Prenuptial Agreements; Are They Enough?
After having accumulated assets, most families envision eventually transitioning family wealth to younger generations and empower them to achieve. However, many are keenly aware of the potential for spouse of their children to pose a serious threat to family wealth. If we transfer assets to our children/grandchildren, to some people they now become an attractive potential spouse. If a child/grandchild was divorced, how much could be lost?
We cherish our children and grandchildren. However, we understand that they may be seen for what they have, or may have, rather than who they are. It is difficult for younger family members to fully grasp the concept of legacy and that their actions impact the family unit. The greater the assets the more magnified this fact becomes. A divorce risks half the assets, in some cases more, that could belong to someone no longer part of the family.
While one cannot control who our children or grandchildren love and marry, there are proactive steps available to protect and preserve the assets we have earned, paid tax on, and plan on transferring (whether during life or after death). The most common tool is the prenuptial agreement, and while it has it merits, is not nearly as effective as most believe.
A prenuptial agreement is essentially a relationship exit strategy agreement which specifies how assets will be divided upon divorce. Simple in concept, but more complicated in application. Most mistakenly believe a prenuptial agreement to be a binding contract when in fact it is an expression of intent only upheld if approved by a family court judge. Generally speaking, prenuptial agreements must pass a five pronged test to be enforceable: (a) each party had separate, competent counsel, (b) full disclosure of assets, © adequate time to consider, (d) agreement was fair at the time it was entered into, and (e) agreement was fair at the time it was being enforced. The last two prongs are essentially within the judge’s subjective view and pose a large degree of uncertainty if and how the agreement will be enforced. Many prenuptial agreements have failed to be enforced leaving family assets exposed. Even some of the best drafted agreements are subject to risk; Jack Welch’s divorce settlement from years ago is a vivid example.
It is often difficult to share with an adult child or grandchild financial concerns or views of the family legacy. Surfacing a prenuptial agreement can be insulting or a viewed as challenging the upcoming marriage, causing relationship strains and resistance. Even when a prenuptial agreement can be a useful part of an asset insulation program, it can become difficult to implement.
Insulating assets offers the most favorable results through the use of several techniques, usually in an interlocking fashion. Legal entities and structures — such as limited liability entities, family limited partnerships, trusts, and the like — can be used to take advantage of their anti-creditor characteristics and provide barriers to reaching assets. One cannot lose assets in a divorce that they don’t own, even if one benefits from them. For example, a trust may own a residence and the child is allowed to live in the property with his spouse and children, but if there is divorce, or any other lawsuit, a well designed trust precludes the creditor from reaching the home. From a relationship perspective, entity and structure based programs only require parental involvement and coordinate with tax planning goals, and thus avoid being seen as intrusive.
When significant assets are eventually transferred, a key facet is the readiness of the younger generation to manage the assets. Even the brightest and most prepared often have difficulty hitting the ground running as they may have limited experience in managing significant assets, addressing taxes, professionals, employees, etc. The vast majority of the structures, when crafted well, incorporate flexibility to permit parents the ability to slowly transfer control, or delay it, to better groom children and grandchildren for management roles. Flexibility and the ability to modify cannot be overemphasized.
Prenuptial agreements have value, and a place in the asset protection program a family uses, but cannot be relied upon exclusively. A well designed program should include a blend of strategies to provide significant protection along with flexibility to adjust to changing views and circumstances. Most attorneys and advisors are not asset protection specialists and many plans have their shortcomings exposed only after a creditor attack. Once a family understands its options, it is much simpler to choose insulation options in a comfortable, manageable fashion which not only preserves family legacy, but harmony.
Adam Chodos, Esq., CPA, is the managing member of Chodos & Associates, LLC, a boutique private client law firm, with offices in Boca Raton, FL and Greenwich, CT, focusing on wealth consulting, asset protection, wealth preservation, business succession, and advanced estate planning. Previously, Mr. Chodos practiced law at the New York headquarters of Sidley Austin Brown & Wood and with Ernst & Young, LLP as a certified public accountant. He holds a B.A. in economics, summa cum laude, from the University of Pennsylvania and a J.D., high honors, from Duke University. Mr. Chodos is a member of the New York, Connecticut, and Florida Bars. mail@adamchodos.com
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