February 15, 2024

By: Kenneth Horoho, Jr. , Robert D. Weinberg

A recent meeting regarding succession planning with an owner of a closely held business resulted in a surprise twist in the conversation: his daughter, who the business owner intended to take over his role and ownership interest, had accepted a marriage proposal. Worse, she planned to tie the knot on Valentine’s Day, less than a month away.

The business owner further revealed that he was chagrined; he felt that his future son-in-law was a charlatan and perhaps the marriage was an artifice toward undeserved wealth. As such, the business owner was considering other options, such as looking outside the family for a new CEO, placing title to the company in some form of trust, or calling his “guy” in the city to “take care of it.”

He had not thought of a prenuptial agreement for his daughter and was pleased to hear that prenuptial (and postnuptial) agreements are not simply tools to resolve disputes in divorce, but that these instruments can play leading roles in estate and succession planning, as well.

Indeed, common misconceptions aside, prenups are for everyone, and they are an essential tool for any couple contemplating marriage, regardless of their age or financial station in life.

We have multiple estate planning tools to handle and manage financial concerns at the late stages of life. Most people know, at least generally, about the need to save for retirement, the need for life insurance, the availability of Social Security and related benefits, and about the need for a will. Similarly, most people don’t talk about these items when they get married (especially when the marriage is precipitous!)—but they absolutely do when they get divorced, and at that point it is often too late to avoid multiple messes.

Prenups, in essence, are financial planning tools—a roadmap for how marrying couples will organize not only their finances but also their estate plans—on the front end of their lives, or at least on the front end of their marital relationships.

Yes, prenups are critical in terms of avoiding financially and emotionally devastating divorce litigation, but they are so much more; prenups are an opportunity for spouses to have a critical conversation (even if they never sign a prenup) that can circumvent future conflicts about financial issues.

And, as in the case of our business owner client, a family that contemplates succession issues or the passage of wealth from one generation to the next can utilize these benefits to both minimize marital conflict but, as important, to protect family wealth from degradation through a messy divorce process.

Prenuptial agreements fundamentally provide an opportunity for marrying couples and their extended families to put a concrete plan in place while times are good. For this reason, discussions surrounding prenups should be seen as a positive; it is hopeful, creative, and involves making a plan to help two people navigate and potentially avoid arguments that often lead to litigation.

Most importantly, it is a discussion about how “joint” (or marital) property will be created. Without a prenup, the notion of what constitutes marital property can be contentious. Under our Divorce Code, marital property includes all property acquired during marriage, regardless of title, except for gifts, inheritance, or property acquired before the marriage. Marital property also includes growth in value of property acquired before the marriage or by gift or inheritance up until the date of separation.

Without a prenup, our business owner’s daughter’s interest in the company that she receives by gift during the marriage would not be marital property, although the growth in value up until a possible date of separation would be, which could potentially create a valuation dispute; the prenup can resolve this concern by stating that any ownership interest, growth or income regarding the business is not marital property.

A prenup, as a planning tool, changes the definition of marital property as the parties see fit and changes the rules that are dictated by the Divorce Code and the judge in the event of divorce. They are liberating and provide an opportunity for wide choices. Typically, a prenup creates a default: all property brought into the marriage, and all property acquired after marriage in individual names, can and will remain separate property unless the parties make a conscious decision to put property in joint names, which would then create marital property that would be divided upon divorce. Want to agree on the percentage distribution of the marital property and debt in the event of divorce? Good idea! Want to waive a business interest? That makes sense! Again, these terms are up for discussion, but it gives parties control over how they create their marital estate, and it provides clarity and predictability should the parties separate or divorce.

A prenup also implicates estate planning. Spouses cannot “disinherit” each other in Pennsylvania because of statutory spousal election rights. Without a prenup, marital status has critical implications for the simple reason that if parties are married and grounds for a divorce have not been established (which is itself a topic worthy of an article), the Probate, Estates and Fiduciaries Code, and not the Divorce Code, will control, which means that a surviving spouse can elect against the will of the deceased spouse, among other important concerns. It is easy to see how this could lead to immense issues where a couple is estranged but still married, and the surviving spouse can modify the will of their spouse to the detriment of other intended heirs. Therefore, you must consider legal responsibility beyond the grave. In a prenup the important rights that the Probate Code provides may be waived, wholly or partially, which will avoid sleepless nights for our business owner/client.

All of these estate planning concerns can be and typically are addressed in a prenup, in a manner that can be both creative and avoidant of messiness. Once again, a prenup creates a default which the parties can control. Often, the default is that if there is an “event of separation,” which is itself clearly defined, then the term of any will or beneficiary designation in favor of the other spouse is automatically revoked, unless clearly stated otherwise in either party’s estate plan.

Finally, prenups allow the parties to make certain estate plan promises to each other in the event that one of them passes and the parties are not separated. This could include provisions that one party will draft their estate plan such that the surviving spouse will be guaranteed certain benefits, like remaining in a house or receipt of certain payments or death benefits from life insurance or retirement plans.

There are myriad of other opportunities for creativity inherent in the process of drafting prenuptial agreements. At a minimum, a prenup is an opportunity for a discussion—when love and romance as opposed to acrimony and disdain are the driving emotional factors—and this discussion can, in many instances, serve to avoid the landmines that often harm marriages. Thinking about prenups in this light debunks the mythology that asking for a prenup is somehow unseemly or suggestive that the marriage won’t last. In fact, a case could be made that prenups should be mandatory prior to a couple exchanging vows so as to avoid the raging, expensive and time-consuming wars over finances that characterize many divorce proceedings.

Pennsylvania is arguably one of the better jurisdictions for prenuptial agreements. Our courts are adamant that any inherent unfairness in the document will not serve to invalidate the agreement so long as both parties have voluntarily entered into it and have received “a full and fair disclosure” of each other’s assets, which really boils down to the ability to review and knowledge of all pertinent information.

Back to our business owner. Clearly his concern is to protect his family’s wealth and the succession of his business to his daughter. On the other hand, his daughter is lovestruck, even if her suitor’s intentions are nefarious. A month before the wedding will give him ample opportunity to discuss all of these matters with his daughter that will in turn allow her to have these discussions with her fiancé so that she will either scare off her suitor or at least convince him to sign an ironclad agreement that protects them both.

For our business owner client, the information described in this article provided substantial relief and left him with plenty of time to convince his lovestruck daughter that she should either cancel the wedding or, at minimum, sign an ironclad prenup. And, if needed, he still had plenty of time to call his “guy” to “take care of it.”

Reprinted with permission from the February 14, 2024 edition of the Legal Intelligencer© 2024 ALM Media Properties, LLC. All rights reserved.