As a family lawyer, I am often asked to advise on protecting family businesses from the impact of relationship breakdown. This can be a particular concern for the next generation as settling down and starting their own families often coincides with taking on greater responsibility in, and ownership of, a family business. Although no one embarks on a marriage believing it to be anything other than ‘till death do us part’, it’s a sad fact of modern life that a significant minority of marriages are ended by divorce. And with divorce comes financial claims which could, potentially, disrupt and impact a family business.
In my experience, the next generation often feel a keen, and understandable, sense of responsibility to preserve wealth which their parents, grandparents, or indeed great grandparents, have built up. There is often a twin sense of obligation to both the generations that have gone before (and the hard work they have put into establishing the business) and the future generations to come, who will hopefully take on the mantle in the future. A prenuptial agreement can prove to be a vital document in ensuring those twin obligations can be met.
Equally, though, it’s readily appreciated that introducing the idea of prenuptial agreement is not easy and can seem inherently unromantic, not to mention untrusting, during what should be the happiest time of a couples’ life together.
However, in the same way as any couple embarking on a life together should discuss the big questions around children (how many, if any, schooling, division of caring responsibilities etc), an honest conversation about management of finances, both during the marriage and in the event of relationship breakdown, is advisable for all couples. Where wider family considerations, in the form of a family businesses, are involved, those conversations are only more important.
Prenuptial agreements: A summary
Any agreement made prior to marriage by a couple regulating how they wish their finances to be divided in the event of a divorce should be upheld by the family courts in England and Wales on any subsequent divorce provided (a) the terms are substantively ‘fair’ and (b) certain procedural safeguards are met.
In summary, those procedural safeguards are that:
- the Agreement should not be entered into too near to the wedding (generally, Agreements should be concluded by no later than 28 days prior)
- there should be disclosure of each future spouse’s financial (and other) circumstances and
- both future spouses should have independent legal advice on the terms (with it being common for the financially stronger party to pay for the financially weaker party to take advice).
With particular reference to family businesses, at its simplest, a prenuptial agreement may seek to purely ring-fence the family business from any claims (leaving non business assets, such as the couples’ home, investments, pensions etc to be divided between them as they deem fair at the relevant time). More complex agreements can seek to make specific provision (either on a percentage basis, or with reference to a certain standard of living, or at a level quantified at the time of the agreement). What is the best approach will differ depending on each individual couple’s circumstances and personal views.
Introducing the idea
Understandably, introducing the prospect of a prenuptial agreement is likely to be a difficult conversation. The key, as with all difficult conversations, though is to pick the right moment, be open and honest, and most importantly, listen.
No one wants to suggest a prenuptial agreement immediately after the proposal, but equally, it is important to start discussions relatively early. From a family law perspective, an agreement entered into in good time before the wedding, with adequate time for reflection, discussion and negotiation, is more likely to be upheld on any future relationship breakdown. Equally, from an emotional health perspective, the ideal is that the agreement is completed, signed and filed away in the bottom drawer well in advance of the final months of wedding preparations, when both parties should (rightly) be concentrating on the day itself instead.
To achieve that, we suggest that the lawyers be instructed to begin drafting and discussing the terms around six months (plus) prior to the planned wedding, with informal discussions between the couple direct, raising the idea of the agreement taking place prior to that.
Timing the conversation
Introduce the idea when there is time, free of other distractions, to really discuss it. Some couples may be attending marital preparation courses in which case the conversation may naturally flow from other issues raised in those sessions. In any event, wider discussions about how the couple intend to run their joint (and separate) finances and the drawing up of wills etc, should be had and a prenuptial agreement discussed in the context of those conversations may feel less ‘accusatory’ than a stand-alone conversation about asset protection and a potential future divorce.
Be open and honest about why having an agreement is important. Acknowledge if the discussion feels an uncomfortable one to be having.
Listen to your partner, and more importantly, seek to understand their perspective. Avoid being defensive.
For some couples it may be useful to have the conversation with a trusted third party, such as the couple’s financial advisor or accountant. However, a word of caution: this will certainly not be appropriate for all couples. It can be easy for the spouse marrying into the family to feel overpowered or brow beaten. Any third party should be truly impartial and not linked to the family business or wider family’s interests.
Many will understand the wish to preserve the family business for future generations, particularly when that will likely include existing and/or future children of the marriage. Some families have a policy that all family members should enter into pre-marital agreements (such ‘policy’ is sometimes recorded in a Family Constitution). If that is the case, or if other family members have entered into similar agreements, then explaining that to the spouse to be can help make the discussion feel less ‘personal’ and will avoid the spouse feeling like they have been singled out as in some way ‘unsuitable’.
Equally, most will have heard horror stories of the emotional and financial costs of acrimonious divorces and can appreciate that a prenuptial agreement (negotiated at a time of trust and happiness) can help avoid that acrimony and can provide some security for everyone going forward.
Finally, negotiations around a pre-marital agreement can be a good opportunity for a future spouse to really understand the family business and where their ‘piece’ of the family fits into the wider family picture. That understanding, and an early agreement as to what would happen if the marriage were to break down, can help support the marriage, rather than (as some fear) undermine it.
Negotiating the terms
Although the initial discussions should be led by the couple direct, negotiating the terms itself may require a different approach. What process will work will depend on the couple themselves and how comfortable they feel (and indeed how financially sophisticated they both are) discussing the finer detail. Some prefer to hand over the conduct of the negotiations to their respective lawyers (acting on their instructions); others prefer to discuss the terms direct (with the lawyers very much staying in the background and their role being constrained to advice on the proposed terms and drafting the formal agreement only).
Dispute resolution models such as mediation or collaborative law can be ideal processes to enable options for the agreement to be explored, and terms to be agreed, in a supported but constructive setting.
A good family lawyer, and/or mediator, will understand the wider emotional context to the preparation and negotiation of the prenuptial agreement and will support their client through the process, enabling constructive discussions to be had about the family finances, the implications of marriage (and any future divorce) and the interplay with the wider family business not just in preparation for the wedding but throughout the marriage.