Prenuptial Agreements for Family Business Owners
Family business owners, and their children who may come to own or participate in a family business, are well-advised to enter into a prenuptial agreement when contemplating marriage. One reason is that appreciation in the value of a business may be considered a marital asset if the appreciation occurs during the marriage. For example, in Ohio, the owner of a business worth $1 million at the date of marriage may owe his spouse $500,000 if the value of his interest in the business appreciates to $2 million during the marriage. This scenario applies even if the business interest would otherwise be a spouse’s separate property, having been an asset owned prior to the marriage. It also applies even if the other spouse is not involved in the business and makes no direct contribution to the increase in value. (It should be noted, however, that other states have different rules to consider for these issues.)
Are prenuptial agreements enforceable?
It is well settled in Ohio that public policy allows the enforcement of prenuptial agreements in divorce actions. The seminal case in Ohio is the Ohio Supreme Court’s decision in Gross v. Gross (1984), 11 Ohio St.3d 99. Such agreements are valid and enforceable if the following requirements are met:
- They have been entered into freely without fraud, duress, coercion or overreaching.
- There was full disclosure, or full knowledge and understanding of, the nature, value and extent of the prospective spouse’s property.
- The terms do not promote or encourage divorce or profiteering by divorce.
When does such an agreement need to be executed?
Ohio law requires that a prenuptial agreement be executed prior to the marriage. In the event it is executed shortly before the wedding, a presumption arises of overreaching and coercion. Indeed, the Ohio Supreme Court has held that presentation of a prenuptial agreement a very short time before the wedding creates a presumption of overreaching or coercion “if postponement of the wedding would cause significant hardship, embarrassment or emotional stress.” Fletcher v. Fletcher (1994), 68 Ohio St.3d 464. Thus, waiting until shortly before a wedding to present a prenuptial agreement to one’s fiancé may be an issue when it comes to subsequent enforcement.
Are all provisions in a prenuptial agreement on equal footing?
Provisions related to division of assets upon divorce are reviewed by a domestic relations court based on the circumstances existing at the date of execution of the agreement. In contrast, enforcement of provisions related to limitations on spousal support may be reviewed by a domestic relations court based on the circumstances existing at the time the prenuptial agreement is sought to be enforced. Thus, circumstances may arise after a marriage that render provisions related to spousal support unenforceable at the time of divorce. Provisions related to child support and custody of children do not limit the jurisdiction of the domestic relations court at the time of divorce to impose child support obligations or determine the best interests of children for purposes of custody or parental rights.
In summary, a prenuptial agreement is enforceable as to provisions protecting interests in property. Important considerations include:
- Presenting the proposed agreement to a prospective spouse significantly in advance of a wedding.
- Making sure both parties are represented by independent legal counsel.
- Ensuring that there has been a full and complete financial disclosure.
- Omitting terms that are overreaching or that promote or encourage divorce or profiteering by divorce.
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