Marriage Contract / Pre-nups
If spouses separate and divorce without a marriage contract, their property will normally be allocated according to the laws of Ontario. The laws are complex but, in general terms, they require an equalization of the net family property of the parties ordinarily calculated at the date of separation. The spouses calculate the increase in their net worth since marriage and equalize the difference. There is an exemption for the “value” of property calculated at the date of the marriage in respect of most property. Essentially, the property owned by each spouse at the date of marriage is given a dollar value based on its worth at the date of marriage. The dollar value at the date of marriage is then subtracted from the value of each spouse’s total property at the date of separation.
However, in advance of the marriage, or before separation, couples can enter into a marriage contract – often referred to as a pre-nup – to decide for themselves how their property will be affected. A marriage contract may also deal with other matters such as spousal support.
A marriage contract must be in writing and can be made by a married couple or by those who are planning to get married. The main purpose of a marriage contract is to set out what will happen financially if a couple separates rather than their being bound by the terms of the Family Law Act. There are some restrictions on the right to contract in family matters. For the most part, these restrictions arise in respect of children of the marriage and possession of the matrimonial residence.
Why enter into a marriage contract?
There are generally three reasons why a couple may decide to have a marriage contract. First, a spouse who is substantially wealthy or has an asset base that is increasing in value, may wish to avoid having to account for any increase in wealth on marriage breakdown. When a person has a great deal of money, or expects to receive a lot of money in the future, he or she may want to make sure that any increase in net worth will not need to be equalized. Specific assets can be protected such as pensions or real estate and can be kept intact if the marriage fails.
Second, a marriage contract can be used to establish arrangements in advance for financial support if the relationship ends. For example, one spouse may want to make sure that the other spouse will provide adequate spousal support or child support if the relationship ends. Alternatively, the other spouse may wish to limit the amount and duration of any support paid. Income tax obligations may be a concern that can be addressed in respect of spousal support. Either way, spouses can come to an agreement about support while they are still on friendly terms.
Third, a marriage contract can be used to make arrangements for dividing property and money earned during the marriage or to make special arrangements about particular matters such as partnerships or corporations in which one or both may have an interest. Again, this allows couples to decide on a division of property different from that provided by the Family Law Act and to reach an agreement while they are on good terms.
Limits on marriage contracts
Although spouses can make any kind of financial arrangements in a marriage contract, a marriage contract cannot make any rules about which spouse will get custody of children, or which spouse will have access to children. Also, a marriage contract cannot put any limits on the rights of a spouse to live in the matrimonial home.
Requirements for a legally binding marriage contract
To create a legally binding marriage contract, both spouses must be completely open and honest about their financial situation. This requires a detailed disclosure of their significant assets and liabilities. The contract must be in writing and signed by each party in the presence of a witness. The contract must be entered into voluntarily and not under any duress, and each party must understand the contract.
It is in the interest of both parties that each of them receives independent legal advice. Some aspects of the contract may eventually be subjected to judicial review and in certain areas, particularly where the rights of children are involved, the terms of the contract can be overridden.
While it is the policy of the courts to uphold marriage contracts, practically speaking, it is a good idea that one-sided contracts be avoided. Unfair contracts may tend to create resentments that can contribute to marriage breakdown. Unfair contracts also encourage litigation on marriage breakdown which is the very thing that they are supposed to avoid. Although a marriage contract becomes legally binding once it is signed, the parties can change the terms by further agreement at any time.
Getting legal advice for Marriage Contracts
A marriage contract is an important legal document and it is important to get legal advice for several reasons:
- A lawyer can tell you what rights you normally have under the law and what rights you may be giving up by signing a marriage contract.
- Your contract will be stronger if you and your spouse each consult a different lawyer before signing it. This will prevent one spouse from later saying that they did not understand what they were agreeing to in the contract.
- A lawyer can ensure that the contract is clear and complete. While the failure of a marriage is rarely pleasant for either spouse, a clear and fair marriage contract may make the separation much easier. Since most of the consequences of a marriage contract will only come into play if there is marriage breakdown, once you and your future spouse have signed a marriage contract, put it away and get on with your marriage.
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