Why Everyone Should Have a Marriage Contract
Over 40% of Canadian marriages end in divorce and, without proper planning, a failed marriage will often end with intense fighting, expensive litigation, a huge loss of assets. However, there are ways to avoid many of these risks, like using a marriage contract (aka a “Pre-Nuptial Agreement”). In simple terms, a marriage contract is an agreement that can be made before or after marriage, stating what will happen if the spouses get separated or divorced.
What happens if there is NO marriage contract?
If there is NO marriage contract, then both parties’ financial gain during marriage gets equalized upon separation. This means that each party’s asset value is calculated at the date of marriage, and then calculated again at the date of separation. The difference, or gain, between the two time periods, is divided equally between the spouses.
The one asset that does not get equalized is the matrimonial home. Worse – its entire value is split upon separation. To qualify as a matrimonial home, there are two requirements:
- The property should be under one spouse’s name;
- Both spouses live in the property on a routine basis after marriage OR both spouses agreed to register a designation of matrimonial home on title by a real estate lawyer.
A marriage contract can basically alter the equalization rules. For instance, you can state in the contract that upon divorce, the wife gets properties 1 and 2, and the husband gets the matrimonial home that he purchased before marriage. This way, the couple can set up different asset allocation rules – ones that may work better for them than a strict equalization.
What Decisions Can I Include in my Marriage Contract?
You can do the following things in your marriage contract:
- You can set rules for “Spousal Support” if you get divorced in the future – Spousal support is money that one spouse MUST pay to the other spouse to cover their financial needs after a divorce. The payments are often monthly and can last for many years. However, a valid marriage contract can:
- state who will be responsible for spousal support;
- state how much support must be paid;
- state how many months or years spousal support will be required; and
- can even state that NO spousal support will be required on a future divorce.
- You can decide what happens to a property purchased BEFORE MARRIAGE, even if it becomes a matrimonial home. You can also decide who gets the other assets, like vehicles, investments, or furniture.
Advantages of Having a Marriage Contract
There are many advantages to doing a marriage contract, such as:
- Avoid EXPENSIVE litigation if the couple gets divorced in the future. Divorces usually cost tens of thousands of dollars for each spouse. These fees can be greatly reduced by making important decisions in advance. With the contract, lawyers will not spend time fighting over property, investments or spousal support obligations. This will save time and money if the couple gets divorced in the future.
- Having a marriage contract will remove difficult emotions from the process. For example, if a couple waits until they are getting divorced to decide who gets the assets, they will often fight to get more than the other person due to anger and hurt feelings. However, by having a marriage contract drafted before the marriage fails, the couple can make these difficult decisions based on fairness, instead of out of spite.
- Having a marriage contract provides certainty at a time when things feel like they are falling apart. The end of a marriage is often very difficult and can be scary in many ways. Knowing who gets what assets in advance can reduce fears for everyone, including any children the couple may have.
- A marriage contract serves as an insurance plan. We do not get insurance so we can get into an accident; we get it in case we get into an unexpected Having a marriage contract will save you if there is an unexpected marriage breakdown.
What Should NOT be in Your Marriage Contract
There are two types of issues that CANNOT be decided by a marriage contract.
The first type is any decision related to minor children, including custody, visitation rights, and child support payments.
Let’s say Mr. and Mrs. Smith decided in their marriage contract that if they ever get separated, then they would get split custody of their children. This would be unenforceable in Court. When making a decision regarding custody, the Court would need to look at how both parents are at the time of separation (not how they were at the time that the marriage contract was signed), and what would be the best for their children, not just what’s best for the parents.
Likewise, you cannot set rules regarding who gets to live in the matrimonial home in the contract, nor how the value of the matrimonial home would be split if it was purchased after or within the marriage.
For example, Mr. and Mrs. Smith bought a house a year after their wedding. Mr. Smith paid for the entire house and stated in the marriage contract that he should get 100% of its value upon separation. Both parties signed. However, because the property was bought after marriage, this clause is unenforceable. The matrimonial home must still be split evenly upon separation.
Also, in the contract, Mr. Smith cannot put in any clause that requires Mrs. Smith to leave the house before divorce proceedings are finalized. This means that Mrs. Smith can live in the house until the divorce ruling– she can effectively prevent the realtors from doing showings and stop the new owners from moving in. This means that even if there’s a marriage contract, Mr. Smith cannot sell the matrimonial home unless he can get Mrs. Smith to agree or until the judge makes a final ruling on their divorce.
When Should You Make Your Marriage Contract?
A marriage contract can be made before or after you get married. However, we always recommend doing the marriage contract while the relationship is healthy and strong. Parties who do marriage agreements early can avoid the destructive emotional issues faced when doing the agreement later after the marriage has failed.
What is Required to Make a Marriage Contract Binding
To be valid, a properly drafted marriage contract must meet many different requirements. The following lists the basic rules that must be followed to ensure you have a strong marriage contract:
- Both spouses must be at least 18 years old. Since a minor is not allowed to sign a contract, any marriage contracts created by minors would be invalid;
- Both spouses must not suffer from a mental disability that would make them unable to understand the contract. Like any other contract, the people who sign the agreement must have the mental ability to understand the terms. If one of the spouses has a mental disability and cannot understand the contract, a judge will say the contract is invalid;
- The agreement must be in writing;
- Both parties must sign the agreement;
- The agreement must be witnessed and signed by the witness;
- Both parties must agree voluntarily and with no pressure to sign from any other people;
- Both spouses must make full financial disclosure. If one of the spouses owns property and they do not tell their spouse about the property, a court will say that the agreement is invalid. Essentially, both spouses need to understand what they are agreeing to. If one spouse is agreeing to something without all of the information, they did not really understand the agreement; and
- Each spouse should speak to their own independent lawyer to get advice and to review any agreements. If the agreement is signed, but one or both of the spouses didn’t get legal advice from their own independent lawyer, it is possible that the spouses will claim they were tricked or pressured into signing or that they didn’t understand the agreement. Without getting advice from their own lawyer, it is likely that a judge will say the agreement is invalid.
For example, if a husband drafts a marriage contract on his own and tells the wife to sign it without getting her own lawyer, it will likely be invalid since there is no proof that she wasn’t tricked into signing. Additionally, if the agreement is signed, but the wife is not told that the husband owns a cottage, a judge would likely find the agreement is invalid, as both spouses need to disclose all significant assets so both parties can make an informed decision.
Conclusion:
While no one plans to separate from their partner, the reality is that divorces are a common occurrence. Without a marriage contract, many people stand to lose a huge portion of their assets. A marriage contract can clearly set out rules for what happens during divorce. To ensure the agreement is valid, it should be drafted and witnessed by competent lawyers.
If you have any questions regarding marriage contracts, we invite you to book a 1st free consultation with us: https://calendly.com/sabrina-668/1stfreeconsult
