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Horizons: Family Office & Investor Magazine

How to Do a Prenup Without Shooting Yourself in the Foot

Monday, September 19, 2022

Family Office Anonymous is a column in Horizons: Family Office & Investor Magazine that respects the confidentiality of our interview partners and contributors.

The following text is a transcript of a talk at a private family office gathering. The principal of this family office has signaled his openness to have a dialogue and exchange with peers (no lawyers or other solicitations ;-) ). Please email Matthias Knab using Horizons@Opalesque.com, your email will then be confidentially forwarded.

I come from a very old French-German family of merchants and entrepreneurs. We go back lots and lots of decades. During the French revolution we kept our heads on, which was good, but today I want to speak about legal constructs of the 20th and 21st century: prenuptial agreements and family charters. I do have a legal background, but I’m not here to share any legal advice on prenuptial agreements or family charters. I’m just telling my experience from a wealthy family’s standpoint. And this also typically involves a controversy between oxytocin and the in-house legal counsel when a relationship starts to go towards a marriage and a prenuptial agreement is wanted.

Oxytocin is the hormone your body produces when you fall in love. Imagine you have a family member bringing in a new person into that family, completely in love in most of the cases, not on both sides always, but let’s put it that way.

And on the other hand, you have the family legal counsel who is going to draw up a draft version of a prenuptial agreement that you and I and everyone in this room should be thinking hard about signing because it’s going to be completely pinged onto one side, protecting that family member. And that is exactly the problem because classical prenuptial agreements carry the fundamental risk that once it goes divorce and to court, it could be kicked out of court because it is visibly tilted towards one side, and that is not what a judge would accept. So that’s a very real risk.

If you look at prenuptial agreement 40 or 50 years ago, these could include clauses saying that if you leave that person, you will get no support for the common children or for yourself. These things won’t be accepted in the courts anymore. So what has been my personal experience? I was married for some time and now I’m the first one in the family for generations to get divorced. But already when I got married, my idea back then was how can I do a prenuptial agreement that is safe, that is safe for me, that is fair for my wife and in the end good for the family as a whole? Maybe I had the attitude like that old Arabic saying that states that “a good contract is when both sides are equally unhappy.”

So that’s what we did by going for a reward-based prenuptial agreement. My first aim was to give a bit more to my wife to create a better balance so that the prenuptial agreement might not run into a problem with a divorce judge. And then, I also wanted to make my wife as much independent as I could. And thirdly, reward the time of being married. Most prenuptial agreements are compensating the loss of your marital status and that is not really smart because you sort of compensate something you don’t really want to happen when you’re still in love and on your honeymoon.

Also, back to the legality of prenuptial agreements, there are also certain ways to make them void when a marriage goes sour. For example, a prenuptial agreement has to be notarized, so one party could be drunk or drugged being at the notary and getting that testified afterwards and therefore making this prenuptial agreement void, maybe needed years later.

That’s one trick. Another one is claiming inexperience, for example in families where the children marry very young. If one of the person is maybe only 18 or 19, they could claim later that they didn’t know what they were signing there. This sometimes works with a divorce judge. So make sure that both parties are sufficiently legaled up.

You may have heard of a Russian oligarch’s wife who moved from Moscow to London and then filed for divorce there. According to the prenuptial agreement she had with her Russian husband, she would have only gotten 84 million Euros or Pounds out of the divorce. But then, as I said she moved to London, filed for divorce and wanted 3.2 billion Euros. However, the divorce judge kicked her out of court and said this is divorce tourism, we’re not going to do that. So in that case, that trick didn’t work.

Let’s look at post-marital alimony, do you have any idea how that is calculated? Usually, the judge looks at the last couple of years of your living standard. So, if you are spending a ton of money and then get divorced, it could be very expensive for you. If you buy a Ferrari every year, a yacht, whatever, the person that is getting divorced from you as the family member then can easily say, “Hey, I’m used to that standard, I want this too.” That will be an expensive divorce.

Therefore, cost of living is very important. You want to get divorced because you don’t love your spouse anymore, be smart, you might want to look at cutting down your cost. What you can’t regulate in a prenuptial agreement is children support and custody. This doesn’t work. You cannot say things like, “I’m willing to pay that much for child custody and I want the kids.” Don’t get into a situation like Brad Pitt and Angelina Jolie and their six kids, for example. These type of fights just make the lawyers rich and it’s going to break your family apart, your children are going to suffer, and you and your spouse too. You don’t want that.

Be Fair

Here is my point: Be fair, that is pretty much in a nutshell what I’m trying to tell you, and that the prenuptial agreement should reflect that. And that you need to be aware that there are legal and illegal clauses that lawyers sometimes still try to put into them. As I said, with the children and the custody, you cannot put strict rules around that in clauses. But there are certain legal clauses you can put in. For example, you can sort of limit the possible alimony. You can say that if that spouse is divorced and is working and is making that much money, that should be calculated in a potential alimony to pay.

Illegal is anything that has to do with behavior. That might include clauses about potential drug abuse, you can do that to a certain extent, but I would certainly refrain from so-called “intimacy clauses” you can sometimes see in the US trying to fix how often you have sex, sometimes even down to “mandatory practises”.

So, you want to stay away from illegal clauses. You can sign them but they won’t work. At the end, what you want is, you want a separation of your assets, right? There’s the chance, or the risk, that the person that comes into your family could be more interested in your money than maybe in you as a person. It could be. So you have to prevent bad outcomes there and establish a separation of property during and after your marriage.

My aim has been to protect the family wealth, but still being fair and open and supportive to my wife. Back to my case, when we got divorced, what has really helped with the divorce judge was that the judge said, “That is a fair prenuptial agreement, so it is valid.” And otherwise, you have a joint ownership of property and that makes it extremely different splitting that up. For example, if you have joint ownership in a company, you may have to sell the company to pay out the other person. That is probably not a good outcome.

Marriages and divorces have become even more complex today as more people marry someone with a different citizenship, or if you marry in one country but live (and divorce) in another one. Different legal systems can be very different in how they handle a divorce. You may need to get educated on those aspects too.

Family Charters, Voting Rights and Black Sheep

I want to turn now to family charters. As I said, I come from an old family. Our family charter is about 300 years old and, as you would imagine, there’s a lot in there stemming from bad experiences in family life and in marriages. For example, that family charter says I’m not allowed to marry a dancer because some of my ancestors must have married a dancer and had a bad experience.

A great deal of our family charter is about managing how new family members are coming in and maybe leaving the family through death or divorce. In most family charters, only those being born into that family become principals. Anyone who is coming from the outside usually is not a principal, which is not always smart because maybe some of your relatives might bring in someone who is very very supportive, active, and valuable to that family. So how do you handle the rights and obligations?

Some families manage it through pro-rata ownership into a family wealth. I am not sure if this is a good idea. In our family, since many generations, we look at family wealth per capita. By the age of 18 you become a principal and you have voting rights. Even if you don’t know what you’re talking about, you have a voting right.

The second thing we have is a simple majority rule. I think that helps too. Some families have very complicated voting rights, but my recommendation would be to make it as simple as possible. When you are writing up a family charter, look at it several times and make sure that the rights and the obligations are as simple as possible.

Then, you have the so called black sheep clauses. As you can guess, we have that too. The problem on that side is not really about some form of morals but when someone is not able to take their obligations and their rights. For example, because someone is addicted to drugs or otherwise psychologically unstable. These things happen in life and in any family, so we want to be prepared upfront and not when we’re forced to deal with a certain situation. We did that too, simply because some of my ancestors were black sheep. But when everyone then sticks to the family charter, these situations can work out well, even for the so-called black sheep.

Let me come back to the per capita voting principle, I think that’s always good. Plus, it puts some of the responsibility on your younger principals. I think if you are at the age of 18, 19, 20 and you’re able to have the same voting right as the senior principal, this does have an effect on both the younger and the older generation. As I am standing here, let me also share that in my family I’m starting to become more and more the senior principal, so the other ones in my family tend to be younger. This creates a very interesting dynamic. Personally, as I said, I think everyone should have the same vote. And in most of the cases, the others tend to be more right than I am.

I mentioned we have a voting principle of simple majority, and with that we always keep an odd number of – not principals, but voting rights. We want to avoid deadlocks in the form of even decisions because you have to come to a conclusion in your votes and decisions.

Mediation and Legal Guardians

Another thing that may become more important as your family grows is mediation. You need that once in a while. Maybe there are two different family stems or family origins or “alliances”. We all have or know about such cases: Once the fractions don’t like each other anymore, the fight starts. You don’t want that, and a mediator can help here. But, the mediator shouldn’t be a family member, and it shouldn’t be the legal counsel either. It should be someone from the outside, as independent as possible, with a clear objective of what that person can do and what not.

My last point today refers to a legal guardian as a representative of a principal. That is a question that’s been going on and on. Some say, “My children are not grown up enough to manage that kind of wealth. They are going to go to the next Ferrari dealer and spend most of the money. I don’t want that.”

But my point here is, do you really want a legal guardian? Some external person becoming an executor of the estate? I’m not much in favor of that. What I do with my children, and the same was done with me, is bringing in the kids as early as possible into the responsibilities. And, trust me, there are more responsibilities than advantages in serious wealth. The second thing is train them from the very beginning that you are sure that they are able to take over, even at an early age.

Again, this is not in any form legal advice but a sincere sharing what I have learned over many years, and what worked well for me personally, my children, my former spouse, and the larger family. Thank you for your attention.

 
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