Practice Insights

Children of wealth often face significant challenges when preparing to enter into a marriage, as integrating family wealth into the new marriage is always an issue to be addressed.

The general assumption is that the child of wealthy families should have a prenuptial agreement as a prerequisite to any marriage. Sometimes this expectation is expressed as a gentle nudge; at other times, it is a nonnegotiable requirement. Parents, close advisors, and family offices may at times be quite specific in what terms they require to be included in the prenup for the upcoming marriage. In other situations, these stakeholders may give great latitude to the marrying couple to determine their financial terms.

But whether the prenup (and its specific terms) is a requirement or a suggestion, the actual negotiations, in the typically attorney-led process, almost always lead to significant stress for the marrying couple, the memory of which can reverberate throughout the duration of the marriage.

Children of wealth understandably feel they are between a rock and a hard place at this tender time when they are planning their marriage. They want to appease their parents but also want to please their intended spouse and avoid beginning their marriage on a contentious note. Often, the terms suggested by the family attorney or family office emphasize asset protection, seeming to give only a modicum of control over future family distributions to their child. This can set up an adversarial relationship between the child of wealth and their intended during the prenup construction process and throughout the course of the marriage.

There is another factor. The initiation of the prenup and the process of getting one in place often impair the relationship between the child’s future spouse and the parents of the moneyed spouse. The less-moneyed future spouse may receive a prenup as a message that he or she is a potential future enemy of the family (think divorce), which is inescapable. Another potential complication is that the existence of a prenup (and its terms) often disturbs the relationship between the future spouses’ families of origin. The parents of the less-moneyed spouse might be insulted and feel disrespected when they hear about the financial strictures in the proposed prenup, which they feel may disregard and devalue the nonmonetary contributions of their own child to the marriage.

This is not to say that Gen 2 (and Gen 3) individuals should not enter into prenuptial agreements. Prenups serve beneficial purposes in setting expectations, in understanding the contours of family wealth, and in settling money issues in divorce and in death. However, to achieve these beneficial outcomes, it is helpful to begin with a collaborative, nonadversarial process to design the prenup.

A Collaborative Approach to Prenups

In my experience working with numerous second- and third-generation couples to negotiate prenuptial agreements, I have learned that starting with mediation is the most effective approach to creating a mutually satisfying and equitable prenuptial agreement—one that supports the marital enterprise and is seen as fair and equitable by both future spouses.

This collaborative prenup process entails a series of three-way meetings, usually held virtually, with the two future spouses and a trained mediator. The mediator is generally an attorney with substantial knowledge of family law and estate planning concepts, as well as alternative dispute resolution techniques.

One skill the mediator brings to the table is his or her approach to “leveling the playing field.” One future spouse may be more articulate or more knowledgeable about finances and business than the other. The mediator serves as a neutral party who can gently provide the context needed by the less financially sophisticated future spouse, encouraging that party to express what they are thinking.

The mediator can also provide valuable context to help educate the future spouses on the various assets, trusts, and business interests. Both parties need to be informed about what marriage law in their state entails and the various planning options that people include in their prenups.

In my experience, the less financially advantaged spouse often feels he or she has less to offer to the marriage than the other and therefore may forgo asking for financial benefits as part of the marriage contract. This may create a situation in which that future spouse will not advocate for himself or herself, thinking they do not deserve to share in the good fortune of the other.

In reality, their agreement to marry already entails an equal exchange. They have chosen each other for what they each bring personally to the marriage, far beyond the money they can earn or provide. In work with my mediation clients, I have seen time and again many instances in which it is clear that the less-moneyed spouse has (or will) contribute significantly to the marriage with regard to navigating the family wealth by partnering with the other in dealing with the practical and emotional complexities the wealth introduces. Another topic that often comes up for mediated discussion is how to manage the wealth as it will affect their own children’s lives.

Prenups (similar to all contracts) can be boiled down to a list of terms called a “term sheet.” In the context of working with rising-generation couples who are about to be married, these term sheets essentially create a financial plan for their marriage. Calling it a “financial plan” is less triggering but still accurate and descriptive of what we are actually working toward together.

One of the common issues in designing prenuptial agreements is whether, and under what circumstances, to integrate the partner’s foreseeable accession of family wealth into the marriage. Money and assets will likely be coming to the child of wealth directly and to the couple and their new family jointly. It is important for the new couple to discuss and determine what rules will apply during the marriage to accession to and integration of this family wealth.

Some degree of integration into the family’s wealth will not necessarily mean that the less-moneyed spouse will have direct and enforceable rights to the family wealth if the marriage ends in divorce. To the contrary, an effective prenup structure will define the rights and articulate the extent to which the family’s wealth may be shared within the marriage and upon its potential dissolution. The plan for sharing of the wealth during marriage can help lead to greater security, a lower likelihood of divorce, and, if there is a divorce, a more amicable one.

One of the important features of prenup mediation for children of wealth is the educational and fact-finding aspect within the mediation process. This is of great benefit to the couple. The mediator will ask for the documents and financial information germane to understanding the family wealth and its structure. During sessions, the mediator and the clients will spend time reviewing this information together. The mediator will review the important terms of irrevocable trusts, limited liability company operating agreements, income tax returns, and other documents so that all three gain a clear understanding of the family wealth, the underlying businesses, and the expected distributions during the marriage.

Through this educational process, the couple can better understand restrictions on transfer of assets and the level and types of distributions from businesses and invested assets the child of wealth might receive during their lifetime. Understanding these facets allows the couple to plan jointly for their future. From there, the couple can make decisions as to how to plan for family wealth distributions during their marriage and how they might choose (or not) to incorporate these decisions into the terms of their prenup.

Mediation provides a setting in which the couple can engage in full and truthful discussions of family of origin wealth, facilitated by an informed neutral party. This gives the new couple agency in their decisions. Once they have all the facts, they can determine how (and if) to integrate the family wealth into their financial lives during their marriage. This is the opposite of the adversarial prenup approach, which tends to be a zero-sum game, where one party gains rights and the other loses rights.

Having open and facilitated discussions about family wealth before the marriage—and a plan for how to integrate it into the marriage—goes far in alleviating the stress caused by the imposition of a prenuptial agreement. Sharing separate property, insofar as reasonable, reduces the potential for a growing inequality of resources for a marrying couple and the resulting separateness, mistrust, and fear that can weaken a marriage.

Promoting a process in which the couple works as a team to plan the financial aspects of their marriage (including the foreseeably expected access to family wealth) gives as much agency as possible to the new couple in their mutual decision-making. Additionally, it strengthens the prospect that the upcoming Gen 2 (or Gen 3) marriage will be a successful lifetime venture.

DISCLAIMER: The views expressed in this article are those of the author(s) only. The information contained in this article is provided solely for informational purposes. This article does not constitute legal or tax advice or create an attorney-client relationship.