Sign a prenup now, or open up the family books later

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For enterprising families, relationships can reach beyond the couple involved. Combining assets and wealth when a business is involved means crucial planning beyond the perfect gift for Valentine’s Day or the perfect wedding for those who aim to get married.

Wendy Sage-Hayward is the academic director at Family Enterprise Canada (FEC), co-founder of SAGE Leadership Advisers Inc., and a senior consultant at The Family Business Consulting Group. In an introduction to the webinar, It’s Not You, It’s My Family’s Business: Where to Start with Cohabitation, Prenuptial and Postnuptial Agreements, Wendy and her husband, Ian Hayward, observe, “We understand that there is a bit of contradiction in a couple swearing their undying love while negotiating a contract that outlines how they will separate.

“Often, these conversations can be as emotionally charged for the family as it is for the couple.”

Indeed, cohabitation agreements take careful consideration, and protecting the family business is as important as protecting each other’s hearts, especially when it comes to legacy and financial stability.

Here, Paul Slan, senior lawyer and mediator at Toronto-based Gelman & Associates family law firm, shares why cohabitation agreements are integral to couples in enterprising families, and why they must be established before heading down the aisle, or moving in together.

Why are cohabitation agreements so important, especially in family enterprise settings?

“When I refer to cohabitation agreements, unless indicated by me in other words, they are applicable to marriage contracts, as well.

The main reason these agreements are important with respect to a family business, is privacy. Most family businesses that I’ve seen value keeping their matters confidential and their business confidential.

If there’s a separation and a claim against the other spouse, for either support, which would involve income, or some type of property claim, which would involve property owned by the spouse, then disclosure is going to be sought and generally required.

This means an opening up of the books and records of the family corporation extensively. In terms of assets, liabilities, revenue, expenses, etc., the entire gamut of financial records will be open. And as I said, in my experience, family enterprises don’t like that one bit.

So that’s, in my mind, the main reason why an agreement is important to, if at all possible, limit the exposure to claims so that it’s not open season on going through the records, the books and records of the family business.”

When is the right time for a family to discuss the topic of cohabitation agreements when a member of the family is getting married?

“The simple answer is the sooner the better, because in law, a signed agreement can subsequently be set aside if there is a duress and sometimes duress is equated with proximity to the wedding date, so this is more applicable. This is applicable to marriage contracts. With respect to cohabitation agreements, you could substitute the wedding date for the date that the parties commenced living together.

But it’s advisable to approach the other spouse early so this isn’t done at the last minute. If it’s a last-minute thing, invitations have been sent out, everybody’s hyped up for the wedding. And so the other spouse that’s being asked to sign feels pressured, perhaps implicitly, perhaps, explicitly, to sign the agreement. And that may be a factor that that spouse can use down the road to try and set aside the agreement.

The other factor is these things take time to negotiate. Financial disclosure is required when an agreement is entered into, and … that takes time. This should be done at the commencement of negotiations, and the process should start as early as possible.”

How can a patriarch or matriarch approach this topic?

“Well, you know, that’s not really a legal question. That depends on the dynamic of the particular family. Again, that should be done as soon as possible after plans are set in motion for either people living together or getting married. The patriarch or matriarch might get their own legal advice, and, in my experience, it often happens that their lawyer tells them, ‘Your son or daughter needs a contract.’

Their first step might be to speak to their lawyer, and then after speaking to their lawyer and getting a clearer picture of it, then approaching their son or daughter and discussing it with them.”

Do you ever encounter couples in ultra-high-net-worth families going into marriages without a prenup?

“Well, not usually, but it could happen. Nobody can be forced to sign a prenup. Either they don’t think of it, they don’t want it, or one person doesn’t want to.

A marriage contract and a cohabitation agreement are voluntary documents. And if one party isn’t prepared to negotiate or to enter into it, that’s the end of it. So the, the theory behind the legislation is, well, if that happens, then the other party has the choice of not getting married or not moving in together. So again, that’s a reason for starting this process early rather than at the last minute.”

Even if a prenup is in place, why how does it need to be properly sworn?

“For any type of agreement of this nature to be binding, it has to be signed voluntarily. There has to be full and complete and accurate financial disclosure. It has to be witnessed. There has to be an understanding of what’s being signed, which generally means that each party has independent legal advice. There has to be no duress. There has to be no misrepresentation. These are all common law principles of contract.”

How do future business earnings needs to be mapped out?

“They can’t, because if there are children, child support will be based on current income. Now, historic levels may be important, but you can’t specify a future income for support purposes.

When it comes to spousal support, there may be a release of spousal support or a fixed number for spousal support and, for that matter, of fixed duration.

So you could deal with future earnings when it comes to spousal support, not by saying what the earnings will be, but by restricting the extent of the claim or extinguishing it altogether.

But you can’t when it comes to child support. It doesn’t matter what the parties agree on child support. It’s the child’s right to support and the income of the parties is going to be relevant no matter what.”

In the event of a couple establishing a separation date, how might the planned date be related to the changing value of family business?

“When it comes to cohabitation, common law claims, you can’t really change it.

In either case, the date of separation is a factual issue, determined by when one party lets the other party know that they wish to separate and, in addition, acts upon it.

In other words, they might move out, they might have a lawyer send a letter, they might start sleeping in separate bedrooms, they might do activities separately, they might tell the children. The list is not exhaustive, but it’s any behavior that confirms their stated intention of separating, and that’s the date of separation. You can’t really play with it. It’s a question of fact.

Now, it can have some importance when it comes to married couples, because for equalization purposes, which is, in layman’s terms, property claims, if they’re not jointly owned, the value of assets and liabilities is determined as of that date of separation. We call it the valuation date.

So if you have a fluctuation in value after that separation date, it’s likely not going to be important. The value that’s going to be assigned for equalization purposes is the value at the date of separation.

And with a common law couple cohabitation agreement, it’s likely current value as well, because there is no such thing as equalization. For common law couples, their claims are determined based on common law principles.”

How should a cohabitation agreement or prenup where the spouse married into and worked in the family business, address “constructive trust,” wherein the owner might suggest there’s less value in the business to split because the spouse was a key player?

“This is a reference to trust claims.

The simple solution when it comes to property claims is to in either the cohabitation agreement or the marriage contract either extinguish them – so have a complete release of property claims – or to fix a number in advance.

So you can agree on what each spouse is going to receive, notwithstanding what their values are at date of separation. So that disclosure date of separation is not relevant. And you don’t really have to provide it if you’ve already agreed in a binding contract, that this is what’s going to happen when it comes to property on separation.

So you’ve agreed in advance, [but] it’s kind of dangerous, because it’s like throwing a dart at the wall, because you really don’t know what the circumstances are going to be in a separation.

But if parties are prepared to do that, you know, it may work out to their benefit and may work out to their detriment, we don’t know. But if they’re prepared to do that, that voids all the property claims that could arise down the road.

You could do the same thing for spousal support. And again, it’s like throwing a dart at the wall because you don’t know what the incomes are going to be. You don’t know the length of the marriage; you don’t know if there will be children. So again, you can do anything from the extreme of releasing spousal support claims to fixing an amount or fixing duration (the length of time it’s payable) or both.

Often in ultra-high-net-worth families, the spousal support is an issue and that is dealt with in these agreements. When it comes to child support, there’s nothing you can do.

So income is going to be relevant, and so some financial disclosure will be necessary. Historically it will usually go back at least three years; that will be important, as well. There is really no way around that because child support is the entitlement of the child. It’s not the parents’ ability to give that away.”

Responses have been lightly edited for clarity and length.

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