At family-owned businesses, “managing relationships” has become a skill of the utmost importance.
That includes legal contracts designed to address the post-marriage division of property and spousal support, known as prenuptial agreements. Where family businesses are involved, prenups also often restrict or limit rights to company assets.
Considering that family-owned enterprises account for around 65 per cent of all private sector firms in Canada and generate half the country’s private-sector GDP — that’s almost $575 billion a year — it may come as a surprise that a 2017 Ipsos survey revealed that only 8 per cent of married Canadians have prenups in place.
This is often because “people really shy away out of fear that if they even bring [a prenup] up, it’s going to spark active conflict, it’s going to start marriage off on the wrong foot, it’s going to lead to a divorce down the road,” says Keith Whitaker, president of the Massachusetts-based think tanks Wise Counsel Research, which focuses on family wealth and philanthropy.
“One thing I see very commonly in families is conflict over the inclusion of, or involvement of, spouses in the family business or in the family wealth.”
On one hand, navigating prenups can be “a very emotional and personal process,” says Richa Arora, whose official title with Toronto-based KPMG Canada is senior family advisor and lead relationship manager. On the other hand, she says, “it’s really important to set the right framework around the provisions that are going to be involved so that both parties are represented fairly and there’s no sense of entitlement going into a marriage.
“That’s why we undertake a full diagnostic understanding of their family dynamics, and then help them create a strategic roadmap for the future.”
We've had situations where issues like marital litigation and preserving family wealth are ignored up until the 11th hour, when people go running to lawyers.
Tasso Lagios, Richter LLP
All of this can be achieved by implementing the best practices that follow.
Stay ahead of the game
It’s never too early to start educating the next generation about the importance of prenups, says Tasso Lagios, managing partner at the Montreal-based Richter LLP multi-family office.
“We’ve had situations where issues like marital litigation and preserving family wealth are ignored up until the 11th hour, when people go running to lawyers. Taking action much earlier is of great benefit to everyone involved because it creates clarity and helps avoid litigation.”
While better than nothing, these last-minute discussions tend to go badly, says Blair Trippe, managing partner with Boston-based Continuity Family Business Consulting LLC. Starting early, she adds, makes it less likely that clients will “be in a situation where they need to use that prenup.”
Prenups should also be reviewed regularly to make sure they align with wills, trusts and other estate plans, Lagios adds.
Share and share alike
Taking action starts with educating the younger generation about everything from protecting their inheritance and legacy to fostering awareness and understanding of family values. The latter involves asking pointed questions, Arora says.
“Our role is to help clients explore the pros and cons. How do prenups align with your family culture? Why do you want one in place? Is this driven by fear? Is it because your friend did it? It’s all about getting to the core purpose of having a prenup in place.”
According to Trippe, one question towers above the rest: “Is the family bond strong enough to leverage compromise, forgiveness and commitment to change? If a family really only shares a collection of assets, it’s very difficult to manage conflict because there’s no room for compromise. So for me, the red flag is when families really don’t care about each other.”
In-laws in particular can provide key perspectives, Trippe says. “Even if the in-laws are not experts in the business, or they’re not experts in trust agreements, they are experts in the family and bring a perspective that generally is more objective.”
Fairness for the win
Basing prenups on fairness is another key to success, Trippe says.
“It can’t be about protecting family assets from an interloper. Rather, it should be about determining what would be fair to this person who is joining the family, and who may have children and keep the family going. What would be fair to him or her should this not work out?”
Ultimately, prenups provide levels of clarity and certainty that many families find deeply comforting, Arora says, especially when multiple generations and family members are involved in a family enterprise’s financial affairs, legacy and reputation.
“Families really appreciate what this process helps them discover about themselves,” she says, “and in most cases it improves overall family dynamics.”
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