In the UK, prenups are not (yet), legally-binding. They can, however, still carry substantial weight in family courts. For this reason, anyone with significant pre-marital assets, especially a business, should at least consider having one in place before they marry or enter into a civil partnership. Here is a quick guide to what you need to know about them.
The basics of prenups
A prenup is essentially an agreement regarding how assets will be divided in the event that a marriage or civil partnership is brought to a close. For prenups to be taken seriously by family courts, they need to meet all the standard requirements of contracts. In particular, they need to be entered into freely, by parties capable of giving consent. They also need to treat both parties fairly.
What prenups cannot do
Prenups cannot be used to coerce people into accepting unfavourable terms. This not only applies to financial terms, but to restrictions on their behaviour. For example, you cannot propose different levels of financial settlement depending on whether they remain faithful to you (or you remain faithful to them).
It’s also vital to remember that prenups will never be allowed to disrupt the welfare of any children you may have either now or in the future. Prenups can include certain provisions for existing children. They may also offer minimum guarantees of care for children who may be born in future. Generally, however, issues regarding child custody and maintenance are dealt with separately from prenups.
As a corollary of this point, prenups are unlikely to be enforced if there has been an obvious, material change of circumstances between the time the prenup was signed and the time it is due to be enforced. Prenups can, however, be updated post-marriage/civil partnership (in which case they are known as post-nups).
What prenups can do
As an absolute minimum, prenups can form a baseline and path forward for divorce proceedings. For example, if a business owner has a prenup, then they will have had their business valued prior to the marriage. This makes it clear what portion of the business equity belongs to the pre-marital period. Ideally, they will also have agreed on the approach to valuing the business in the event of invoking the prenup.
You may also have to set out an agreement on how the profits from the business will be handled. This is likely to be particularly important if you pay yourself through dividends instead of (or as well as) drawing a salary. If you’re effectively underpaying yourself in the short-term to build up equity in your business over the long term, then you need to do everything possible to protect that equity.
Your spouse and your business
There are two main ways your spouse can potentially earn a beneficial interest in your business. The first is if they enable some form of financing. This could be either directly, through providing cash from their own pre-marital assets. It could also be indirectly, for example, by allowing shared marital assets to be used in a way which benefits your business.
The second is by donating their labour without receiving suitable recompense. Be aware that the provision of labour can extend beyond working in the business itself. It can, for example, mean providing childcare so that you can focus on developing your business.
Depending on your situation, it may not be possible to cover all the potential issues in a prenup. Notwithstanding, the process of developing a robust prenup can help to highlight issues you may need to address at some point in the future. You may then want to think about updating your prenup and converting it into a postnup (or coming to some other form of agreement with your partner).