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Hope for the best, but always be prepared for the worst. That’s the advice financial advisor Anju Sharma gives to clients who are going to walk down the aisle – especially as it pertains to their finances.
“Marriage is a beautiful partnership that also entails huge financial risk. The moment you get married, all your assets – from your bank accounts to real estate and other investments – become matrimonial assets,” says Ms. Sharma, an advisor at Hunjan Financial Group Inc. in Mississauga.
In the event of divorce, clients risk losing 50 per cent of those assets, along with tens of thousands of dollars in litigation costs, she adds. “So, one should be well prepared if the marriage fails. I always recommend that my clients sign a prenuptial agreement if they’re bringing assets into the marriage.”
No longer reserved for the uber-wealthy, prenuptial agreements have entered the mainstream as an important part of financial planning, in part because drafting them has become more affordable.
“The more complicated the agreement, the more expensive it is, but in general, a couple can get a simple prenup for around $5,000,” says senior divorce lawyer Anna-Marie Musson, managing partner at Musson Morneau LLP in Toronto to whom financial advisors often refer their clients.
When the alternative is paying $100,000 or more to a former spouse upon divorce, spending money on a prenup is an excellent return on investment, she says.
“We tell clients to treat prenups like insurance. We hope you’ll never need to use the agreement, but if you do break up, you’ll be grateful to have it because you have the certainty of knowing which assets will be shared,” she adds. “Couples with properly drafted prenups have a much easier and less stressful divorce than their friends who don’t.”
Recently, Ms. Musson has noticed an uptick among professional millennial couples deciding to enter a prenuptial agreement. Rather than attach negative emotions to the process or the agreement, they treat it like a business deal to help preserve their net worth.
“Millennials have witnessed first-hand the financial and emotional toll on the family of their parent’s divorce and fighting in court. They don’t want to endure that,” she says. “They’re also getting married later, and entering marriages with significant assets like properties and investment accounts.”
When getting married later in life
However, older couples entering grey marriages don’t have the same mindset when it comes to prenups, she says. But with a divorce rate of close to 70 per cent among second marriages, it’s extremely risky for clients to choose not to get a prenup, Ms. Musson says.
“Couples in grey marriages typically have significant assets, which include pensions, homes that are paid off, and investment accounts,” she says.
“Having no protection for these assets causes substantial financial hardship for the couple because they’re now splitting the value of those assets at a time when they have limited earning capacity to rebuild their net worth. So, they are forced to live a more frugal lifestyle than what they planned.”
Not having a prenup can also drive a wedge between parents and adult children, who see their inheritance as being at risk. That’s especially the case with family properties or family cottages. As a result, the adult children and parents often have to come up with the funding to buy out the interest of the new spouse if they divorce.
The bottom line, Ms. Musson says, is that couples who are not on the same page regarding their finances and who cannot have difficult conversations tend to divorce. “These are the couples who need [prenuptial] agreements the most.”
There are multiple factors that determine the extent to which a marital breakdown will affect a particular client, says Rod Tyler, financial advisor with The Tyler Group Financial Services at Peak Investment Services Inc. in Regina.
“These include the province in which it occurs, the definition of common-law marriage, and whether children are involved,” he says.
“Clients who will most obviously benefit from agreements are those with significant family assets and businesses. In our province, that includes farming families with meaningful assets in land and equipment, but it applies equally to other types of successful family businesses.”
Agreements for unmarried couples
Mr. Tyler keeps a list of individual lawyers on hand who are available to advise clients on not only prenups but also co-habitation agreements for couples who are unmarried.
That’s increasingly important as many clients in common-law relationships assume incorrectly that they won’t have to share their assets or property if they separate.
In fact, co-habitation agreements can make sense for myriad reasons, says Naoshad Pochkhanawala, financial planner and chartered life underwriter at Amiko Benefits Inc. in Markham, Ont.
“Whether they’re supporting a significant other, do any sort of co-parenting, plan on purchasing a property together, or are expecting a significant inheritance, clients don’t have to be getting married to enter into a ‘marriage contract,’” he says.
The advantage of doing this type of planning as early as possible is that everyone knows where they stand financially and there are no surprises at the end of the day, says Debbie Hartzman, a financial planner with Hartzman & Associates Inc. at Professional Investments in Kingston, Ont., who holds the certified divorce financial analyst designation
The cons are that it can become contentious if things have not been discussed prior to the new union.
“The parties may find out that they are fundamentally at different ends of the spectrum when it comes to their money and assets, and that can add a layer of stress and tension to the relationship,” Ms. Hartzman says.
While there’s no evidence that having a prenup increases the chances of divorce, Mr. Pochkhanawala has heard some wry lawyers comment that it may, however, decrease the chances of a wedding. Still, he points out to clients that prenups can be customized to their unique situations.
“Prenups are not, and should not be cookie-cutter,” he says. “Like other things, they should be personalized and well understood. The conversation is an important part of the process.”
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