The importance of prenuptial agreements in protecting family businesses

Eric Maier and Courtney Koch, OLDER LUNDY KOCH & MARTINO

Pondering how, and when, to ask the love of one’s life, “Will you marry me?” often generates huge anxiety for the proposer; often it can pale in comparison to pondering how, and when, to subsequently ask the same love, “Will you sign a prenuptial agreement?”

Unfortunately, expert advice for how to broach either of these topics is outside the scope of this article (except to reiterate the obvious point that skywriting only works for one of these two questions). We will, instead, focus more on the inevitable next question that anxiety-ridden fiancés or fiancées often ask themselves – “Do I really need a prenuptial agreement?”

More specifically, what are the benefits of a prenuptial agreement for one subset of these people—those who own or whose families own a business at the time of the marriage?

As we know, a prenuptial agreement is a written contract between two people planning to marry, executed before the marriage, to establish the parties’ financial rights and obligations in the event the parties divorce. With a high percentage of marriages ending in divorce (according to some statistics, Florida has one of the highest overall divorce rates in the country), a prenuptial agreement is a practical tool for protecting a family-owned business, its revenue stream, and its assets from exposure.

The absence of a prenuptial agreement can complicate a divorce involving a premarital business, making it quite complex. As a general matter, to the extent a premarital business increases in value during the marriage, as a result of the active efforts of the owner spouse, the increase in value will be “marital property,” subject to equal distribution. On the other hand, to the extent a premarital business increases in value during the marriage, as a result of market or “passive” appreciation, that increase in value remains the “nonmarital property.”

Thus, without a premarital agreement, a divorce involving a premarital business will involve, among other things, appraisals of business assets, analyses of the value of the business at the time of marriage vs. at the time of divorce and complicated analyses to determine which part of the increased value is “active” and, therefore, marital and which part is “passive” and, therefore, nonmarital.  These additional steps can lengthen an already stressful process and increase the costs associated with the divorce substantially. Most, or all, of this can be avoided with a properly drafted prenuptial agreement.

Prenuptial agreements may impose restraints on a non-owner spouse’s ability to investigate the finances of the business, pursue an ownership interest in the entity, claim a share of the increase in value of the business during the marriage (regardless of active or passive) and obtain a support award based on the owner spouse’s business-related income. A premarital agreement can protect a premarital business and reduce the volatility that a business often faces because of the divorce of one of its principals. The primary goal is to protect the survival, and future success, of the business and its owners. It is critical to recognize that the decision will affect not only the owner spouse, but also the owner spouse’s family members and the non-spouse partners in the business.

Knowledgeable family law attorneys can draft a prenuptial agreement to protect interests in family businesses and establish how the family business passes on to the next generation. While asking one’s intended to sign a premarital agreement is not among the most romantic aspects of the engagement, it is important not to procrastinate too long, as the more notice and opportunity the other party has to evaluate the agreement and the parties’ respective financial circumstances, the less vulnerable the agreement will be to a legal challenge in the event of a divorce.

ERIC MAIER and COURTNEY KOCH are family law attorneys at OLDER LUNDY KOCH & MARTINO.

For 20 years, OLKM attorneys have been offering a fresh, and innovative, approach to the practice of law. With their skills and interdisciplinary expertise, they deliver extraordinary service and results. Whether it’s business or personal, OLKM attorneys will have a precise understanding of the client’s needs and will deliver customized solutions. To learn more, or to set up a consultation, please visit OlderLundyLaw.com or call 813-254-8998.

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