Remove barriers to divorce planning

Most newlyweds don’t realize that, in opting for a life together, they’ve also opted into an intricate legal and financial framework, which includes tax filing privileges, estate rollovers, spousal immunity and—if the marriage breaks down—a default property division regime.

That regime, contrary to popular belief, is not “each spouse gets half.” Even in equalization provinces like Ontario, spouses share post-marriage net worth growth, not pre-marriage net worth (with exceptions for gifts and inheritances). And while people can use marriage contracts to opt out of that regime—and, the rich often do—they can only do it if they know what they’re committing to in the first place.

Legal knowledge shouldn’t be a luxury—so someone should provide a primer.

People renewing their health cards could also be asked to review what happens if you die without a will.

This is where the provinces can help. Much like how drivers are asked their organ donation preferences when renewing their licenses, marriage license applications could require applicants to review a video, infographic or short article outlining what the default property regime is and how it works. This step could help make this kind of discussion between spouses less taboo.

Simple Ontario Equalization Primer

• Determine a spouse’s net worth (assets minus debts) on the separation date (joint property is divided equally)*.
• Next, subtract excluded property (inheritances, gifts [not from spouse], life insurance payouts, certain personal injury settlements).
• Then, subtract that spouse’s net worth (assets minus debt) on the marriage date*.
• Result: a spouse’s net family property (NFP).

Finally, divide the difference between the two spouses’ NFPs by two to find out the equalization payment. The spouse with the higher NFP will owe the spouse with the lower NFP the equalization payment amount. So, if Spouse A’s NFP is $500,000 and Spouse B’s NFP is $150,000, Spouse A will owe Spouse B $175,000 ([$500,000 – $150,000]/2).

*cannot be a negative number

Advisors, too, are well placed to spread knowledge. While clients won’t enjoy discussing a potential split, they’ll be more willing to if a third party presents the facts in a non-judgmental fashion. Give all soon-to-be-married clients a short outline of the default regime (see “Simple primer,” this page). You can bundle information about how marriage will benefit their finances (e.g., access to spousal RRSPs, spousal loans) to make the talk easier.

If your clients disagree with the default method, suggest they draw up a marriage contract. Cindy Scharff, a family lawyer with Gelman & Associates, says a simple agreement usually starts at $2,000 per spouse. If clients balk, there are ways to save fees.

First, provide clients with their full financial picture as of their marriage date— a task already part of your repertoire. In equalization regimes, the more your client can prove she owns on her marriage date, the lower the equalization payment she’d owe her ex (if his net property is lower).

Second, let clients know that agreements can be customized to focus on just one issue. “The narrower an agreement, the lower the cost,” Scharff says. So, if partners have contributed unequally to the matrimonial home purchase, for instance, their contract could state that each spouse is entitled to their portion in case of separation, but that the default regime applies to everything else.

Divorce is an unpleasant subject, but its legal framework shouldn’t be an unknown—after all, no one plans on getting arrested, but many North Americans can recite the U.S.’s Miranda rights. So, until each province’s divorce regime becomes as notorious as the phrase “you have the right to remain silent,” advisors have to make sure clients realize what they’re getting into.

After all, your clients have the right to an attorney.

Agree? Disagree? Respond in the comments or write to melissa.shin@advisor.rogers.com.

Melissa Shin is editorial director of Advisor Group.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.