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Nathalie Boutet
Nathalie Boutet

LEADERSHIP LAB

How parents can protect the family business if their children divorce Add to ...

Nathalie Boutet is a family law lawyer, mediator & family enterprise adviser

There are many considerations given to how couples can protect themselves and their assets from divorce, but what about their family members – specifically the older generation – whose assets may also be at risk?

What can parents who started a business do to protect it from risk in the event that their children divorce?

Educate family members about family laws and prenups

Families plan their legacy with advisers, but often those who are most impacted by those plans, the second generation, are not involved in the process. Or the family has done due diligence when it comes to estate and tax considerations, but is insufficiently informed and protected from the related implications of family laws.

For instance, some families transfer shares in the business to children through a strategy called an estate freeze. But depending on how it’s done, family law makes important distinctions based on whether the transfer occurs before or after the child is married.

If the shares are transferred to children before they are married, the value of the shares on the date of the marriage is considered excluded property, but the growth of value will be included as family property and divided equally with a spouse upon a divorce.

If they are transferred when a child is already married, the shares may be considered gifts and excluded from family property, but only if no consideration (payment) was made for those shares. If any consideration was given, then the shares will be included in the family property and their value (calculated at the time of separation) will be shared equally with the spouse upon a divorce.

There are ways around these family law implications, such as with the negotiation of prenuptial agreements or transferring assets into a trust.

Prenuptial agreements can be contentious without proper context. Some children may not sufficiently appreciate the hard labour and sacrifices it took for their parents to build the business and the wealth, or why they would like to find ways to protect their assets from being diluted if there is a marital breakdown. As a result, some may rebel against the idea of being compelled to enter into a prenuptial agreement with their loved one. Similarly, the non-family spouse who has been ill-prepared for the conversation is likely to feel rejected, vilified or even unloved when the idea of the prenup is broached.

For the second generation to develop an attachment to the family business and culture – and to embrace the desire to preserve wealth for future generations – it’s important that these issues be discussed during family meetings. It’s also important that conversations about prenups with the new partner are as generous, and as balanced, as possible so as to avoid the negative feelings this topic almost always generates. A prenup that is protective of the family business, but still fair for the new spouse, is less likely to be challenged if there is a divorce.

Open communication

What parents want to see in a prenup for their heirs is not necessarily achievable. The new spouse that is marrying into a family also has a say. If he/she is asked to waive a right to an asset or income, they will likely ask for something in return, which might be different from what the family would like to see.

The parents may become frustrated with the negotiations and perceive the new spouse as unreasonable when, in reality, it may be that their expectations were unachievable in the first place. This can create rifts not only between the two generations, but also between the new spouse and the entire family.

It’s critical to maintain ongoing dialogue within the family, especially as the negotiations of the prenup evolve, so that everyone is kept apprised of what is and is not achievable at the negotiation table. This does not mean that a parent sit in during the negotiation meetings – that would be unacceptable – but it is recommended that family members discuss the progress of the negotiations outside of the lawyer’s meetings, to manage expectations.

Don’t fund an acrimonious divorce

The worst thing families can do when there is a divorce is to become overly aggressive against the exiting spouse. This happens when the older generation retains an acrimonious lawyer for their child, funds an aggressive legal fight, exercises undue financial control or pressure against the exiting spouse, or speaks ill of them with the grandchildren.

This will usually result in the exiting spouse also retaining an aggressive lawyer to mount an equally aggressive attack or defence. No one wins in these types of situations.

If the circumstances permit, mediation and collaborative negotiation continue to be preferred routes for separating couples. An excellent way of preserving your family wealth is to provide the separating couple with the tools they need to get through the divorce in a private setting, out of court, as quickly and amicably as possible.

Executives and human-resources experts share their views in the ongoing Leadership Lab series. Find more stories here.

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