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Parents, Children, and Premarital Agreements

The previous two posts on premarital agreements have addressed future spouses who are considering signing a premarital agreement. The final two posts in this series will address the future spouses’ parents.

In particular, this post is directed at parents who have worked hard enough, and been fortunate enough, to accumulate significant property. You desire, naturally enough, to leave that property to your children. But you do not want that property to pass to your children’s spouses. How can this goal be accomplished?

Understand initially that you may not need any special measures. When a marriage ends in divorce, most states give special treatment to property acquired by gift or inheritance. In North Carolina, gifts and inheritances are defined as separate property that the court lacks the power to divide. N.C. Gen. Stat. (“G.S.”) § 50-20. Separate property includes not only the initial amount of the gift or inheritance, but also any future “passive appreciation” in that gift or inheritance—growth caused by market forces, and not by the funds or efforts of your children after they are married.

For example, assume you have investment stock, bonds, or a bank account. If by gift or devise, you transfer this property to your children, the property transferred will be separate property. Any future passive appreciation in the gift or devise will be separate property also. Upon divorce, your child’s spouse will not have any claim to separate property.

A special situation is presented, however, when you wish to make a gift or devise of an interest in a business in which your child works. The base value of such a gift or devise would be separate property. But any future growth would be marital property to the extent it is “active appreciation”—appreciation caused by your child’s efforts. If your child works for the company, your child will probably cause at least some of the growth. If your child runs the company, your child may cause most or all of the growth. In this situation, there is a valid basis for taking special measures to protect the future growth in the company from being shared with your child’s spouse.

What sort of special measures can you take? To begin with, you can suggest to your child that your child enter into a premarital agreement with his or her spouse. The agreement can waive any marital interest in the growth of the company.

Be aware, however, that your child has valid reasons not to sign such an agreement. Attitudes toward premarital agreements vary, and some people prefer not to sign them. In particular, some people still adhere to the traditional view that married persons should share everything. If your child is not willing to sign a premarital agreement, you cannot force them to do so.

Even if your child is willing to sign an agreement, your child’s spouse may not be willing. The law normally requires married persons to share income earned during the marriage. The reason active appreciation is marital property is that it is very easy for owners of businesses to pay themselves little or no salary, and take their compensation in the form of appreciation in the value of the business.  If a premarital agreement waives the marital interest in active appreciation, the effect may be to frustrate your child’s spouse’s right to share in your child’s earnings during the marriage.

With divorce rates near 50%, your child’s spouse needs to protect his or her financial security in the event of divorce, especially if your child has children. It is reasonable to raise the possibility of a premarital agreement, but you should not necessarily expect that your child will be willing or able to sign one.