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Do You Need a Prenuptial Agreement? Key Benefits and Considerations Thumbnail

Do You Need a Prenuptial Agreement? Key Benefits and Considerations

Estate Planning & Wills

People who are getting married will typically create a wedding checklist to ensure everything’s taken care of. Venue and catering? Check. Invitations sent? Check. Outfits and decor selected? Check. Prenuptial agreement – wait, how did that get on the list?

Leading up to the exciting day, it’s easy to overlook the reality that marriages could end in divorce. Without a prenuptial agreement (also called a prenup or marriage agreement) in place, it could lead to disputes over financial and other assets. A prenup is a written, legally binding document that a couple signs before they marry. In the event of divorce, a prenup determines the rights of entitlement (e.g., how assets are divided). Understandably, people often hesitate to sign a prenup, and for very good reason. It’s common to think “Who enters into marriage planning the demise of your relationship”? It’s a tough conversation to have, and such a mental block surrounding the sheer idea of having to enforce a prenup while you are blissfully planning your dream wedding. People often feel it assumes the relationship is headed for divorce or treats marriage as nothing more than a business arrangement. That’s not necessarily the case.

Think of it as a form of insurance. When you buy home insurance, you’re not assuming your house will burn down. When you buy disability insurance, you’re not assuming you’ll suffer a major accident. You just want peace of mind knowing that you’re protected if something bad happens.

Benefits of a prenup

A prenup encourages open communication before marriage regarding important life issues. You will disclose financial circumstances (good and bad), major goals, approach to childrearing, etc. You’ll also learn what’s important to your partner and what needs and concerns they may have.

Here are 10 compelling reasons to sign a prenup:

  1. You want to protect your existing assets (e.g., a home, investments, insurance policies, jewelry or other possessions with monetary/sentimental value) and future inheritances.
  2. There’s a significant imbalance in the value of assets each person brings to the marriage. Without a prenup, the combined assets could end up being split evenly (more or less), failing to reflect the notable financial imbalance.
  3. You own or have an ownership stake in a business (especially a family business) or real estate holdings.
  4. You expect to receive a large inheritance or financial gift from a family member, and you want to stipulate how that money will be used.
  5. One partner plans to be a stay-at-home parent who deserves financial recognition for their childrearing commitments, even if they might not be earning income during those years.
  6. One partner (or both) is carrying a large amount of debt into the relationship.
  7. You want to uphold an existing estate plan so your assets are distributed according to your wishes when you die.
  8. One partner (or both) is already divorced and/or has children who may be receiving financial support.
  9. A prenup can make divorce less contentious, facilitate a smoother settlement (which may mean lower legal fees) and ensure a fair distribution of assets.
  10. Divorce is a common cause of financial hardship and bankruptcy, potentially jeopardizing long-term financial health and stability.

In Canada, the laws regarding prenuptial agreements vary by region, so be aware of the parameters and limitations that apply to your province or territory of residence.

Postnuptial (postnup) and cohabitation agreements

Like a prenup, a postnup agreement is legally binding and stipulates how a couple’s assets are distributed in the event of divorce. But as its name suggests, a postnup is signed after getting married. Courts often consider a postnup carefully to ensure validity of the reasons why the couple made this arrangement after they had exchanged vows.

Cohabitation agreements differ slightly. Without a prenup, a divorcing couple typically splits their assets equitably. This default action doesn’t apply to common-law couples with no cohabitation agreement. For example, you’re not automatically entitled to 50% of the shared home, even if you’ve been making 50% of the mortgage payments and covering 50% of home maintenance costs.

Keep all receipts and other documentation regarding home-related expenses, and ensure your name also appears on the title of the home. Alternatively, a cohabitation agreement may clearly (and legally) articulate how you deal with financial issues when together, and what happens to your assets should the relationship end.

In the end, knowledge is always power. Part of our job is to inform our clients of potential risks down the road and then decide together the best course of action for your family.