Money Matters at the Altar

As a child's spouse is welcomed into the family, these steps may help pave the way for the new marriage to be a happier one —and cushion the blow if it's not.

  • Viewpoint
  • Updated October 2013

Like most marriages, this one started with joy and promises of a lifetime of devotion. This daughter of a successful businessman and her fiancé shared a passion for human rights causes, the outdoors and travel to exotic locations. While the marriage lasted a few years, the couple saw themselves falling out of love soon after the honeymoon.

As the couple careened toward divorce, they became more acrimonious. They soon faced a confrontational settlement process, and the husband threatened to seek a share of the successful privately held manufacturing businesses that the young woman's parents and grandparents had built by hand and the family still owned.

"The nature of those businesses made them very difficult to value," says Stacy Allred, a director with Merrill Lynch's Wealth Structuring Group. "Establishing in court what they were worth would have been time-consuming and expensive." Worse was the prospect of having a decidedly hostile outsider, who had never worked in the businesses, as a partial owner.

Fortunately for the young woman and her family, they didn't have to worry about any of those scenarios. A strong prenuptial agreement ensured that the family enterprise was off-limits in case of divorce. "It was crystal clear," Allred says. "The business was to stay entirely within the wife's family."

While "happy ending" may not quite apply, the resolution to the story of the family business heir and her estranged husband underscores how important it can be for families, even amid the excitement of an approaching wedding, to consider the financial implications of a marriage.

"Parents often worry about whether an investment will have a positive return," says Arlene Dubin, a Manhattan-based matrimonial attorney and author of Prenups for Lovers: A Romantic Guide to Prenuptial Agreements. "But a marriage is an investment that can cost 50% of their child's wealth. Divorce is the quickest way I know to lose half of what you have."

Parents often worry about whether an investment will have a positive return. But a marriage is an investment that can cost 50% of their child's wealth.
— Manhattan-based attorney, Arlene Dubin

Potential for Boosting Returns, Shielding Volatility

Prenuptial agreements admittedly are hard to warm up to. Many young couples worry that such contracts raise the possibility of failure before a marriage has even had a chance to succeed. To help ensure that an agreement will hold up in court, it's important to be able to show that both parties entered into it freely. That means each party needs to spend time reviewing the document with his or her attorney, hardly the most romantic way to spend the weeks before a wedding. (Some states also have special requirements, such as a waiting period between when the document is presented to a spouse-to-be and when it is signed.) People marrying for the first time tend to be especially resistant, Allred says. She estimates that, among the ultra-high-net-worth families she works with, only about 65% of first-time newlyweds take the precaution of a prenup, compared with approximately 85% of marriages in which at least one partner has already been divorced.

But prenups can be much easier to accept, Allred notes, if broaching the topic is seen as an extension of a family's overall approach to money. "More and more, families are recognizing the value of being up front with their children about the family's wealth and all of the responsibilities that go along with it," she says. "Kids who have been exposed to that kind of philosophy are going to have an easier time bringing that same level of transparency and straightforwardness to their new spouse."

In this context, then, a prenup becomes just one part of a broader discussion about how the new spouse is going to fit into the family dynamic. Such a dialogue is as much an opportunity to encourage involvement in family affairs as it is a means of protecting family assets. Handled correctly, it's also very much a way to help a marriage get off on the right foot.

Laying the groundwork

Ideally, the process begins long before prospective spouses are even in the picture. Teaching children about the meaning of wealth may be the surest way to make them better stewards of their own money and could ultimately improve the chances that they'll seek a spouse who shares their views on finances. "I'm not suggesting you tell an 8-year-old your exact net worth," says Jeralyn Seiling, a director with Merrill Lynch's Wealth Structuring Group. "But communicating with your children about finances does suggest that as they grow and demonstrate personal responsibility, you will share more and more over time."

To help formalize the process, families should consider planning meetings in which members of all ages gather to discuss such issues as philanthropy, budgeting, resisting peer pressure to overspend and guarding against identity theft. As children mature and become involved in serious relationships, the family wealth conversation expands to include the potential role that spouses will play, including the terms to open family financial meetings to spouses.

"Every family deals with this issue differently," Seiling says. "In general, we think the more open you are, the less chance there is of driving wedges in relationships and creating problems where none existed." More important, though, is having clear, consistent standards.

Some families have taken to segmenting the family meeting, making part of the proceedings accessible to all while limiting certain discussions to natural descendants. That way, even if spouses aren't immediately offered access to the most sensitive family financial information, they'll be less likely to see the exclusion as a personal slight.

"The goal is to share the right amount of information at the right time," Allred adds. "It's O.K. to tread carefully, and when information is shared, to have asked family members to develop a policy on confidentiality."

Let your child be the driver

Although parents play a crucial role in establishing these structures, ultimately the child getting married has to take the lead in communicating the family's point of view to his or her prospective spouse. With luck, such discussions become just part of the natural process by which the bride and groom are defining the roles of their life together. "This should be an exercise in mutual discovery," Dubin says. "What does the couple want out of life? Do they want to have children? Do they both intend to keep working, or will one of them stay home? The degree to which the family's money should and shouldn't figure into their plans is all just part of that."

When they're little you protect them by holding their hand. When they're older, you protect them by encouraging them to get a prenup or putting their assets in a long-term trust.
— Steven Lavner, National Wealth Planning Strategies Group, U.S. Trust

Still, such weighty discussions can be difficult to initiate, and parents should resist the temptation to get heavily involved at this stage for fear of undermining the bond of trust the couple must build on their own. Even if parents have reason to mistrust a prospective spouse, they should be careful not to force their will on their child, says Dubin. "Ask your daughter what she knows about him," Dubin suggests. "Empower her. Share your concerns and tell her that you'll help her with any resources she may need, but let her make the decisions."

Broaching the 'P' word

The child should also be the one to raise the idea of a prenup. One way parents can help their children here is by writing a requirement for a prenup into the terms of a family trust. The best arrangements "depersonalize" the issue entirely, Dubin says. If prenuptial agreements are simply a fact of life within the family, the child will be able to report honestly that the need for a prenup stems not from mistrust of any individual but from a longstanding family policy.

Calling for a prenup in trust documents is part of a larger trend during the past 20 years of creatively using trusts to encourage financial responsibility, says Steven Lavner, of the National Wealth Planning Strategies Group of U.S. Trust. Whereas a traditional trust may distribute wealth when a child reaches a generic milestone (age 30, for example), "incentive trusts" are triggered when an heir accomplishes a more values-driven goal, such as completing education or holding down a steady job over a period of time. Such a trust might require a child to have a solid prenuptial agreement in place to receive any funds while married. Other parents may simply use trust language to require a child to meet with an experienced matrimonial attorney to discuss the advisability of having a prenup.

Human capital is the most important resource a family has, and new spouses can play a big role in providing it.
— Stacy Alfred, Director of Merrill Lynch's Wealth Structuring Group

According to Lavner, long-term trusts can provide added security, either in conjunction with a prenup or on their own. He sees more and more parents using long-term trusts that withhold control of the money until their sons or daughters turn 50 or even 60. Beneficiaries may still receive distributions at the discretion of the trustee before reaching that age. But since they don't control the money, it's generally safe from claims by a spouse during divorce proceedings.

"It's another way of parents trying to protect their kids," Lavner says. "When they're little, you protect them by holding their hand. When they're older, you protect them by encouraging them to get a prenup or putting their assets in long-term trust

Crafting the agreement

If a prenup is called for, keep in mind that there are almost as many varieties as there are wedded couples. An agreement might specify how the couple will provide for pre- and post-marital debts; what will happen to post-marital property and family business interests in the event of death or divorce; and the status of gifts, inheritances and trusts that benefit either spouse before or after the marriage.

"The agreement should avoid containing anything a judge might deem 'unconscionable,' or she may invalidate it later," Dubin says. "Though that's a somewhat nebulous term, common sense can alert you to provisions that are patently unfair." For example, if one spouse has $25 million at the time of the wedding while the other has only a few thousand dollars in a checking account, a prenup that leaves nothing to the poorer one and that waives spousal support and equitable distribution of assets accumulated during the marriage would likely be rejected in court, she says.

Indeed, a prenuptial agreement can do much more than just provide protection in case of divorce, says Allred. A solid prenuptial agreement serves as a positive force for all concerned, setting clear boundaries at the outset, but leaving flexibility for the financial or business relationship to deepen as the level of trust builds between the family and the new spouse.

A family with a closely held business might use the document to stipulate the degree to which a son- or daughter-in-law will participate in the family enterprise. "It could state that only family members can be partners, or that the family has the right of first refusal to purchase back a spouse's partnership interest," Allred says. Over time, as the new family members show that they're loyal, supportive and on board with the family's overall mission and goals, the agreement can be amended to permit a deeper level of involvement.

That's the best possible outcome, says Allred. "You want their buy-in," she says. "Human capital is the most important resource a family has, and new spouses can play a big role in providing it. They're essential to grooming the next generation, and if you include them, they can add powerful value."

Past performance is no guarantee of future results.

Examples are for illustrative purposes and do not represent actual events. Neither Merrill Lynch nor its Private Wealth Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

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