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Home » Why Family Businesses Should Consider Instituting a Prenuptial Agreement Policy

Why Family Businesses Should Consider Instituting a Prenuptial Agreement Policy

February 22, 2024

Family businesses can pose unique challenges in divorce, especially where multiple generations or branches of the family are involved. A spouse’s interest in a business is considered a marital asset subject to equitable distribution and a source of income used to calculate alimony and/or child support. In a divorce, the financial impact on the business can be significant. To avoid problems and protect the company, families should consider instituting a policy requiring all owners to enter into a prenuptial agreement.

How Does a Family Business Get Divided in Divorce?

Without a prenuptial agreement, all assets are subject to equitable distribution in Connecticut, even those acquired before marriage and owned solely in the name of one spouse. As a result, a family business will be treated as a marital asset to be divided by the Court using a variety of statutory factors

Regardless of how the couple’s assets are ultimately divided, the owner-spouse generally retains his/her business interest. It is exceedingly rare for a nonowner spouse to be assigned an ownership interest in the company. Instead, the business will be valued, and the owner spouse will have to “buy out” the other spouse’s interest in that asset, or other assets will be assigned to the nonowner spouse to ensure equitable distribution. 

What Problems Can Divorce Cause for the Business?

Buying out the nonowner spouse or divesting other assets in a divorce can burden the owner-spouse financially, impacting the business’s health. In addition, the divorce process can significantly disrupt company operations. During discovery, the owner spouse must gather financial records and answer questions about the business or provide employees who can do so. A valuation expert will also be needed. This is time and money taken away from the business. Family conflicts and tension can also arise and impact how everyone works together.

Why Should Family Businesses Require Owners to Get a Prenuptial Agreement?

A prenuptial (or postnuptial) agreement can help reduce the costs associated with resolving the divorce. Instead of litigating financial issues, the prenuptial agreement can set forth how the family business and other assets will be treated in divorce for equitable distribution and alimony purposes.

Further, a prenuptial agreement ensures that the business is protected and the owner doesn’t have to use funds from the business to buy out the other spouse. It’s also useful to keep a spouse from inheriting the business for estate and succession planning purposes.

Accordingly, it’s recommended that family businesses institute a policy requiring all owners to sign a prenuptial agreement. A uniform policy for all owners avoids problems with singling out certain owners and spouses. Future family business owners should also be educated about the policy at a young enough age so they know they will need a prenuptial agreement before they get engaged.

What Should Be in a Prenuptial Agreement?

Every couple has different financial circumstances and concerns. As a result, the family business should not demand a one-size-fits-all prenup. However, the policy should outline the key terms that must be in a couple’s prenuptial agreement. These include provisions requiring that the business and any family trusts, gifts, or inheritances not be considered part of the marital estate for purposes of equitable distribution and that the income from such assets be excluded for alimony purposes.

In addition, the prenuptial agreement should provide that the nonowner spouse waives his/her right to the spousal elective share. The prenuptial agreement also should not have a sunset clause. Some prenuptial agreementsl expire after the couple has been married for a certain period. However, the agreement should not expire with family businesses.

The couple may also want to address how other assets are divided. This can help to preserve the business owner spouse’s interest in other marital property.

If you or your fiancé own a family business, it is essential to talk with a lawyer. Our attorneys have extensive experience with prenup and postnup agreements and can advise you regarding how to best protect your rights.

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