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Prenuptial agreements – can they protect business assets?

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Although the term ‘prenup’ is frequently bandied around, many people don’t really understand what it involves or why it might be worth their consideration.

A prenuptial agreement is essentially a contract that is entered into before marriage or civil partnership. Ideally, it’s made well before a marriage and sets out how assets will be divided should there be a divorce or dissolution.

It’s a common misconception that they’re just for wealthy individuals, but prenuptial agreements actually cover a wide range of issues and can be particularly important in protecting business assets, as well as personal. In broad terms, the agreement is designed to ensure each individual’s financial position is protected from the outset of the union.

It is a sad fact that 42% of marriages end in divorce and this statistic rises to 70% for second and third marriages. While many consider a prenuptial agreement to be unromantic or expecting the worst, it might be more favourably viewed when considered against the alternative scenario, which could see the courts decide on the distribution of a couple’s assets. 

In this situation, all of the assets of the marriage, whether jointly or separately owned and whether they were acquired before, during or after the marriage (including pensions, business assets etc) are susceptible to the discretionary jurisdiction of the court. 

When you, therefore, consider that a spouse may be entitled to up to 50% of any business interests on divorce, it is hardly surprising that more and more business owners are thinking about pre and post marital agreements to protect business assets. 

We recently carried out some research on prenuptial agreements and found that 44% of people considered that a person entering into a business should be compelled to enter into a marital agreement, with the remaining 56% believing they should not. Despite the majority favouring a prenuptial agreement remaining optional, it is a very sensible and logical step to take before walking down the aisle - especially where an individual’s financial arrangements are  complex or they need to protect business assets, for example in the case of a family business.

While some of our survey respondents considered a marital agreement to be essential in protecting the business in the event of marriage breakdown, others noted that making such a contract a ‘requirement’ could actually undermine the prenuptial agreement – the idea being that both parties must enter into it freely, with no duress, misrepresentation or undue influence.

Our respondents clearly understood the sentiment behind the prenuptial agreement with 80% of them considering that a person entering into a business who doesn’t wish to enter a marital agreement should not be refused shares. Although a large majority, the reasons behind our respondents’ views varied quite significantly. Some believed that business owners should be able to give their shares in the business to whoever they choose (whether family or not) while others felt that asking someone to enter into the agreement could itself put a strain on a marriage, especially at the beginning, implying that other family members don’t like them or don’t think the marriage will work.

In the case of family businesses, a prenuptial agreement can be even more important, helping to ensure the business remains within the family should there be a divorce. While we all like to think that our marriage will be a success, it is generally a wise precaution to formalise arrangements should things not work out.  Business owners in particular should carefully consider whether protection is needed and whether it is appropriate in their particular circumstances, to avoid the risk of lengthy and costly divorce disputes.

 

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