Thinking About a Marriage Contract or Cohab?

There are many issues to consider when deciding whether to marry or move in with a partner.  One of them is whether or not you want or need a domestic contract.  The following are some thoughts on these kinds of contracts to assist you in your decision.

Many people are afraid of marriage contracts or cohabitation agreements, considering them to be forecasting the demise of the relationship.  I prefer to look at them as a way of getting your financial house in order before you being a new phase of life.  Domestic contracts are akin to a life insurance policy or a will – sensible and valuable wealth management and planning tools that will allow you to deal with future possibilities and permit you to structure your affairs as you see fit.  The best time to plan for the future is when both parties want what is best for the other.  This is when parties are embarking upon the relationship, rather than upon its breakdown.  Upon separation, hurt feelings interfere, and parties are dealing with hindsight rather than foresight as their financial decisions are a “fait accompli”.

The issue of a contract is a delicate one.  It forces a candid and honest discussion about money because spouses must disclose their income, assets, debts and liabilities to each other.  It requires spouses to discuss their future plans and expectations, including such questions as: will you each be financially self-sufficient or do you anticipate forming one financial unit? what if one spouse stays home to care for children? do the parties’ support or property entitlements change if the relationship lasts five years? ten years? twenty-five years? do spouses want the same result if the relationship ends due to separation or ends due to death? do you share the house value equally even if one spouse owned it before marriage or one spouse contributed more to the house than the other?  People are marrying later in life, once they have already accumulated wealth.  Similarly, parties entering into second marriages may want to allocate wealth to their children, rather than sharing same with a spouse upon relationship breakdown.  What if one of the spouses works in or has shares in a family business? Or expects to receive a large gift or inheritance? What if one spouse has significantly more debt than the other? Domestic contracts can address all of these issues and more.

In Ontario, marriages are deemed to be a form of economic partnership. As such, at the end of the marriage, under Ontario law, the spouses have a right to share in the wealth generated during the marriage. This is accomplished by a process called equalization under the Family Law Act (“FLA ”).  Equalization is a sharing of wealth, or the growth in value of assets, but not the assets themselves. Nothing changes ownership nor do married spouses acquire an ownership interest in each other’s assets simply by virtue of the marriage.  Married spouses (both same sex and opposite sex) will equalize property unless they enter into a marriage contract which says otherwise (known as a “prenup” in the United States).

Common law spouses, however, are not covered by the equalization scheme. Title (ownership) will dictate division of their property, subject to certain trust claims that can be made.  Common law spouses can enter into a contract called a cohabitation agreement in order to structure their financial arrangements both during the relationship and upon its breakdown.

What can be dealt with in a marriage or cohabitation agreement?  Parties can contract around ownership and division of property, spousal support and any other matter in the settlement of their affairs as well as the right to direct the moral training and education of children.  Spouses cannot resolve custody of or access to their children in a marriage or cohabitation agreement, as such issues are determined based on best interest at the relevant time.  In addition, married spouses cannot contract out of their equal rights to possession of the matrimonial home.  It should be noted that cohabitation agreements do not expire upon the marriage of the parties to the agreement.  Rather, the cohabitation agreement becomes a marriage contract and its terms survive in full force and effect.

A common property provision contained in a marriage contract deals with the matrimonial home.  That is because, for married spouses, the asset the most affected by the equalization scheme is the matrimonial home.  Spouses will enter into a marriage contract in order to ensure a date of marriage deduction for the matrimonial home.  This deduction would otherwise be lost as a result of the operation of the law such that the entire value of the matrimonial home (and not just its increase in value) would be shared.  Since spouses are entitled to deductions for the value of other property being brought into the marriage, such that only their increase in value during the marriage is shared, parties consider it only fair to provide the same treatment for a matrimonial home brought into the marriage.

In order to be binding, a domestic contract must be in writing, signed by the parties, witnessed and supported by proper financial disclosure.  Although not mandatory, independent legal advice is crucial.  One lawyer cannot represent both sides.  With each party being represented, and the contract actively negotiated between counsel, the contract will not be one-sided.  Future challenges to the agreement are less likely to succeed.  It will be more difficult to make out a claim for duress or undue influence and courts will tend to assume that the parties understood the nature and consequences of the agreement into which they have entered if they are represented.

Please feel free to contact me with any questions about this material, or any other family law query either by telephone at (416)306-1742 or by email at [email protected]. I would be pleased to assist.