Marriage contracts protect assets

If your client’s getting married, she may want to create a marriage contract. That’s because in some jurisdictions there’s a default regime for property division between spouses when the marriage ends, and she may not like the results.

In Ontario, spouses can determine their own regime for property rights, support rights, and related issues using a marriage contract, with some exceptions. For instance, spouses cannot lay out issues of child custody and access, and generally do not determine issues of child support in a marriage contract. And they must respect the provisions of the Family Law Act regarding temporary possession of the matrimonial home.

Read: Protecting clients in second marriages

The marriage contract’s an important part of wealth protection and inheritance planning—it can help protect assets from claims by her spouse if they separate or divorce, and helps ensure assets pass to her chosen beneficiaries when she dies. Note, this agreement is only one type of domestic contracts (see “3 types of agreements,” below).

Details of the contract

A marriage contract may be broad or narrow. It may focus more on property or on support issues and can set out different rights of the spouses based on whether someone dies or if they separate or divorce.

Read: Most couples don’t discuss retirement before marriage

Also, it can be especially helpful when one or both spouses enter the marriage with significant assets, such as a house. The contract may state the value of certain assets will not be shared when the marriage ends, and also address the treatment of price gains in these assets and any income from them. And, it can set out treatment of gifts and inheritances from relatives.

3 types of agreements

• A marriage contract is an agreement between two married spouses that may address some of their respective rights and obligations during marriage and when the marriage ends. A marriage contract may address property rights, support rights, and related issues.

• A cohabitation agreement is an agreement between two cohabitees (two people who live together in a marriage-like relationship but are not legally married) that addresses some of their rights and obligations during cohabitation and when the cohabitation ends. This agreement may also address property rights, support rights and related issues.

• A separation agreement is an agreement made by married spouses, typically while separating or divorcing, or by cohabitees, typically while separating. A separation agreement may address property rights, spousal and child support rights, and child custody, among other issues.

The Family Law Act also provides married spouses with a right to share a deceased spouse’s property on death, subject to conditions (see “How to address an inadequate inheritance,” Advisor’s Edge December 2012).

Read: Help clients save for their marriage

For example, instead of making a Family Law Act claim for equalization of net family property on death, a spouse can agree to receive certain benefits under the deceased spouse’s will. This can be useful in a subsequent marriage to protect the inheritance by children from a prior marriage.

Under Ontario law, a court can set aside a marriage contract or declare certain provisions invalid if it doesn’t meet certain tests:

• if one spouse didn’t properly disclose assets or income;
• if one spouse didn’t understand the consequences of the contract;
• or if the contract was entered into as a result of undue influence, mistake or fraud.

A court may also refuse to enforce provisions for spousal support in a marriage contract in certain circumstances, including where they are considered unconscionable.

Read: Protect clients before a third marriage

Warning!

If members of a couple divorce without a marriage contract, they’ll have to follow a default property division regime.