How to Protect Yourself Financially Before Marriage
Often, people planning to get married do not think about how to best protect themselves financially before the marriage. Marriage is intended to be lifelong but the reality is approximately 40% of marriages in Canada end in separation and divorce. You may not want to think of the possibility of the upcoming marriage ending in the future but you should be prudent in planning ahead of time to minimize risk and protect your finances.
If you and your spouse end up separating and/or divorcing, a division of property and equalization payment may ensue. Under the Family Law Act, the net family property (NFP) of each spouse is calculated by finding his or her net worth on the date of separation (the valuation date) and subtracting his or her net worth on the date of marriage, excluding all forms of excludable income or property gained over the course of the marriage. The spouse with the lesser NFP is entitled to one-half the difference between the spouses’ NFPs (equalization of NFP).
You should negotiate and draft a marriage contract, known colloquially as a prenuptial agreement, before the marriage. Think of such a contract as akin to insurance – a plan to protect yourself for the worst case scenario.
A marriage contract may make sense for you, especially if you have more than nominal assets, are entering into a second marriage, or want to protect assets derived from your parents or family. The FLA recognizes that spouses may want to organize the division of assets in their own way. Property set out and agreed upon in a marriage contract can be excluded from a spouse’s net family property should separation occur later.
To be legally binding, a marriage contract must be in writing, signed by both spouses and by two witnesses. Full frank financial disclosure should also be exchanged prior to the execution of the marriage contract.
Note that the statutory scheme regarding net family property and equalization does not apply to common-law couples. If common-law couples don’t have joint legal title to property, there is no statutory protection for the property. Common-law couples could resort to trust law principles that can recognize interests in property based on fairness but this is much more expensive to litigate. Therefore, common law couples should enter into a cohabitation agreement which can become a marriage contract if and when the parties marry.
The matrimonial home is treated differently in regards to marriage date deductions from the NFP calculation. A home that was owned pre-marriage and is the matrimonial home on the date of separation cannot be deducted from the NFP calculation as a date of marriage asset. To be able to have your pre-marriage property deducted as a date of marriage asset, it has to no longer be the matrimonial home on the date of separation. Move elsewhere with your spouse before the date of separation to be able to have your pre-marriage home as a marriage date deduction in the NFP calculation.
Inheritances and Gifts
Inheritances and gifts received during the marriage from third parties are exempt from the calculation of net family property if you are able to show that the inheritance or gift is still in existence at the date of separation. The value of the inheritance or gift at the date of separation will be excluded from the NFP, not the original value (this is true whether the value increases or decreases). An inheritance or gift that is cash should be kept separate so that it is traceable. If the money is placed in your regular bank account, it will be mixed with the rest of your funds as they are spent over time and you will no longer be able to show the portion of the account traced to the inheritance or gift. If the money is placed in a joint account or used to purchase property in both spouses’ names, even if it is traceable, you will only be able to exclude one half as the other half is seen as a gift to your spouse, pursuant to s.14 of the Family Law Act save and except for some exceptional circumstances.
To protect an inheritance or gift from your spouse, you should not put the money towards the matrimonial home and if the inheritance or gift is a home, you should not move into it. You will not be able to exclude the inheritance or gift from the net family property calculation if you use the funds for mortgage payments or renovations on the matrimonial home, or if you use it for a down payment on a matrimonial home.
Note that income from an inheritance or gift (i.e. rental income from a rental property) is not excluded unless the person giving it indicates in writing that the income from the inheritance is also to be part of the inheritance and excluded from the net family property. Otherwise, the income from an inheritance or gift will be included in your date of separation assets.
The pre-marriage value of an inheritance or gift can be deducted from your net family property, as other pre-marriage assets would be as it will not be considered an inheritance but it will be a date of marriage deduction the same as any other date of marriage asset.