It is quite common these days for couples to enter into a pre-nuptial agreement to try to control how their property will be divided in the event their marriage breaks down. Fundamentally, a pre-nuptial agreement is a binding contract just like any other kind of contract. For this reason, pre-nuptial agreements are formally known, in Ontario, as “marriage contracts”.
When a marriage breaks up, there are many legal issues to deal with. Property must be valued and divided and other financial issues must be dealt with. In a situation of marriage breakdown, the spouses’ rights and obligations will be dictated by the marriage contract (if there is one) or by legislation (if there is no marriage contract).
In Ontario, the legislation which governs the issue of property division, as well as other financial issues, is the Family Law Act. Other provinces have similar legislation. Where there is no marriage contract, the Family Law Act dictates the spouses’ rights and responsibilities. Thus, in order to understand the potential benefits of a marriage contract, it is first essential to take a step back and understand what normally happens by law in marriage breakdowns where spouses do not have a marriage contract.
The Family Law Act: Where there is no marriage contract
Following is the scheme which is applied by law, on marriage breakdown, where there is no marriage contract.
1. Upon separation, all of the property owned, either jointly or by either party individually, is valued as of the date of separation and divided up so that each party walks away with half the value of the “net family property”.
2. Each spouse’s “net family property” is calculated by adding up each spouse’s assets on the date of separation and deducting from each spouse’s assets the following:
(a) Any debts the spouse owes on the date of separation;
(b) The value of any property the spouse owned on the date of marriage, valued as of the date of marriage;
(c) Any inherited property or gifts acquired from anyone other than the other spouse during the marriage.
3. There are several important exceptions to 2(b) and (c) above, which are as follows:
(a) If one party owns a home on the date of marriage and that home later becomes the matrimonial home, the total value of the home is not deducted from that party’s property, but is instead subject to division in accordance with no. 1 above;
(b) If a party inherits money during the marriage and that money is used to acquire or pay down a matrimonial home, there is no deduction for the portion of the inheritance which is used to add value to the matrimonial home; instead, that portion of the inheritance is subject to division as well;
(c) As well, if a party inherits a cottage, vacation property, or home during the marriage, that property could also be labelled a matrimonial home which is subject to division on marriage breakdown.
It is easy to see how this statutory framework can lead to unfair results. For example, imagine that your parents, in their will, leave you the family cottage with the intention that it be kept in the family. You’ve been enjoying the cottage for 45 years, since you were a child; you inherit it; you and your spouse spend a few weekends there for a couple of summers afterwards; suddenly, your spouse decides to divorce you. The 45 years leading up to the date of inheritance don’t count for anything because the cottage has now become a “matrimonial home” – and you are shocked to learn from your lawyer that your only option is to sell the cottage because you owe your spouse half its value.
Or, imagine that you marry later in life. Your spouse enters the marriage with an investment portfolio worth $700,000.00. You bring a home into the marriage, which is worth $500,000.00, is fully paid off, and represents your life savings. You and your spouse settle down into your house, which becomes the matrimonial home and which increases in value to $700,000.00. The marriage sours and you separate. You are told by your lawyer that because you did not have a marriage contract, you have to sell the home and give half the proceeds to your spouse. To add insult to injury, your spouse gets to keep the $700,000.00 he brought into the marriage. The result? Your spouse walks away with $1,035,000.00 and you walk away with $350,000.00.
How can these results be justified? Because all property owned on marriage is deducted from the pool of “net family property” — except for a matrimonial home. That’s our law, and unfair as it can seem, judges are bound by it.
It is not difficult to think of many similar examples of unfair outcomes that can be generated by this legislative framework. As such, one of the most common reasons for people to enter into marriage contracts is to create a fairer alternative for themselves.
One of the most common objectives of a pre-nuptial agreement is to exclude from one’s “net family property” the equity one has in the matrimonial home on the date of marriage. For example, if Mr. Jones owns a $500,000.00 (mortgage-free) home and is contemplating marriage to Ms. Smith, he knows that if there is no pre-nuptial agreement, Ms. Smith moves into the home, and they become separated 6 years later, he will have to share his interest in the home with Ms. Smith at the time of separation. If they enter into a pre-nuptial which stipulates that upon separation, the matrimonial home is to be excluded from the Family Law Act property division process, he will not have to worry about writing her a cheque for half the value of the home at the time of separation.
Another common objective of pre-nuptial agreements is to establish that upon separation, neither party will be responsible for providing the other with spousal support. This type of arrangement can be modified so that if a marriage lasts a certain number of years, the spousal support waiver will expire.
Pre-nuptial agreements can be as simple or as complex as the parties wish them to be. For example, parties may wish to exclude several specific items of property or as is often the case, both parties may agree to exclude all items of property that either party owns on the date of marriage or will acquire at any time during the marriage. With respect to excluding a matrimonial home, a couple can agree to exclude the property completely or to just exclude an amount equal to one party’s equity in the home as of the date of marriage but include any subsequent increase in the value or equity. Marriage contracts can be custom tailored to address a couple’s specific concerns.
From a legal-financial prospective, pre-nuptial agreements make an awful lot of sense. Why take chances? Why leave things unclear and open to interpretation? Why not do whatever one can to avoid the uncertainties and financial bloodbath of litigation? Clearly, there is a very simple reason why some people avoid discussing the issue of marriage contracts, let alone sign them — people who are getting married happen to be flesh and blood human beings.
Is there a more exciting, joyous and hopeful time in one’s life than those weeks or months between the date of the accepted wedding proposal and the date of one’s marriage? Although stories abound of couples for whom this becomes an exceedingly stressful time, it is probably safe to conclude that the pride and happiness one feels about one’s relationship with their significant other is at its zenith during the engagement period. Yet it is during this period of time that the topic of pre-nuptial agreement is usually raised.
There are few moments more awkward than the moments before a person is about to broach, for the first time, the topic of a pre-nup with one’s fiancé. It is not an exaggeration to say that the introduction of the notion of a pre-nup can have a long-lasting negative effect on a couple’s relationship. Regardless of the legitimacy of one partner’s need to protect his or her assets, the other partner, upon being asked to consider a marriage contract, instantly formulates the following thoughts:
“He/she doesn’t trust me”
“He/she is not really committed to making this marriage work”
“He/she does not see me as an equal partner in this marriage”
”I thought he/she loved me”
“What does he/she think I am, a golddigger?”
“My parents were right about him/her”
“I thought this was about forever” etc. etc. etc.
The emotional fallout from the suggestion of a pre-nuptial agreement affects many people, not just the engaged couple. Very often, the bride or groom’s parents have insisted that their son or daughter have a pre-nup in exchange for their approval of the marriage, and it is the parents’ own financial interests, and/or their own mistrust of the future in-law child that drives their demand for the piece of paper. Conversely, the parents of the person being asked to consider a pre-nup often become incensed by the self-perception that they are being looked down upon by the wealthier family who will be sitting at the other end of the head table. Even if the happy couple is ultimately able to move past the whole pre-nup mess, their parents may have a much harder time forgetting.
I was once retained by an acquaintance to prepare a pre-nuptial agreement. This woman was bringing a house into the marriage. While the agreement itself was negotiated fairly and was quite appropriate under the circumstances, her fiancé’s parents were extremely resentful that their son was asked to sign such an agreement. My wife and I were invited to the wedding. To my surprise, I noticed some members of the groom’s family pointing me out and whispering to each other with scowls on their faces.
For many people, the suggestion of a pre-nup destroys all the positive feelings one had about the upcoming wedding. These people are either unwilling or incapable of understanding their fiancé’s financial fears and concerns and in some cases, will never feel quite the same way about their future spouse again. Obviously, this is an enormous price to pay for financial security.
I was once asked by a man to protect his interests by preparing a pre-nuptial agreement. He told me that his fiancé was aware of his concerns and that she was “okay with it”. When he came down to my office, his fiancé was with him and waited in the reception area while he and I discussed the proposed terms of the agreement (a lawyer may only represent one of the parties). At the conclusion of the meeting, the man warmly greeted his fiancé and they proceeded to exit through the elevator. Approximately 20 minutes later, after clearing my desk and shutting off my computer for the day, I exited my building only to find the happy couple screaming at each other, right in the middle of the street. They did follow through with the wedding but they were separated not three months later.
Clearly, there is a delicate balance to be struck between protecting one’s financial interests and laying a strong foundation for a long and happy marriage. The prevailing difficulty is that many people are unable or unwilling to appreciate both sides of the issue. Some people see no difference between purchasing life insurance, trip cancellation insurance and having a pre-nup. These people consider all three to be prudent investments and hope that “they will never need it”. Conversely, while there are some people who believe that marriage is for life, even those who don’t hold such an idealistic point of view still believe that the only way that a marriage can last is if both parties are fully committed to its long-term success. These people believe that the mere desire to have a pre-nuptial agreement is, in and of itself, a prescription for a flawed relationship that has already been infested by fear and mistrust, two of the main ingredients of marriage breakdown.
So what should one do?
Over the years I have come to the conclusion that there are two groups of people who seek pre-nuptial agreements. Those in the first group have legitimate reasons for wanting the protection of a pre-nup. They find themselves in one of the following four circumstances:
1. The person is the owner of one or more specific assets that he or she does not wish to potentially split with one’s spouse on separation. These assets may include a house, pensions, family heirlooms, or objects d’art. Remember, even if one owned an asset on the date of marriage, any increase in value thereto occurring after the date of marriage, is still subject to division unless a marriage contract states otherwise;
2. One of the parties has a stake in a business venture, either as partner or shareholder. This also includes partnerships in a medical, dental, law or accounting practice, or a stake in a family business. Without a pre-nuptial agreement, some people find themselves having to sell their stake in a business just to have enough money to pay off their spouse when the marriage breaks down;
3. A person has an existing financial obligation to one’s ex-spouse and children from a previous marriage. Without a pre-nuptial agreement, a person might find herself indirectly making her spouse’s child support payments! A pre-nuptial agreement will clarify a party’s financial obligations to a previous family;
4. Money and property received by way of inheritance is generally excluded from the property division scheme but only if such money or property is kept separate from the matrimonial home. Many a person has inherited a large sum of money and used it to pay down the mortgage on the matrimonial home only to find that the marriage ends and the equity in the home is divided with the spouse in the divorce settlement. A pre-nuptial agreement can anticipate this scenario and make adjustments for the intermingling of inheritance money with family assets. The agreement can also ensure that any increase in value of inherited funds is sheltered from the statutory property division scheme, since normally the increase in value is subject to division unless the testator specified otherwise.
For people in the above noted categories, it is sometimes be quite apparent to their fiancés that a pre-nuptial agreement is not only necessary but welcome in that it addresses a problem that would otherwise result in unfair circumstances. These are not merely legitimate reasons to have a pre-nup; in fact, the presence of these issues cries out for there to be one.
The other category of people who seek a pre-nup are those people who do not have a clear understanding of the Family Law Act property division scheme and either feel that they need a pre-nup or have been told by similarly misinformed people that they must/should have one. This category of individual is going to unnecessarily upset his or her spouse as well as the spouse’s family without even knowing why he/she needs a pre-nup.
Remember, with the exception of a matrimonial home, all property one owns at the date of marriage is excluded from the property division scheme at the time of separation. There may be no need to enter into a pre-nuptial agreement to protect one’s assets when the Family Law Act does this for you already. Allowing for the fact that the increase in value of one’s assets during the course of a marriage is still subject to division, there is no benefit to entering into a “what’s mine is mine and what’s yours is yours” type of agreement. The benefits are minimal and the emotional cost of convincing one’s fiancé to sign the pre-nup is potentially huge.
There is a practical consideration which should be noted. It is easy to say that, at the end of a 20-year marriage, all one needs to do is figure out the value of one’s assets as of the date of marriage. But rare is the individual who can maintain such good records over the course of a 20-year marriage. Invariably, most people are at a loss to calculate the value of one’s pre-marriage assets. Moreover, the onus is on the party claiming a pre-marriage deduction to prove it. As you read this, banks are shredding the very documents that you will need in order to prove what you had at the date of marriage. Whenever parties enter into a pre-nuptial agreement, they will attach, as schedules to the agreement, a list of both parties’ assets and liabilities in existence as of the date of marriage. This makes it very easy, upon separation, to determine what each party is able to exclude from the post-separation division of assets.
In some cases, all that may be necessary is the creation of a record of the value of a party’s assets. If one is contemplating marriage but does not fall into one of the categories referred to above where a pre-nup is required, all one needs to do is engage a lawyer to prepare an affidavit which sets out in detail, all of one’s assets and their current (ie. marriage date) values. This will require the attachment of supporting documentation which will confirm both ownership and value. Once it is signed, the document should be kept in a very safe place so that it can be easily accessed should the marriage end. It should also be kept secret so that one’s fiancé does not see it.
Earlier, I mentioned that there are circumstances where a pre-nuptial agreement is required and that a person’s fiancé should appreciate and understand why there ought to be such an agreement. Of course, this does not mean that one’s fiancé will understand and appreciate the need for a pre-nup. A person in this situation (for example, an owner of a house that will ultimately become the matrimonial home) may decide that protecting one’s asset may simply not be worth the emotional cost of suggesting a pre-nup. There are still things that can be done. Remember, regardless of whether one owned the house before marriage, the total value of the equity in the matrimonial home on the date of separation is subject to division. But if one has cash at the date of marriage, this cash is not subject to division by virtue of the Family Law Act. Consequently, if a person is about to enter into a marriage with $500,000.00 equity in a house, and the person’s fiancé will not sign a pre-nup, it behooves that person to convert as much of that equity into cash before the day that his or her fiancé moves in after the honeymoon. This way, cash and a $450,000.00 mortgage (along with $50,000.00 of equity) is being brought into the marriage instead of house with $500,000.00 worth of equity.
In the case of inherited money and property, similar pre-arrangements can be made to ensure that there will be no intermingling of funds.
It is sad but true that many people who are contemplating marriage fail to approach the issue of pre-nuptial agreements with the appropriate level of care, caution, and wisdom. Those who approach it with tunnel vision or a lack of sensitivity will find themselves in a position where they are unwittingly jeopardizing their financial health or the health of their relationship. By seeking out expert legal and financial advice, both can be preserved.
