Abstract: Roughly half of U.S. marriages end in divorce. So, many people enter into premarital agreements before they tie the knot. This article describes why it can be risky for couples to cut corners on hiring a valuation expert to help draft the agreement, especially if one of the parties owns a business.
For richer, for poorer
Factoring valuation into premarital agreements
It’s a well-known statistic that roughly half of U.S. marriages end in divorce. So, many people enter into premarital agreements before they tie the knot, especially when they’ve been previously married and accumulated significant wealth. Couples might be tempted to cut corners on hiring a valuation expert to help draft the agreement, but that mistake could cost them later — especially if one of the parties owns a business.
Disclosing assets and values
State laws regarding the validity of premarital agreements vary. They generally require the agreements to satisfy several requirements, including a disclosure of each party’s assets.
States that have adopted the Uniform Premarital Agreement Act (UPAA) apply a “fair and reasonable” standard to such disclosures. Here, spouses must fairly and reasonably disclose their property and financial obligations, unless their spouses voluntarily and expressly waive their disclosure rights or possess actual knowledge of the property and obligations.
Other states have adopted a “full and fair” standard. This generally means that each spouse has a sufficient understanding of the nature, extent and value of the other spouse’s assets to make an informed decision to relinquish rights to them. The agreement should specify whether stated values reflect fair market value (FMV), fair value, book value or another standard of value.
Valuing business interests
A couple may prefer to simply stipulate to the value of property, including business interests, rather than hire an expert to determine asset values. That can be a risky move, because values can often change over time. Moreover, a court could subsequently find the stipulation doesn’t fulfill the disclosure requirement and reject the premarital agreement.
The risk is even greater if other indications of FMV exist. For example, a business might have key person insurance, life insurance, loans or other arrangements that require a statement of value — or a business interest might have been recently valued for the owner’s previous divorce, another shareholder’s divorce or a shareholder’s probate. If the stipulated value doesn’t match an appraised value, a court might find it falls short of the requisite standard.
Finally, a stipulated value may fail to account for discounts that a valuation expert would apply to reach FMV. For example, if a spouse owns a minority interest in a closely held business, the value may need to be reduced for the interest’s relative lack of control and marketability.
As a trusted advisor, you can help clients stay grounded during the excitement of premarital activities. A solid, enforceable premarital agreement can provide some protection if things don’t work out. And it takes time to secure the details, including the valuation provisions for closely held businesses.