Does your family have a prenup policy?

Your family business could face significant disruption if a family member needs to access money for a divorce settlement. That’s why it’s important to develop a family policy on prenuptial agreements to protect your business and wealth. We share tips on how to approach these sensitive conversations and why it’s important to start early.

Engagements and weddings are at the heart of family life and are occasions for joy and celebration. On the other hand, the breakdown of a relationship can be extremely difficult. For most families, divorce is a private matter. Yet, for a family business, when a family member divorces the conflict can have a contagion effect on the business, other family members, and the family’s legacy.

To pay a divorce settlement, a family member may need to extract capital from the business, which can lead to family disputes about its valuation. And if cash can’t be extracted easily, the divorcing family member may be forced to sell some of their equity to outside parties or transfer it to their ex-spouse.[1] Then, the family may end up with external pressure on the family business.[2]

What’s more, legal disputes are often stressful, distracting, expensive and embarrassing.

That’s why many family businesses use binding financial agreements (BFAs) – the Australian version of a prenup.[3] Set out in section 90B of the Family Law Act 1975[4], a BFA is a legal document signed by couples before they marry or live together in a de-facto relationship. The agreement lists each person’s assets, property, business interests, inheritances and debts – clearly defining distinctions between personal assets, family assets and business assets. It also sets out how the assets will be divided should the relationship end and how future children will be cared for financially.[5] When constructed well and tailored to the circumstances of the couple and the family business, BFAs bring a sense of clarity, understanding and security.

However, starting an unexpected conversation about BFAs can cause a lot of hurt and offence. When done poorly, discussing a BFA can damage the couple’s relationship with each other and, in turn, the couple’s relationships with other family members.

It's human nature to fear these types of agreements. The person marrying into the family may interpret a lack of trust or commitment. The couple can also feel that the family business and family wealth is being prioritised over their relationship. So, it’s understandable that families may avoid bringing up the topic of BFAs altogether.

Using a family BFA policy to prevent hurt and offence

Given the potential landmines, the best approach may be to develop a family policy that requires all family marriages to have a BFA. A family policy setting out a consistent approach to the financial aspects of divorce that applies to all family members is both fair and avoids couples feeling singled out. Broaching the subject in this way is less likely to cause personal offence and may even strengthen trust across the family because everyone understands the reasons for the policy.

Ultimately, a BFA helps to protect the family business, maintain equity across family members, and preserve family wealth for future generations. 

BFAs are particularly helpful for second or subsequent marriages, particularly if the partners have children from previous marriages and assets to protect.

When a BFA is prepared in friendly times it can provide certainty for everyone about how financial assets will be distributed if the worst were to happen.

How to start the conversation

If your family chooses to have a BFA policy, effective communication will be key to its success. Here are some entry points for starting and reinforcing the BFA message:

• Family business education sessions. If your family business has regular education sessions, then explaining the benefits of BFAs to everyone at the same time, without singling anyone out, can help family members appreciate the equity and surety benefits. Being transparent and providing opportunity for discussion sets the expectation early. An expert third party facilitator can help guide the conversation, convey information with less emotion and mediate any disagreements. Lawyers who specialise in BFAs can help ease tensions because they’ve done it before.
• Relationship milestones. Bring up the topic of BFAs when younger family members begin to have serious relationships – so that couples can discuss the topic before an engagement. After an engagement, raise the topic again so the couple can talk through their financial plans and set up the BFA before the wedding. 
• Asset transfers. Take time to explain the family member’s fiduciary and stewardship responsibilities when transferring equity or other assets to next generation family members. Show how BFAs protect those obligations.

Whatever the occasion, when you talk about BFAs, handle the conversation with empathy, patience and understanding. Be clear on the rationale – for the couple, the family, and future generations.

Make sure the agreements are fair and supportive

If you plan to use BFAs to foster family harmony and equity, it makes sense that the BFAs are fair and honest – particularly towards the person marrying into the family.

Indeed, if a BFA isn’t fair, it may be overturned in court. So, ensure that there’s no fraud in the disclosures, that all financial positions and assets are accurately disclosed and that the partner and any children are well-provided for.[6] Take care to consider potential changes in circumstances such as the loss of employment or assets.[7]

Also, importantly, see to it that both parties receive independent legal advice and have ample time to review the advice.[8]

In navigating the agreement, make sure any conversations with the couple are private and planned so that the couple is prepared. Anticipate any possible reactions and questions and reinforce your love for the couple and support for their relationship and its future. Finally, take care to respect a couple’s privacy and autonomy and celebrate with them as they create their own family unit.

Learn more

At ANZ Private we offer specialised banking and advice and work with high net worth clients to protect, grow and transition their wealth. To discover more about family wealth management and protection, speak with an ANZ Private Banker or visit the ANZ Private Insights homepage.