First you say “Yes,” then you say “I do.” But between those two momentous events, some couples are choosing a third way to seal the deal: signing a prenuptial agreement.
Planning a wedding may leave little time for anything else, but consider this: A prenuptial agreement (also called a domestic contract or a marriage contract) may be as critical a negotiation as the price of food at the reception. And think about this: 43.1% of marriages end in divorce before a couple reaches their 50th anniversary, according to Statistics Canada’s 2011 snapshot on the topic of divorce.
Even couples who live together but aren’t married should consider having a cohabitation agreement. If you do marry, you can convert it to a prenup. Some couples arrange postnuptial agreements, which accomplish the same thing but are signed after the marriage — in some cases, years later.
When drafting and signing these agreements, both sides should have independent legal counsel.
Talking about finances, including how marriage or a common-law partnership will affect your taxes may seem pessimistic because it presumes the possibility of a divorce. But look at it as a form of insurance. People don’t buy a home assuming it’ll fall apart, but they buy homeowners insurance. Safe drivers buy auto insurance and healthy people have health and life insurance. It just makes sense. Prenups protect both spouses.
One way to ease the potential discomfort of broaching the subject is to say that your accountant or legal counsel insists you have a written agreement as part of your financial and estate plan.
So what exactly is a prenup? It’s simply a legal agreement that outlines how you’ll divide your assets in the event of a divorce. And it isn’t just for wealthy people. It works for everyone.
Financial disagreements are one of the leading causes of marital problems. So, it’s important to consult with your tax advisor, banker and legal counsel before you tie the knot to get a handle on your financial, tax and estate planning strategies as a joint household. Here’s a checklist of important steps to consider:
1. Candidly discuss joint finances. For example, how much debt is each of you bringing to the marriage? What about savings? How is your credit rating? The older you are, the more (good and bad) financial baggage you may have.
2. Decide on joint or separate bank accounts — or both. Your banker can walk you through what will be needed to combine checking, savings and money market accounts.
Even if you decide to maintain separate accounts, it’s often helpful to have at least one joint account to pay for shared expenses, such as the costs of a mortgage or rent, household expenses and childcare. This account can be used for your combined needs, and it allows you both to keep track of how you’re spending money.
A joint account can also help avoid trouble and delays in case of death. If a spouse or common-law partner dies and there are separate accounts, the survivor could be unable to access the account until the estate goes through probate. That could take months.
3. Update deeds, wills and power of attorney documents. An attorney can discuss the full array of estate planning tools, such as various trusts, which might be relevant once you’re married.
4. Plan financial goals as a couple. Create an annual budget, as well as a contingency plan in case a spouse gets laid off or becomes disabled. Make sure you have several months’ income saved as an emergency cash reserve. Designate who’ll be responsible for paying the bills and reconciling the checkbook. Also look beyond your current financial situation. For example, discuss what you envision your retirement will look like, and whether current retirement account contributions are sufficient to achieve your long-term goals.
5. Review beneficiaries and the amount of life insurance policies. As your marriage progresses and if you have children, remember to update the beneficiaries of policies as well as retirement accounts. These assets will be distributed to your named beneficiaries, regardless of the terms of your estate planning documents. Coordinate designations with your estate plans. Review how much life insurance you hold. Do you need more to ensure that any children are treated fairly and equally?
6. Check property titles. Jointly owned property automatically passes to the co-owner.
Once you’ve determined how to split assets in the event you separate or divorce, turn your attention to taxes. Among the tax benefits are:
Tax-free rollovers. Designate your spouse as beneficiary of your Registered Retirement Savings Plan and Tax-Free Savings Accounts and then tax-free rollovers will be available after one spouse dies. In addition, when you die, you’ll be deemed to have sold all your assets. That can generate a capital gains tax. If you leave the assets to your spouse, taxes will be deferred until your spouse dies, or sells the assets.
Make certain you discuss all of these issues independently with your advisors before you commit to a life together.