(June 2008) Second marriages, an inheritance from your grandmother, or sizeable retirement assets are a few of the many reasons why more and more Canadians are signing on the prenuptial dotted line.
Prenuptial arrangements, while not yet the rage, are becoming more and more commonplace, explains Jim Stoffman, a Winnipeg-based lawyer with 34 years of family law experience. Since the Divorce Act was passed in 1977, Stoffman has noticed a consistent and persistent increase in the use of prenuptials among his clients.
“Prenups are becoming more common because society is becoming more aware of an individual’s rights,” says Stoffman. “And people are realizing that marriage is not a one-size-fits-all proposition.”
Stoffman believes that advisors who have clients entering a relationship where one person owns property, has an inheritance, or has amassed assets should consider having a discussion about prenuptial agreements.
Under current legislation, most assets accumulated during the marriage (and in some provinces, after a certain period of time of cohabiting) are deemed to be subject to division should a divorce occur. These assets must be shared evenly with a 50/50 split, either in value or in kind. While property is governed by distinct provincial laws, it is also subject to court scrutiny and can also be divided (either with a payment from one party to the other or through sale of the property and then division of the assets).
“The biggest issue is that most people don’t realize that the division of property assets is legislated,” explains Wade Walters, CFP with W.H. Stuart & Associates in Victoria, B.C.
“People are marrying later, which means they are going into the [union] with RRSPs, assets, pensions and other investments that they consider ‘mine’, but the court might not agree.”
The biggest problem, according to Walters, is that while courts are only interested in dividing the assets and growth accrued during the marriage, many couples do not keep records of what they owned before they got hitched.
“If a couple was married 10 or 12 years they probably didn’t keep documentation of who came into the marriage with what assets,” explains Walters. “Then, when the courts go to divide the estate, all assets — even those not accrued together — are thrown into the same pot. It’s very messy.”
Stoffman says, despite the negative impressions surrounding prenuptial agreements, people are turning to these arrangements because they provide an opportunity to talk about a taboo topic: money.
“When these discussions take place it shows what a unique situation we are in [as a culture]. People are prompted to declare what they view as the financial worth of the other, and this [type of discussion] can take on a whole life of its own,” explains Stoffman. “People get to drill down to the core values that drive one another — core values that are often intentionally not spoken about during the courting stages.”
From Stoffman’s perspective, prenuptial agreements are being used as “a way of making more informed decisions about their life.”
On many occasions, discussions prompted by a prenuptial agreement can lead to the dissolution of the relationship before the marriage even takes place, explains Stoffman.
Since money can sometime make or break a marriage, advisors should talk to their newlywed clients about prenups. Janet Freedman, a Toronto-based CFP, says sometimes clients might be better off hammering out financial details before going to a lawyer, as the legal profession doesn’t always look at the long-term issues. “Advisors can be less nitpicky,” she adds. “You can protect the important things, but you don’t have to get too carried away.”
She admits that it can be difficult to talk to a couple if both are clients, but if she’s only responsible for one soon-to-be spouse, she says she “might be a bit more blunt.”
Of course, advisors can’t give legal advice, and a lawyer will have to be called in at some point, so if you can find an advisor-friendly lawyer it might be best for everyone to work on a prenup together, says Freedman.
Stoffman’s approach to this topic is to first ask if both parties in the relationship have individual, independent representation. “This is the cornerstone of any good contract.”
Then he asks his client to think about the dissolution of the current relationship through a lens of a few stages — short term, medium term, long term and “till-death-do-you-part.”
“Most people, when asked what they expect after the termination of the relationship in the short term, do not expect a lot,” explains Stoffman. “It’s when you get to the other phases that things become cloudy.”
By having discussions about assets and retirement plans and lifestyle choices — all prompted by the prenuptial dialogue — people have a better chance of a successful relationship,” says Stoffman. “It shows how well two people can negotiate, communicate and resolve tough issues that crop up in relationships.”
Under the law, all assets accrued over the course of the relationship need to be divided evenly. However, this rather simplistic formula is not always easily in practice. Walters recalls one case where the husband of a divorcing couple received a portion of his salary in the form of stock options. “At the time of divorce, he wasn’t in a position to divest those shares. The question, then, became, how do you value those shares? Are the shares valued at market value? At the price he paid for them? Or are they valued when they are liquidated?”
The reality was the shares, at the time of divorce, were worth a fraction of what they had been worth when issued. Any financial advisor would have urged the shareholder to stay the course, be prudent, and wait for the stock to rise before divesting. But in a divorce proceeding, these decisions are taken out of the hands of the advisor or the shareholder and put into the court’s trust. “Assets get divided and people have to come to terms with downsizing and diminished borrowing power, not to mention dealing with potential support payments,” says Walters.
Stoffman believes that for many couples, the prenuptial agreement is the first time they have engaged in a “me-versus-you type of discussion.”
However, he also believes that the advantage to this is that people who are willing to talk about sensitive and difficult topics will also be capable of finding common ground. He adds that, based on his personal experience, “people treat themselves and others in a much kinder manner” when dealing with difficult matters in a state of compassion and love. “People are much more fair and generous regarding what will happen to their spouse during a separation when they are in love than when they are racing for the door.”
While Stoffman admits that prenuptial agreements are not suitable for everyone, he is surprised that more couples do not consider this course of action, particularly considering more than one-third of marriages will end in divorce before the 30th anniversary, according to Statistics Canada.
“People don’t want life to be governed by a piece of paper — a manifesto — but a good prenuptial is a document that is entered into willingly by both parties, with independent representation.
“It’s a document that provides protection to personal assets and yet considers the contribution of both parties. “The best prenup is one that each party puts in a draw and doesn’t look at or think about again,” says Stoffman. “The reality is you can always change it, if both parties agree, later on down the road.”
While Walters does not currently work with a particular lawyer when dealing with prenuptials, Stoffman — with his 34 years of experience — admits to having long and mutually beneficial relationships with a variety of professions, including financial advisors.
“We work with a whole host of financial advisors, accountants, chartered business evaluators, forensic accountants, and everything in between,” he says. “This is because a prenup involves so many different aspects of the law,” of business and of planning that creating professional relationships benefits all involved — particularly the client.
“While it’s not suitable for everyone,” reiterates Stoffman, “if you have something worth protecting then you should consider it.”
Filed by Bryan Borzykowski, Advisor.ca, email@example.com