Despite high divorce rates, people still can’t help but fall in love. As advisors, it’s your role to protect clients in case their relationships don’t work out.
In Ontario, family law stipulates that all property accumulated during the marriage, and the increase in value of any property owned prior to the marriage, is to be shared equally between spouses if they divorce. For common-law couples, assets are usually divided according to who owns what, but since it is easier for partners to claim a share of assets in the other person’s name if there is a separation.
To get around these legal outcomes, couples can enter into a marriage agreement if they are going to get married, or a cohabitation agreement if they will live common law. Here, we’ll collectively refer to them as domestic agreements.
What do domestic agreements protect?
These agreements let couples plan not only how their assets will be divided in the event of a separation, but also what should happen if one of them dies while they’re still together.
Their assets may be kept completely separate from the other, or the couple can agree to share only some assets in the event of separation. People who are part of a family enterprise may be inclined to keep their shares separated from their spouses, but agree to divide other assets, such as a home or savings.
If the couple will be purchasing a residence or a cottage together, but one makes a greater contribution to the purchasing price, the domestic agreement may divide that asset proportionately upon separation. For example, if Spouse A contributed 60% and Spouse B contributed 40%, Spouse A would be entitled to 60% of the value upon separation.
Domestic agreements also protect spouses in the likely event that one predeceases the other. The agreement can govern the right to occupy a residence that may be in the name of the other, the payment of the expenses related to that residence, and other cash flow issues that may result from someone’s death. Some couples plan to keep all property separate if their relationship ends by a separation, but to pass on certain assets to the other if the relationship ends as a result of death. In some cases, the couple may set up trusts to distribute wealth to their children.
4 ways of negotiating
1. The traditional model: Traditionally, the lawyer for one spouse generates a first draft of the agreement based on instructions from his or her client. That draft is given to the other spouse and his or her lawyer, thus starting a negotiation. This model works well for fairly simple financial situations.
Pitfalls to this model include the likelihood that the spouse on the receiving end of the draft could be hurt and insulted by the proposals. This can happen when the first iteration of the agreement is too one-sided, or when the couple didn’t spend sufficient time discussing a balanced approach before the first draft of the agreement was completed.
Additionally, the ensuing back and forth between the lawyers is generally costlier than resolving issues in person.
2. Collaborative negotiation: This is an emerging trend for negotiating domestic agreements. Before anything is drafted, the parties and their lawyers meet collectively to create the framework for their life together and the contents of the domestic agreement. Only when both parties are satisfied with what has been discussed does the drafting begin.
An advantage of this model is that face-to-face discussions, with lawyers present, tend to be more balanced. Even when an agreement was requested by one spouse only, the involvement of all parties in the pre-drafting discussions tends to generate balanced agreements that both spouses can live with.
This method may not be useful for couples whose financial situation is simple and can be dealt with in one draft. Or, if they have already had several discussions about the contents of the agreement they may not need to review these issues with lawyers before the first draft is generated.
3. Mediation: In this situation, following a respectfully facilitated discussion that incorporates the input of both spouses, a domestic agreement is then drafted and each spouse receives independent legal advice.
Some couples prefer this approach because they fear that involving lawyers too early in the process could add a dimension of acrimony.
If one party lacks the financial awareness to be able to properly advance their ideas, however, the mediator should consider involving the lawyers in the mediation discussions rather than waiting until after the agreement has been drafted. But clients that select mediation rather than lawyer-assisted negotiation may resist getting lawyers involved during the process, so it will be up to the team to agree on the best time to involve them.
4. Co-mediation: This fairly new model involves two mediators/facilitators at the outset, and is particularly useful for older couples that wish to co-ordinate family law planning and estate planning for children from previous relationships.
A domestic agreement will address the couple’s wishes for how they want to organize their financial affairs in the event of a separation, or death during their relationship. Given the interplay between family and estate laws, families that have sizeable or complicated estates would be wise to involve both family lawyers and estate lawyers to mediate the terms of the domestic agreements, as well as an accountant or tax lawyer as necessary.
Couples with simple estate planning needs, however, may not want to incur the added cost of having estate lawyers present during discussions about the domestic agreement’s contents.