March 5, 2014
Today, parents’ delight at the announcement of their child’s engagement is often followed by concerns about the future success of the marriage. Given that almost 50 percent of all first marriages end in divorce those concerns are well founded. Where there are substantial or just important family assets such as a business, vacation home, retirement fund or other accumulated wealth there is a heightened awareness of the emotional and financial costs of a failed marriage.
Traditionally, prenuptial agreements are the first line of defense to avoid division of assets with ex-spouses and loss of control of family business operations. A prenuptial agreement is a contract entered into before marriage which addresses any number of marital concerns including division of assets in the event of divorce, waiver of spousal rights to estate assets, child custody and support and maintenance during the marriage or upon divorce. Alternatively, a prenuptial agreement can be limited to address only those important family or business matters that concern the parent.
My experience with prenuptial agreements for young adults entering a first marriage is that they are problematic and may not be valid or enforceable for many reasons. The enforceability of a prenuptial agreement is dependent on a number of statutory requirements. The agreement is unenforceable if any of the following occurred:
• The agreement was signed under duress;
• It was unconscionable at the time of signing;
• Each party did not have independent legal counsel;
• There was not full financial disclosure; and
• The agreement attempted to alter statutory rights to qualified retirement plans or other assets protected as a consequence of the marriage.
Where a parent initiates (or dictates) the discussion and negotiation of a prenuptial agreement the result maybe an extreme negative reaction from either or both of the engaged couple, even to the point of delay or termination of wedding plans. What an unfortunate result for both a well-meaning parent and an optimistic young couple!
When parents ask me for advice in these matters I caution them about the emotional and legal impediments in getting a fair and enforceable prenuptial agreement. Fortunately, there are alternative planning options parents can pursue.
First, the parents must be sure that their own estate plans provide all the protections possible should the child’s marriage fail. The parents’ estate planning documents should be reviewed. Are bequests to the child outright or in trust? If in trust, what are the distribution dates? Should those dates be extended? Are spouses of children included or excluded as trust beneficiaries? There is a great deal of flexibility in drafting a trust to meet any specific circumstances and concerns.
Second, family wealth and business assets should be structured to assure family control. Entity ownership can be modified to segregate voting control in a separate class of stock or with the manager of a limited liability company. After a relatively simple restructure, the ownership of nonvoting assets can minimize possible interference by a non-family spouse. A child who already owns a portion of a family business could be asked to give up (by gift or sale) the voting ownership and retain only non-voting ownership during the marriage.
Buy-sell agreements for family business entities can also address the effect of a divorce or separation with a possible trigger of redemption rights or loss of voting control.
A concerned parent may also be able to convince their child to transfer specific assets owned by the child prior to the marriage either to other family members or in trust. If the trust is a properly structured irrevocable self-settled spendthrift trust for the benefit of the child, trust assets will be protected from the claims of future spouses in divorce and need not be disclosed to the spouse. Such a trust is referred to as an Asset Protection Trust. While New York law does not recognize such a trust, practitioners generally look to Delaware which enacted appropriate trust legislation in 1997. The Delaware statute allows for effective premarital planning with flexibility for the child beneficiary to obtain access to trust assets and modify the beneficiaries who will receive trust assets upon the child’s death. The trustee (who may be removed or replaced by the child beneficiary) must always be an individual who lives in Delaware or a qualified bank. Many New York banks are qualified trustees in Delaware so the family’s local connection with their bank need not be lost. Additionally, the settlor of the trust (the child or parent) may retain the right to direct trust investments which is important where the trust holds closely-held business assets. Such an asset protection trust must be planned, executed and funded prior to the marriage.
Lastly, the child should execute appropriate estate planning documents prior to the marriage. The child’s will, revocable trust, power of attorney, health care proxy and living will can appoint the parents as agent, proxy and executor to act and make decisions as necessary for the child during the child’s life, disability, end of life and post death. Failure to designate this authority can have disastrous results. The unfortunate case of Terri Schiavo is a stunning example.
Parents should have thoughtful discussions of these issues and obtain advice and counsel as to the proper planning to achieve their objectives with the minimum impact on family harmony.