and who have children from prior marriages. Here, each party has loyalties to third parties, typically their children, and each has a legitimate interest in protecting the rights of their children to inherit his/her estate.Protecting these rights does not imply disapproval or lack of confidence in the other spouse, as such arrangements apply equally to both families to protect the interests of children.

Once the parties recognize that each has a legitimate interest in preserving assets to be inherited by his/her children, it is easy for the parties also to recognize the interests of the children.Parents can ensure their resources are not depleted as a result ofproperty settlements or alimony arrangements if the marriage fails.

Similarly, if the parties divorce, in most cases both parties want a prenuptial agreement that returnseach spouse to the same financial position he/she would have enjoyed if the marriage had not taken place.This result can be achieved only if substantial restrictions are placed on each person’s right to receive any property or alimony from the other at the end of their marriage.

Finally, negotiation of such an agreement may strengthen the relationship between the two.It assures that the property rights of each are protected, includingrights to transfer assets to children or other beneficiaries upon death.It also avoids misunderstanding of the other’s intentions and expectations.

The First Marriage

A more difficult case arises when such a prenuptial agreement is negotiated between two people who have neverbeen married before, and have nochildren or third parties they are obliged to support. In such cases, the agreement is often negotiated at the suggestion of the parents, whose understandable concern is to minimize any financial risk incurred by their child as a result of his or her marriage.

It is particularly in this context that a family’s suggestion to create an agreement could be construed as distrust or hostility.In that case, what can a lawyer or other advisors suggestto minimize ill will between the couple’s respective families?

  1. An option which has been increasingly adoptedis to limit the scope of the agreement so that it protects only the assetseach party owns at the date of the marriage and any assets which either may thereafter acquire by gift or inheritance.In addition, certain limited categories of assets, such as interests in family businesses, may also be protected, even if theseinterests are purchased rather than received through a gift or inheritance. Such an agreement mayprotect assets acquired without any effort or contribution on the part of the other spouse while also recognizing the legitimateinterests of parents or other family members making gifts or bequests to benefit their own children.

    The disadvantage of this agreement is that it leaves unprotected other assets which may be of substantial value, including assets acquired from income earned by either party after the marriage. To the extent that assets remain unprotected, their disposition may provoke difficult negotiations in any subsequent divorce.

     

  2. A second alternative, employed less often, is creation of a family compact or agreement which has moral suasion but may not be legally enforceable.Under such an agreement, all of the children and the parents agree–before any of the children are married or have found a prospective spouse–that, if any of them (parents or children) should thereafter marry, each of them pledges to try to negotiate a prenuptial agreement protecting his or her assets from the claims of a prospective spouse (One such policy appears in the Steve Swartz article).Clearly, the advantage of a pre-existing family agreement is to dispel any implication that the request for a prenuptial agreement prior to a child’s marriage is an expression of dissatisfactionor distrust of thefuture spouse.  
  3. A third alternative is to include in the prenuptial agreement a so-called “sunset” provision, where the agreement lapses after a specified period of time after marriage (e.g., five years).Sunset provisions are more popular when the agreement isprotecting assets other than those owned before the marriage or acquired subsequently by gift or inheritance.This agreement may strengthen relations between a couple by ensuring that, ina reasonably long marriage, neither’sfinancial best interests would be undermined by limiting his or her interests inassets accumulated by both during their marriage.

The Role of the Lawyer

Unlike otherfamily advisorswho may have an ethical and professional interest in maintaining neutrality and harmony,the lawyer is ethically compelled to representhis client’s interests solely and to provide unequivocal and undivided loyalty.The lawyer must consider first the financial best interests of his/herclient.

In the context of the prenuptial agreement, however, the lawyer serves as negotiator and counselor, not as hostile adversary. The lawyer’s ethics oblige him, therefore, tomaintain the client’s strong relationship with the intended mate and avoid discordbetween the parties’ respective families.If successful, the lawyer has crafted an agreement which promotes simultaneously hisclient’s need for financial security and the couple’s desire for a happy and enduring marriage.

Michael L. Fay is a Senior Partner of Hale and Dorr, a Boston-based law firm, where he is Co-chairman of the Family Business Practice Group.Mr. Fay advises clients on the wide range of concerns faced by family owned businesses.He lectures frequently regarding family business matters, estate planning, and related tax issues.He has been quoted in The Wall Street Journal and Forbes and has been interviewed on National Public Radio.