As I sit down to write this post, it's the day of my 33rd wedding anniversary, so I think I should write about marriage and the family business. Notwithstanding the inspiration, however, this post is not sentimental or romantic. Rather, it's about how owner agreements and estate plans can be structured to include or exclude owners' spouses from the benefits or rights of family business ownership, for better or for worse.
Your feelings about how a marriage should be integrated into family business ownership are influenced by how you may classify the marriage. For purposes of family business succession planning, there are three types of marriages: (1) your own marriage, (2) your child's marriage, and (3) your parent's marriage.
You may have thought that my classification system would be more profound or nuanced, for example, based on personality traits, shared belief systems, or even star signs, but I'm not qualified to provide insights on any of that.
My (somewhat) facetious classification of marriage types is meant to point out our natural bias about how we view a marriage, depending on whether we are a participant in that marriage or merely a "stakeholder." More important, however, my advice as a lawyer with respect to marriage and the family business truly will depend on the client's perspective.
The following is an overview. I will address these scenarios in greater detail in future posts.
Your Own Marriage.
If you are a senior generation owner and your spouse is a parent of the successors, you likely want your spouse to participate in all of the economic benefits of your ownership interest, but without the risk that the business will falter under successor management.
If your spouse is active in the business, your spouse can succeed to your voting rights and perhaps control management composition if you die before you withdraw from the business. Further, both you and your spouse should develop a plan for retirement that will not be dependent on the success of the business after you both withdraw.
If your spouse is not active in the business, it is especially important for you to have a plan that replaces the income and wealth you receive from family business ownership if you die before your spouse, especially if you die while you are still active in the business. Although your estate plan may pass your family business ownership interest to your spouse when you die, the business's owner agreements should provide a realistic and secure means for your spouse to monetize that interest, consistent with plans for succession of management and ownership in the next generation. It also may be helpful to use life insurance and retirement fund assets to provide additional resources for your spouse if you die before you withdraw from the business.
Your Child's Marriage.
If you are a senior generation family business owner, and you plan to pass an ownership interest to a child when you withdraw, you likely will want to prevent that interest from passing to your child's spouse in the event of a divorce or if your child predeceases the spouse.
It may be possible to counsel your child to negotiate a pre-nuptial agreement to classify the child's family business interests as the child's separate property, which will not be subject to division at divorce and will not pass to the spouse upon the child's death. To accomplish that through a pre-nuptial agreement, however, usually will require the willingness of your child and the spouse, and the spouse's attorney. Further, pre-nuptial agreements often are challenged in the context of a divorce and are not always enforced as intended.
A more reliable means of protecting your child's interest in the family business, and keeping it in the line of descent, is to create a lifetime trust to hold your child's ownership interests. The trust can be written to allow your child to vote the family business interests that are held by the trust and to make all other decisions about those interests, but without granting your child the power to withdraw the interests from the trust. The business's owner agreements also can impose transfer restrictions on the family business interests that are held by the trust.
Your Parent's Marriage.
If you are active in the family business as a member of the junior generation, and you expect to succeed to some or all of your parent's ownership interests, you should try to collaborate with your parent to design an appropriate succession plan. This is especially important if your parent's spouse is not also your parent. Unless your parent's spouse is active in the business, you could (gently) encourage your parent to exclude the spouse from ownership in your parent's estate plan.
Your parent could use a pre-nuptial (or post-nuptial, as the case may be) agreement to prevent the spouse from succeeding to ownership of your parent's family business interests and then update his or her estate plan accordingly. The best approach would be for your parent to structure his or her estate plan to provide the spouse with assets other than family business interests, such as life insurance proceeds and qualified retirement plan assets.
Although your parent's estate plan could provide for family business interests to pass to a trust for the spouse upon your parent's death, that usually is not a good approach. That arrangement can create tension between the spouse, as a beneficial owner of family business interests, and the successor managers, who will owe fiduciary duties to beneficial owners. To mitigate that tension, your parent's estate plan and the owner agreements should allow you and other junior generation successors to acquire the trust's interest on terms that will not unduly burden the business.
Conclusion.
Marriage and the family business can live in harmony, with proper planning and collaboration among spouses, successor owners, and the family's trusted advisors.
Gregory Monday
gmonday@reinhartlaw.com
8/10/2020