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Tying a Better Knot

As a child’s spouse is welcomed into a successful family, these steps may help pave the way for the new marriage to be a happy one—and lessen the impact if it’s not.



Like most marriages, this one started with joy and promises of a lifetime of devotion. The 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 found themselves falling out of love soon after the honeymoon.

As the couple careened toward divorce, their relationship became more acrimonious. They soon were embroiled in a confrontational settlement process, during which 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, managing director at Merrill Lynch’s Center for Family Wealth Dynamics and Governance®.

“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 unsettling scenarios. A strong prenuptial agreement ensured that the family enterprise was off-limits in the 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.

“Everyone worries 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 a person’s wealth. So naturally parents are concerned when their children marry. Divorce is the quickest way I know to lose half of what you have.”

CONSIDER IF A PRENUP IS RIGHT FOR YOU

Prenuptial agreements admittedly are hard to warm up to. Many couples worry that such contracts raise the possibility of failure before a marriage has even had a chance to succeed. Essentially, the question boils down to this: In the event of death or divorce, do you want a judge or state law to divide your property or do you want to decide as a couple? To help ensure that an agreement will hold up in court, for example, 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.)

Entering the prenup process with a lens of fairness (versus simply protection of assets) can safeguard the couple’s relationship.

People marrying for the first time tend to be especially resistant, Allred says. She estimates that, among the wealthy families she works with, only about 65% of first-time newlyweds take the precaution of a prenup, compared with approximately 85% of those entering a marriage 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. “Children 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 can create an opportunity to encourage open dialogue and involvement in family affairs. Handled effectively and with a lens of fairness (versus a focus only on protecting family assets), it’s also a meaningful way to build skills, as a couple, in navigating money conversations.

More than ever, couples are spearheading their own prenup process—talking, researching and deciding on their strategy— before writing anything down. Recently a couple decided on a version of this collaborative process. For both partners, the process required a time commitment, budget planning and a close reading of two books: Prenups for Lovers and The Hard Questions: 100 Essential Questions to Ask Before You Say “I Do.”

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. “We’re not suggesting you tell an eight-year-old your net worth,” says Jeralyn Seiling, a managing director with Merrill Lynch’s Strategic Wealth Advisory 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, confidentiality and resisting peer pressure to overspend. 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 degree to which a spouse may be included in family meetings.

“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 direct 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.

Long-term trusts can provide added security, either in conjunction with a prenup or on their own.

“The goal is to share the right amount of information at the right time,” Allred adds. “It’s okay to tread carefully, and when information is shared, to have asked family members to develop a policy on confidentiality.” Keep in mind that certain financial disclosures will be required in order to execute a valid prenup. This requirement can be a hurdle for families who have not yet disclosed wealth to their adult child. Review disclosure requirements with your attorney.

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 goodwill, such discussions become just one part of the natural process by which the couple begin to define 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.”

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 overstep their bounds, says Dubin. “Ask your daughter what she knows about her partner,” Dubin suggests. “Empower her. Share your concerns and let her know you will help her in any way you can, but let her be the driver.”

THE USE OF TRUSTS

For an added layer of protection, there are long-term trusts.1 There’s a larger trend in 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), some trusts are tailored to distribute funds at more value-driven milestones, such as earning an advanced degree or buying a first home.

According to Lavner, long-term trusts can provide added security, either in conjunction with a prenup or on their own. “Some parents forgo pressing their children into seeking prenups and instead leave everything in a trust for their children and their lineal descendants (i.e., in-laws not included in the class of permissible beneficiaries). Alternatively, some parents create trusts for their children with the condition that no distributions are allowed to married children unless the child has an existing prenup or postnup.”

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, as well as from creditors.

“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 a long-term trust.”

How do you bring intention to action?

See below for three family approaches to establishing guidelines around prenuptial agreements based on defined family principles.

 

Family A - Informed Choice

Family B - Collaborate Requirement

Family C - Stipulated in Trust Document

Define the “why”

We value providing opportunities for family members to make informed decisions and not letting money get in the way of family relationships.

We value a spirit of collaboration in our family and a focus on sustaining family wealth.

We value protecting inherited wealth within the family line.

Set clear policy requirements

The following actions are required of individual family members prior to marriage:


  • Take steps to become educated on the topic of prenuptial agreements
  • Implement a prenup that best meets his/her needs and concerns

Prenuptial agreements are required of individual family members prior to marriage.
Collaborative prenups are encouaged. If an alternative approach is desired, family member will present his/her case to the rest of the family for consideration.

Prenuptial agreements are required of individual family members in order to receive trust distributions, as written into the provisions of the trust.

Outline ongoing actions

Family members will meet as a group to share insights and lessons learned from individual experiences with prenups.

Family members will read Prenups for Lovers by Arlene Dubin (2001) and engage in a group discussion to share reflections and insights.

Each family member will meet with an attorney well in advance of engagement/marriage to discuss and plan for future actions.

WORKING TOGETHER

What is often seen as an “us vs. them” scenario can and should be seen as a “win-win.” That is, a prenup can be a marriage plan instead of a divorce plan, focusing on the couple rather than the individual (with lawyers, likewise, working together). It can be a thoughtful collaboration between people who care about the future. And that discussion goes best if both parties feel educated and empowered, rather than forced or threatened.

Seeing the prenup process as a positive collaboration is a new idea that’s not always shared by everyone—yet. “Most attorneys approach a prenuptial agreement backwards,” says Jennifer Jackson, a family attorney. “They use templates written from a ‘separate property is the ideal’ perspective. My template does not assume that everything has to be separate property from the start. And, having said that, we don’t usually start with a template. We start with a discussion: of their goals (for the marriage, themselves and for the other person), of existing community property law, and what changes they might want to make in order to accomplish their goals.”

There are some key questions that should be addressed in these discussions like:

  • How long should it last and should its terms change over the length of the marriage?
  • Should it take into consideration the couple’s future children? Future inheritance?
  • Should it specify discrete assets or simply designate a percentage division of asset?
  • Should it specify that the spouses carry a certain amount of life insurance?
  • Should it require that each spouse maintain certain provisions in their estate planning documents?

Once the discussions start, differences of opinion between generations can impede progress. Issues may arise, especially in families where both sets of parents are paying for the attorneys and want to control the prenuptial process. Yet since attorneys can only communicate with their clients—the couple getting married—problems begin. However, as more couples broach a subject that their parents were hesitant to address, more attorneys are seeing the mutually positive aspects of a collaborative prenup.

Finally, it’s worth mentioning that post-nuptial agreements can be powerful planning tools as well. “While such agreements are generally not given as much weight as prenups in court, they can work,” explains Stacy Allred. “The point being, it’s never too late to tie a better knot!”

CRAFTING THE AGREEMENT

If a prenup is called for, keep in mind that there are almost as many varieties of them 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.

A prenuptial agreement can be an opportunity to have a productive conversation about money.

“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 multiple millions 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 partner and that waives spousal support and equitable distribution of assets accumulated during the marriage would likely be rejected in court, she explains.

Indeed, a prenuptial agreement can do much more than just provide protection in case of divorce, says Allred. A couple can use the prenuptial agreement as an opportunity to have a productive conversation about money—discussing money philosophies, working through financial concerns, and setting clear boundaries at the start of their marriage.

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 ownership of 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 explains. “Because new spouses play a big role in developing a family’s future, and that value is essential.”

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