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Financial planning tips

April 10, 2014

Why a marriage contract may be right for you

It may not sound romantic, but drawing up a pre-nuptial agreement could be a useful thing to do with your future spouse.

When you are in the midst of making wedding plans, you may want to consider adding “marriage contract” to your to-do list. After all, you’ll spend months planning The Big Day. But what about the life together that begins the day after the ceremony? How much planning will go into that? An honest discussion about money and the assets you and your the partner-to-be are bringing to the union might be difficult, but in the end it could strengthen your long-term relationship. And if one of you is bringing significantly more assets to the marriage than the other, a marriage contract is a particularly sound idea, both financially and emotionally.

The reality is, despite best-laid plans, more than one in three marriages in Canada ends in divorce. Second marriages fare only slightly better, with more than one in five ending in divorce. Each year, reports Statistics Canada, there are more than 70,000 divorces in Canada. That is not to mention that most tragic of circumstances, when a spouse’s death ends the marriage.

The benefit of planning ahead

Because family law constitutes marriage as an “economic partnership,” a domestic contract protects the partners in the event of separation or death. And the best time to negotiate such a contract is when you both have stars in your eyes, when both parties to the marriage want to see the other treated fairly – whatever the future may bring.

“When a relationship is breaking up, typically there is one partner who feels wronged,” says Lynne Triffon, a fee-for-service registered financial planner with T.E. Wealth in Vancouver. “Under those emotions, his or her concept of what is fair changes completely.”

A domestic contract, be it a cohabitation agreement or a marriage contract, puts in place some rules about dividing property if there is a separation or death. Planning ahead protects both partners.

“Second marriages particularly can benefit from marriage contracts,” says collaborative lawyer Cori Kalinowski of Kalinowski Law Office in Toronto. “You have more stuff; you are more likely to have inherited money or property. You have been separated and divorced and you know how helpful it is to have rules set out for the potential dissolution of the marriage or for death.”

Protecting your home

The asset most affected by marriage is the matrimonial home. Family law is a provincial jurisdiction, so the fine print can vary from province to province. But the theme is the same: In the event of marriage breakup, the value of the matrimonial home could be split 50/50, even if it is registered in only one spouse’s name.

That seems fair – unless one of you owned the house before the relationship developed. Say, by practising financial prudence, you bring a $300,000 condo into the relationship. Or, you inherited a $300,000 house before you got married, that became the matrimonial home. Now, let’s suppose that 10 years down the road your marriage disintegrates. The house is now worth $600,000. Under family law, assuming everything else is equal, each of you gets $300,000. If you want to keep the house for yourself, you now need to take out a mortgage for $300,000 or liquidate another asset to pay your former spouse $300,000.

A marriage contract can specify how you and your future spouse want the house or any other asset treated. For example, if the two of you are contributing to the upkeep of the house, together you might decide that only the increase in value from the time of marriage to the time of separation is subject to the 50/50 split. Or, if you and your future spouse aren’t blending your finances, you might decide to exclude the house entirely from family property. A marriage contract can apply to many aspects of property. It might be an inherited family cottage that you want to have clearly designated as yours.

Proper representation

These are all things to be considered when drafting a domestic contract. To have a valid marriage contract, there needs to be full financial disclosure; the agreement must be in writing, signed and witnessed; and you and your future spouse can’t have the same lawyer. Each of you should have independent legal advice to ensure the durability of the contract. If any of these key components are missing, there is a risk that the contract will be set aside.

“There is huge value to having each side represented by a lawyer,” says Kalinowski. It is not an adversarial exercise, she notes; both partners come in with their respective lawyers and, in a collaborative environment, forge a contract agreeable to both.

And if the contract is to stand up to any future legal challenges, it must also be negotiated free of duress. One partner cannot push the other into the contract.

“You need to give your lawyer lots of notice, a minimum of three months,” says Kalinowski. “You can’t do it on the way to the church where the guests are waiting.” The courts see that as putting undue pressure on both parties to sign and thus jeopardizes the legality of the contract.

Both Triffon and Kalinowski see domestic contracts as part of a bigger picture. A couple getting married should be getting their financial house in order. Have they updated their wills? Are the partners insured and are beneficiaries duly noted?

Drawing up a marriage contract as part of an overall financial plan may not sound romantic, but it may be worth thinking about as part of a clear-eyed financial discussion with your future spouse.

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