Should you be considering a marriage contract or cohabitation agreement?
A marriage contract is the Canadian name for what most people call a “pre-nuptial agreement” or “pre-nup”, which are popular American terms. A cohabitation agreement can be like a marriage contract in many respects, but it is between people in a relationship with no plans to marry or whose focus is the division of a shared house.
Whether considering a marriage contract or a cohabitation agreement the intention remains the same; the parties want to agree in advance on what will happen in the event of a breakdown of their relationship. The value in such an agreement is much like an insurance policy. You hope to never have to use it but if the time comes when you do then you will be glad you have it. Marriage contracts and cohabitation agreements provide certainty and can simplify a long, complicated and expensive separation process.
Without a marriage contract or cohabitation agreement, the two major legal issues that are often triggered at the breakdown of a relationship are spousal support rights and property division rights. In Ontario, the Family Law Act (FLA) includes common law spouses for the purposes of spousal support rights. It defines a common law spouse for this purpose as someone who cohabits with another for a period of not less than three years, or who cohabits with another in a relationship of some permanence and shares a child with that other person.
It is important to note that in Ontario property division rights are different for married couples versus common law couples. For married couples, their rights are clearly defined in legislation under the FLA. Stated in basic terms and excluding exceptions, the spouse whose net family property is the lesser of their two net family properties is entitled to a payment in the amount of one-half the difference between them. Common law couples on the other hand, do not have their rights defined by legislation but instead must rely on the common law or “judge-made” law for their rights to property related claims against their ex-spouse.
Common Reasons to Have a Marriage Contract or Cohabitation Agreement
Regardless of whether you are married, planning to get married, common law or living together for less than three years, considering a marriage contract or cohabitation agreement might be in your best interest. Below are some common situations when it would be prudent to have a marriage contract or cohabitation agreement in place:
Unequal contributions to a shared home – This issue is most often dealt with through a cohabitation agreement, but it can also be addressed as part of a marriage contract. In this case one party has not contributed as much or anything to the purchase and maintenance of a house the parties share. The other party wishes to protect their interest in the house by explicitly agreeing on what will happen to the house if the relationship breaks down. In addition, an agreement would be useful in this case to confirm what contributions to the house are being made by the other party and whether those contributions affect the ownership interests in or division of the house upon the breakdown of the relationship. For example, the spouse without any ownership interest could be paying the other spouse a monthly amount as “rent”. In this example, it would be important for the parties to agree in writing whether this monthly amount counts towards paying-down the mortgage or simply to cover their share of the living expenses (utilities, services, food, etc.).
High individual net worth – If one or both parties individually own a large amount of assets, they may want to enter into a marriage contract to ensure that those valuable assets and the future growth of those assets remain theirs and theirs alone in the event of a breakdown of the relationship. Assets such as a business, a pension, a house or an investment are all items that a party should make provision for in a marriage contract if they wish for these items not to become part of a division of net family property calculation under the FLA.
Unequal financial positions – If one party is financially supporting the other or plans to financially support the other while they live together, a cohabitation agreement or marriage contract could be used to redefine their support obligations to one another in the event of a breakdown of the relationship. This should be a consideration even if the financial support is only partial or incidentally based on a gap in annual incomes between the parties. As mentioned above, for the purposes of spousal support, the FLA includes common law spouses in addition to married spouses. Therefore, even unmarried couples with unequal financial positions should consider entering into a cohabitation agreement.
Children from a previous relationship – A person with children from a previous relationship getting married to another may want to enter into a marriage contract not only to protect their assets and income, but also to ensure that the transfer of wealth to their loved ones upon their passing happens according to their current wishes. Generally speaking, a marriage contract cannot reach its full effectiveness without a person also having an updated estate plan in place. This includes having an updated will. When there exist children from a previous relationship, the importance of having an updated estate plan is paramount. Without a proper estate plan in place a person’s estate may be divided in a way inconsistent with their current wishes or divided according to the government-made intestacy laws, if they have no will. Further, the terms of both the marriage contract and the will should work harmoniously together. Otherwise, these documents could become sources of confusion and conflict instead of their intended purposes of providing clarity and direction.
In addition, a marriage contract or cohabitation agreement could be used to limit a person’s child support obligation for their new spouse’s children from a previous relationship. Despite not being the biological parent of a child, if a person is found to be acting in the place of a parent then that person could be obligated to pay support for a child.
People regularly enter into a marriage contract or cohabitation agreement before the marriage date or before they start living together. Although, it is important to note that either agreement can be entered into after marriage or while you are living with someone as long as the relationship has not broken down. So, if you are already married or living together then it is not too late. For more information about marriage contracts or cohabitation agreements, please do not hesitate to reach out to me.