Prenuptial Agreements

Yesterday, as I read some more in Charles W. Collier’s Wealth in Families, I came across a section where he was interviewing Dr. Lee Hausner, a Los Angeles-based clinical psychologist and author of Children of Paradise: Successful Parenting for Prosperous Families. Collier quoted Hausner as saying,

I believe in a prenuptial agreement because healthy relationships should not be based on finances. A prenuptial agreement is a business contract, and . . . families should protect the business or financial assets of the family. [A prenuptial agreement] protects wealth that was created before the marriage. Signing a prenuptial clearly indicates that money is not the motivation for this marriage. . . .

Families of wealth should talk about prenuptials from the time of their children’s adolescence. They need to explain the importance of the wealth protection philosophy of the family and how this will enable the financial wealth to grow for future generations as well as providing lifetime benefits to the current generation. Family money should have nothing to do with the love between two individuals who wish to marry.

When discussing this idea with future in-laws, it is important to emphasize that, even with a prenuptial, everyone will benefit from this type of financial wealth preservation. There can be trips, vacation homes, educational trusts for children, and retirement security, for example. . . .

Hausner’s comments reminded me of some issues we faced in our family a few years ago when our daughter was about to be married.

The idea that we might need to think about documents like prenuptials had never crossed our minds. But there I was, a couple of months prior to the wedding, holding our annual corporate meetings, and I happened to mention that our daughter was soon to be married. Our estate planning and structures attorney immediately said, “She and her husband-to-be need to sign a prenuptial agreement.”

I was shocked.

Everything I had ever heard about prenuptials said they were simply and merely, if you will, “plans for divorce,” the ethical equivalent of accessories to a crime.

As we talked about the idea, our attorney explained things in a way that I can understand, and I came away with the conviction that he was right: Our kids, as beneficial shareholders of our family business, really do need to have prenuptial agreements, and the need for prenups is there with or without divorce. Instead, the creation of a prenuptial agreement ought to be viewed as a form of business insurance. And for well-meaning couples who enter marriage with open hearts and good faith, the presence of a prenuptial should bear no more ethical weight than the purchase of property and casualty insurance.

When our second daughter proposed to get married, the issue of prenuptials came up again, and this time, the proposed in-laws objected with a vengeance. Their concerns were expressed at a visceral level. Worse, it turned out that their pastor himself expressed himself in much the same way: marriage is a deeply covenantal relationship . . . which means that prenuptials have no place. “The two shall be one (Genesis 2:24, Matthew 19:5; etc.).”

I feel strongly that the prenuptial agreement is a mistake. As a Pastor I don’t think I could lead a young couple into an unconditional promise before the Lord if the promise was conditional. The prenup is not marriage friendly but it does come in handy in a divorce. It’s nothing more than a plan for failure. My wife and I agreed early on that we would never speak the word divorce in our relationship. I just can’t imagine how damaging it could be to the permanency of marriage to actually plan for the divorce prior to the wedding. It is a document of division and adds nothing to the unity of the couple.

I soon found myself on one side of an argument with three devout opponents on the other. And so I argued my case. Here is some of what I wrote to the pastor:

I don’t think the covenantal aspects of the marriage relationship have a whole lot to do with the more mundane (worldly!) business, economic and legal aspects of life that impinge on marriage. The one can support the other . . . and should support the other. (Our [Christians'] commitment to integrity in all things means that we should behave in highly moral ways.) But the fact that we enter into business commitments or contracts doesn’t create any competition or conflict with our marital relations. At least, they shouldn’t.

So I wonder what you really mean, because I can’t imagine you would object if a husband in your congregation became the legal president of a corporation and, as part of his compensation package, came to own shares in the corporation. (Many companies pay their employees in shares. And, in fact, only employees may own the shares of many companies. . . . So the wife may be legally precluded from owning shares in the company. . . .) The prenuptial agreement we have proposed seeks, among other things, to achieve this very thing: to make clear that, by marrying J_____, D____ does not acquire ownership interests or rights in our company. This doesn’t mean D_____ cannot enjoy the benefits of being married to a woman who does own such interests and rights. It merely means that he cannot claim such rights for himself.

And so why would we care to have him sign such a document?

One reason, honestly, is related to the cultural and historical realities associated with the fact that we live in a fallen world in which even among Christians–and, sadly, even among a lot of highly dedicated Christians–close to half of all marriages end in divorce.

In the same way that, in Bible times, the bride would either come with a dowry, or acquire a dowry from her husband as part of the marital covenant, so, too, it seems to me, the prenuptial agreement we have proposed is a form of dowry for our daughter. In this case, we are providing J______ with a dowry; D______ need not provide one for her. . . .

In the cultures in which dowries are given, the dowry provides a form of social security to the bride lest her husband divorce her. Our proposed prenuptial agreement provides a form of social security to J_______ lest her intended, D______, should ever divorce her. We want to ensure that she will be able to enjoy the full rights of ownership–without legal battles over the matter–if D_____ should ever divorce her.

Do we expect him to do such a thing? NO! Of course not! But even the Bible offers help–in the form of dowries–for godly women who might find themselves divorced.

Far more–and far more positively–my wife and I view our proposed prenuptial agreement as a form of wise protection not only for us, for our business, and for our daughter, but, in fact, for D______ and J_____, individually and as a couple.

How can this be?

I could demonstrate how it provides protection for each and every one of the parties I have mentioned. But let me illustrate it for the benefit of D______, your parishioners’ son.

Suppose D_______’s intended bride were a medical doctor and D______ owned a thriving art business. Medical doctors, of course, are highly susceptible to lawsuits. If D_______’s bride, on the advice of her attorney, urged them to draft a prenuptial agreement that specifies D_______ has no part in her medical practice so that lawsuits against her will have no bearing on D______ or his business: I have a hard time imagining that you would counsel D______ against signing such an agreement. Clearly, the purpose of the agreement is not to drive a wedge between him and his intended; it is meant to ensure that he can carry on his business without the additional (and unnecessary) risk of being sued by a disgruntled patient under his wife’s care.

If D______ and his wife conduct their day-to-day affairs in such a way that they share the benefits of their two businesses; and if they share the joys and sorrows and trials and tribulations of their two businesses: I can’t imagine you would object that a legal agreement that specifies, for legal purposes–to thwart lawsuits that would seek to take proceeds not just from one business but from both: I can’t imagine you would object to such an agreement.

But it is to just such an agreement that you have objected.

Our family’s business is at risk of lawsuits. Far better for D_____ to be able to enjoy the benefits of being married to a person who owns rights in that company than that he himself be a potential party to such a lawsuit because he is married to her and is, as a result (without a prenuptial agreement) understood to own a portion of the company. Far better that he can carry on his career without that risk, than that, because he refused to sign a prenuptial agreement, he has to face the risk of a lawsuit. . . .

Sorry. I have to leave for an appointment.

The pastor wrote back before I could continue:

I don’t really buy the illustration of the company president who gets paid in shares. My paycheck only has my name on it, but it belongs to my wife and me. We share our lives, our love, our passion, our minds, our dreams and our faith, so we certainly aren’t going to keep our possessions separate. How selfish would that be? If my wife gets sued then I want to be named as a defendant with her. And I willingly risk the wealth for which my father and I have sacrificed so that she and I can be as one. If the lack of a prenuptial agreement leads to financial hassles or a loss of money, then we will exist in love and with the Lord. We will know that we have a vested interest the rare commodity of sacrificial love. You can’t buy that kind of security.

I must also tell you that I strongly disagree with the opinion you expressed when you wrote: “I don’t think the covenantal aspects of the marriage relationship have a whole lot to do with the more mundane (worldly!) business, economic and legal aspects of life that impinge on marriage.” (If you were listening to my words rather than reading my email, you would not feel threatened by my tone.) The prenup says that even while in theory and name I give myself over to you completely, in practice I’m holding back a little safety net. I think that if you pretend that business is business, and marriages are marriages then you’ve missed the practicality of what the Lord wants to do through us.

Relationship with the Lord must drive our business practices and saturate our economic policies. The Lord’s ways are so different than the world’s.

Well, I have thrown my $.02 into the knowledge pool. I hope it makes more of a contribution than a splash I really want D____ and J______ to have a life-long marriage that is governed by love and unencumbered by anything that might threaten their relationship. I’m sure that you guys and the L_____’s feel that even more strongly than I do.

I replied:

Dear Pastor:

You said,

I don’t really buy the illustration of the company president who gets paid in shares. My paycheck only has my name on it, but it belongs to my wife and me. We share our lives, our love, our passion, our minds, our dreams and our faith, so we certainly aren’t going to keep our possessions separate.

More to the point, you said,

The prenup says that even while in theory and name I give myself over to you completely, in practice I’m holding back a little safety net.

I believe–as in almost every area of life–this all comes back down to the heart.

Because to my wife and me (and, as I observe J____ and D_____), your description of the prenuptial agreement is exactly backward. The prenuptial is, for us, as I suggested: exactly parallel to the company president. In theory and name–for legal purposes–the company president, alone, holds shares in the company of which he is president. But the president’s entire family enjoys the benefit of those shares. –At least it does so if the man conducts his affairs in a godly manner! (As you said: your paycheck has your name on it, but it belongs to your wife and you. . . . There are other men, as I’m sure you’re aware, who make sure “the little woman” knows who “brings home the bacon” and whose paycheck she is “graciously” being permitted to feed off of. These “little women” know only too well how completely not theirs their husbands‘ paychecks are. “I’ll use my paycheck to get drunk if I want to! And I’ll give you money for food and clothing for you and the children if I want to. . . . But don’t tell me what I can do with my money, woman!” say these latter men. . . . )

POINT: the difference between the nominal and the real is truly a matter of the heart and not of the language in a legal document. (Yet, at the same time, the presence or absence of a legal document or certain words within a legal document can make an unbelievably significant difference in the way a legal battle is decided.)

From my perspective (and the perspective of my wife),

The prenup says that even while in theory and name I’m holding back a little safety net, in practice I give myself over to you completely.

To use some additional illustrations:

My wife and I have to sign some 13 different income tax returns every year: for two foundations, a limited partnership, an S-Corporation, an LLC (Limited Liability Corporation), our own personal returns, and several more. . . .

These “structures,” as attorneys call the “entities” for which we sign tax returns, are all created for three reasons (which bear greater or lesser weight, depending on the entity):

1. To save taxes.

2. To enable us to live our lives in a wiser, more considered manner. For example: a foundation permits us to donate funds to the foundation on December 31–thus acquiring substantial tax savings for the year in which we donated them–but permits us also to take as much time as we need in order to make wise decisions about what ministries we want to support, for what purposes, and to what extent.

3. To protect our assets from “destruction by lawsuit.”

Similar to the way modern ships are constructed, you create watertight bulkheads that break up the ship into watertight units so that, if one or two–or even a bunch–are penetrated, the ship can keep the water from filling the entire vessel. And so, as we have come to realize, in modern society, the wise business owner who has any significant business property doesn’t keep that property in his or her own personal name. And the wise business owner who works with others doesn’t enter into unlimited partnership agreements. And the wise married business owner doesn’t place all of his or her assets in “joint tenancy in common” with his or her spouse. –All such forms of ownership are of the old, “single-hull ship” variety. And the legal risks are simply too great.

Thus, while functionally, practically, all 13 (or whatever) entities in which Sarita and I have interests are controlled by us (jointly, fully); in theory and name (for legal purposes), each entity is wholly separate. [And, actually, my wife and I joke, sometimes, (even while we’re deadly serious) about the semi-absurdity of negotiating contracts between, say, our homeschool curriculum company and its landlord (both of which companies are owned by the same people--us), or between our homeschool curriculum company and its President and Secretary/Treasurer (since we are both owners and employees of the company in question). . . . ]

So, honestly, these matters are both extremely serious and humorously absurd at the same time. And as long as one can keeps a balanced perspective, there really are some wonderful benefits to be had by conducting one’s affairs in the manner I am describing and we are urging (no, demanding) of J_____ and D_____.

In sum: my wife and I fully expect J_____ and D_____ to share the joys and sorrows, assets and liabilities that the two of them bring to their marriage. We also fully expect that they will participate in and benefit from what some call the “legal fictions”–the “structures,” “entities,” and, even, “prenuptial agreements”–in which our family has become involved.

But now I would like to press one step further into the murky and semi-scary waters of a discussion about divorce.

DOES DISCUSSION OF DIVORCE LEAD TO DIVORCE?

First, let me make clear that I, as you, have made a fixed commitment never to suggest to my wife that we might get a divorce. Such talk, it seems to me, is very unproductive.

HOWEVER,

God Makes Righteous Provision for Divorce

While God hates divorce (Malachi 2:16) and while He offers no ifs, ands, or buts about the fact that what He has put together, no human being should ever dare tear apart (Matthew 19:6), He also made provision for divorce (Matt 19:8; Exodus 21:7-11; etc.).

May I say it? God made godly, spiritual, righteous provision for divorce. [NOTE: I do not mean that divorce itself is godly, spiritual or righteous; I mean that God’s provisions in the case of divorce are righteous--even as His laws concerning murder and theft and adultery and all other forms of wickedness are also righteous.]

[SIDE NOTE: I’ve been thinking about other matters in which God says He hates a certain kind of activity, yet makes provision for our human frailties. Thus, for example, he says He detests lying lips (Prov. 12:22). I’m sure it is because of that that Jesus said, "Let your 'yes' be yes and your 'no,' no; anything beyond this comes from the evil one" (Matthew 5:37). Yet, of course, God made provision for oath-taking and He Himself swore oaths and has even placed seals upon various things He has said in order to "guarantee" their authenticity and truth (Deuteronomy 6:13; Leviticus 19:12; Hebrews 6:16; 2 Corinthians 1:18-22; etc.). Obviously, the fact that God says more than nearly "yes" or "no"--and the fact that He places seals and deposits upon things to guarantee what He says--does not mean that what He says came from the evil one. . . .]

According to what T_____ [D______'s father] said he found on the web (and, apparently, according to your pastoral counsel), it seems that many Christians believe that prenuptial agreements show a lack of trust on the part of those who urge their use. Various Christian leaders say that prenuptial agreements lay the foundation for divorce. (As you put it in your letter: you believe they are “damaging . . . to the permanency of marriage [because they are] actually plan[s] for the divorce prior to the marriage.”)

I would like to suggest that, on the contrary, rather than a “fly in the ointment,” a fundamental flaw in the foundation of any marriage that includes them, prenuptials should be viewed far more like an oath or seal or guarantee: an opportunity for the person who comes into the marriage with little or nothing (or, indeed, major debts)–an opportunity for that person and his or her family to prove their good intentions.

A Prenuptial Agreement . . .

1. Can Make Up for What is Lacking in our Legal and Social Structures and Support the Permanency of Marriage

Moreover, in today’s society, it can make up for what is lacking in our society’s legal and social structures. (See http://www.razormouth.com/archives/00000318.htm for an essay in which the author urges the church to adopt and create uniquely Christian prenuptials to achieve this very purpose: to shore up what is lacking in our various state laws. . . .)

Rather than “damaging . . . to the permanency of marriage,” I believe a prenuptial agreement can be supportive of marriage . . . because it outlines the plans for divorce: it tells the person who thinks s/he would like to wander exactly what he or she will face. For the one who comes into the marriage with little or nothing, it says, “If you want to enjoy the benefits of being married to your partner, you will need to remain married. You can’t expect to enjoy the same benefits (or a somewhat reduced subset of those benefits) after you divorce.” Put another way, a prenuptial agreement lays out the consequences of divorce–in the same way that God lays out the consequences for sin.

2. Serves as a Disaster Plan for Risks both Inside and Outside the Marriage

Finally: a prenuptial agreement is a disaster plan: a plan in case of disaster. (And divorce, obviously, truly is a disaster!)

I mentioned three reasons people create “structures” or “entities.” The third reason has to do with disaster planning.

Let me address that.

There are all manner of disasters for which one might make plans. Many communities and families have made some kinds of preparations in case of tornadoes, fires and floods; winter ice storms and subsequent power outages; civil unrest and outright war; deaths, debilitating diseases and injuries. . . . The list could go on. In all such cases, besides actual plans of action, insurance companies often offer policies to spread the risks. And most of us own homeowner, automobile and health insurance policies to protect us in many of these circumstances.

We, in our business, must make plans and preparations for all the above and other risks, too: theft, loss (of a shipment, for example), an employee becoming injured on the job, the ever-increasing likelihood that we will be sued by some disgruntled employee for “sexual harassment” or “wrongful termination,” and a whole host of other issues. . . .

No one hopes for, expects, or desires to be sued. In our business, we attempt to conduct our affairs with absolute integrity and Christian charity and concern for all parties, though especially toward those outside. We would rather be wronged than to wrong. . . . But that doesn’t mean we–either the company as a whole, or a particular person within the company–can’t be charged (hopefully wrongly!) with, say, unfair hiring or firing.

On a slightly different level, as my wife and I have learned, while no business owner ever enters into a business relationship with someone–either a partner, an employee, vendor, or anyone else–with the idea that the relationship is going to fail and that one person is going to harm the other, a business owner would be extremely foolish not to put policies and procedures into place that guard against and make it more difficult for a partner, employee, coworker, vendor or other to commit fraud, engage in embezzlement, fail to pay one’s corporate taxes, or engage in some other misdeed.

The fact is, if or when such a situations should come our way, my wife and I have structured our affairs and purchased the kinds of insurance products that aim to minimize the damage. At worst, Lord willing, any of the above risks will be able to bring down only a small portion of our business/financial “empire.”

I got thinking a couple of days ago that it is similar with J_____ and D_____’s prenuptial agreement.

Please stick with me a moment.

Notice that the risks in business can come from outside the business as well as from inside: from the foolishness, greed or downright wicked desires of persons external to the business as well as from similar foibles on the part of people inside.

Most of us in business tend to expect attacks more from the “outside” than the “inside” of the business. We fear some unjust lawsuit, a fire or flood. But, even among Christians, we find that business partners embezzle funds, swindle someone, fail to pay corporate taxes, etc., etc. No one expects these things to occur (even as no Christian congregation expects its pastor to commit adultery, or a member of the congregation to sexually molest a child in the nursery). But people do these things. And when they do, woe to the business person who permitted him- or herself to be involved in an unlimited partnership with the party who actually did embezzle, swindle, fail to pay taxes, etc. . . . ! And/or woe to the congregation that failed to prepare for what seems almost unthinkable. . . .

What struck me the other day is this: the same structures that protect against truly wicked deeds by those outside an organization also protect against wicked deeds by those who are inside. The same kinds of “bulkhead” structures that protect owners of a firm from being destroyed by the wickedness of an unjust lawsuit on behalf of someone outside the firm can also protect them from being held liable for–and being destroyed by–the wickedness of someone inside.

So, too, I am realizing, with a well-structured prenuptial agreement.

In the traditional approach to prenuptial agreements, everyone seems to focus on potential risks from inside the marriage–the risks of divorce. But the same agreements can (and will) significantly reduce risks from outside as well. One spouse may sue the other for divorce (an “inside” attack, obviously). Someone from outside the marriage, however, may also sue one spouse (for a business reason) but/and, as a consequence, if there is no bulkhead, this “outside” lawsuit can actually harm the business of the spouse who was never party to the suit. Why? Because without the bulkhead, half of the non-sued spouse’s assets may be viewed as “community property”–property owned by the spouse who is being sued. And so a business owned by the non-sued spouse may suddenly find itself in trouble that could have been avoided if only the couple had pre-agreed upon the “legal fiction” that their businesses are owned completely separately.

With the bulkhead of a prenuptial agreement, if D______’s future/expected/anticipated business were sued, J______’s business assets would be kept out of harm’s way. And, with future modifications of their agreement, if J_______’s future business were sued, D______’s future business could be kept out of harm’s way as well.

Our attorney gave us an example of a couple whose financial viability was preserved for exactly these reasons. The wife owned a million-dollar company; the husband owned a $10 million company. The husband’s firm went belly up, but/and because the wife’s firm was clearly not part of their marital property, the creditors were unable to attack it (which they would have dearly loved to do had there been no prenuptial agreement). Now, after the husband’s bankruptcy has settled, the wife has been able to use assets from her company to help her husband get started in a new business. . . .

What is striking is that it is the same bulkhead that provides protection in both cases: in the case of inside attacks (divorce) and outside attacks (other types of lawsuits).

And it is not ungodly to make preparations for either situation. God made righteous provision for (or in the case of) divorce. I believe we can, too.

In Christ,

John Holzmann

PS: Nowadays, of course, most pastoral counsel has to do with personality types, interpersonal relations, sexuality and matters of these types; relatively little is said about how a couple should conduct their financial affairs; and I have never heard of pastors digging deeply enough to discover the details of a couple’s finances: what assets and liabilities they hold going into their marriage and/or what bride prices or dowries may be involved. Yet are these not of great importance?

As I have observed our families’ (J_____’s and D_____’s families’) discussions about J_____’s and D_____’s prenuptial agreement, I have noticed that it has awakened D_____ and J_____ to some of the more difficult, but very real, issues they will face in their life together. For example, it appears that, prior to a week and a half ago, D_____ had no idea he is $70,000 in debt and accruing interest on a portion of that debt at a rate of close to $3.50 a day. He had no idea how much he owed, nor what kind of interest rate he would have to pay, nor even when his debts would become due. . . . It was as a result of the demands of the prenuptial process that he called his bank and was told about two loans he had either forgotten he had or never knew he owed. . . .

But now, as a result of the prenuptial process, he and his intended bride are well aware of the debt the two of them face in their new life together. And she is prepared to confront that debt alongside him. . . .

PPS: I noted above that while God says He hates divorce, He makes righteous provision for those cases where human foolishness or sin leads to divorce. Among the righteous provisions He makes are rules or laws concerning finance, including bride prices and dowries. For a rather lengthy, detailed–and interesting!–discussion of this matter, I recommend Dr. Gary North’s Tools of Dominion: The Case Laws of Exodus, pp. 248-277 (esp. pp. 253ff), available, in a rather poorly scanned version, at http://freebooks.entrewave.com/freebooks/docs/html/gntd/gntd.html.