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University of Massachusetts Amherst

Family Business Center

Considering A Prenuptial Agreement? Watch for Unintended Consequences

by Shel Horowitz

Guess what: if you and your intended draw up an agreement as to how your assets will be divided if you later split, get married, and then sign it, Massachusetts courts won't accept it. The agreement has to be signed before the marriage is official. Under the law as it now stands, after is too late. In Massachusetts, a judge can divide property any way he or she thinks is equitable, notes Ellen Randle of FBC sponsor Bulkley Richardson and Gelinas, LLP. And that power may have unintended and unfortunate consequences for a spouse whose preexisting interest in the family business is one of the assets brought to the table.

For example, if the other spouse had no role in the business, the participating spouse will probably get that business interest -- but the other spouse may get just about everything else!

In Massachusetts, she notes, an interest in a family business is a marital asset even if the other spouse had no contact with that business. It has to be valued, and the business will be required to produce financial records so that it can be valued by the other spouse. Buy-sells can be helpful in setting the value, especially if there wasn't a prenuptial agreement -- but only if they're accurately tuned to the fair-market value of the business. If you want a prenuptial agreement to hold up in court: Both parties need separate legal counsel, there must be a clear and reasonable waiver of rights, and both parties must make full financial disclosure to the other. When two parties both represented by counsel agree and there has been full financial disclosure by both parties, even if the agreement is one-sided, the courts typically uphold it. But the court has the right to go back and look at any change in circumstances since the agreement was set. If enforcing the agreement means that one party will not be in a position to be self-sufficient after the divorce, the court will modify the agreement. And then there are the emotional issues. "Raising the desire for a prenuptial agreement can be a sensitive issue. Sometimes we do a limited prenuptial, just related to business assets. We cover not just existing business assets but also new and future business assets, but not alimony or non-business assets acquired jointly by the couple after they are married. The disadvantage is that the judge will know that a family business interest is being retained by one spouse, and may be inclined to favor the non-business spouse in other financial aspects of the divorce."

Even so, the prenuptial agreement still will have protected your small business (and the family members in the business who are not parties to the divorce) from the annoyance and potential disruption of being scrutinized and fought over in one family member's divorce case.

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