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Eight scenarios where cohabitation agreements or marriage contracts make sense

by Anita Phillips

Love may be sweeter the second time around, but that doesn’t mean things won’t sour. No one goes into a marriage or committed relationship thinking it will end, but couples should consider what would happen — to their children, home and assets — if the relationship doesn’t work out.

In a recent post, I discussed some myths and misconceptions younger people sometimes have around marriage contracts and cohabitation agreements. In this post, I’ll highlight eight common scenarios that come up with more mature couples and illustrate how cohabitation agreements and marriage contracts can help protect their interests.

1. Purchasing property with a common-law partner

If you and your common-law partner buy a home together but you put down a larger share of the down payment, you should make sure you have a cohabitation agreement saying what happens if you break up. You might want your cohabitation agreement to say that you each get your share of the down payment back before you share the remaining proceeds of sale equally. Alternatively, you might want your cohabitation agreement to say that you own a larger percentage of the home, because you paid a larger percentage of the cost to purchase it. The cohabitation agreement could also include an option to purchase your partner’s share of the home. Putting these terms into a cohabitation agreement when you buy your home can avoid an expensive fight if your relationship ends. 

2. Bringing a home into a marriage

One of the most common reasons couples decide to draft a marriage contract is when one of them owns a home at the date of the marriage. A marriage contract can stipulate that, in the event of divorce, the homeowner retains ownership, and the home will not be shared with their partner as part of their family property. 

If the plan is to share the costs of the home during the marriage, the marriage contract can include terms for the non-owner partner to acquire an interest in the home that increases over time and in accordance with their contributions to the cost of the home — by paying for renovations or helping to pay down the mortgage, for example. 

3. One or both partners have children from a previous relationship

When you live with your partner and their children, there’s a risk of stepping into the role of parent to your partner’s children, whether you intend to or not. Most people want to avoid being obliged to support their partner’s children, if the couple separates, but unless you have a cohabitation agreement or marriage contract that includes terms to that effect, you may be vulnerable to a claim for child support for your partner’s children.

Cohabitation agreements and marriage contracts are not cookie-cutter agreements. The terms of these agreements are customized to address each couple’s unique circumstances and agreed-upon terms for their relationship. It is important to ensure that intentions for support (or not) of your partner’s children are addressed in your agreement.

4. One partner owns a business

When married couples separate and one partner owns a business, that asset becomes part of their family property. If the business has increased in value during the marriage, the business owner may owe a sizable payment to their spouse in the event of a breakup. Sometimes, the business owner must borrow heavily or, in the worst-case scenario, sell the business, in order to make that payment.

Common-law partners can also claim an interest in their partner’s businesses if they can show they contributed to the value of the business. The contribution may be indirect, such as looking after their partner’s children or taking care of the home so their partner could devote more time to their business.

A marriage contract or cohabitation agreement can help protect a business and ensure that its ability to generate revenue isn’t adversely impacted by a separation or divorce. This is especially important to consider when other stakeholders have an interest in the company.

Couples can create provisions in their marriage contract or cohabitation agreement recognizing that one partner is giving up their rights with respect to the business in exchange for enhanced spousal support or the transfer of ownership of a home or cottage, for example.

5. You plan to leave your estate to your children, not your spouse

Let’s consider a scenario where both you and your new spouse have grown children from previous relationships. In these circumstances, people often want to leave most or all of their estate to their children, rather than their new spouse.

The law gives your spouse rights to your estate that could interfere with your plans, unless you and your spouse have a signed cohabitation agreement or marriage contract agreeing that you can leave your estate to whoever you like.

Your marriage contract or cohabitation agreement can also ensure that your spouse is taken care of in the event of your death. For example, the agreement can include terms allowing your spouse to remain living in your home for a period after your death, or that your spouse will receive the proceeds of a life insurance policy.

The important thing to remember is that there are many things you can do in a domestic agreement to protect the estate for your children but not leave your spouse out in the cold.

6. You have adult dependents who rely on your support

I strongly encourage people who have obligations to support dependent family members to consider a marriage contract or cohabitation agreement. If you provide financial support to an elderly parent or adult child who is unable to support themselves, you need to ensure this support will continue after your death, and that your estate plans won’t be disrupted by a claim made by your spouse or former spouse. 

7. One partner earns significantly more 

Something I’ve noticed in recent years is an increase in the number of women initiating the request for a marriage contract or cohabitation agreement. Often, they’re established professionals who have significant assets and healthy incomes, and they want to ensure that everything they’ve worked so hard to build will be protected. 

When one spouse earns significantly more than the other, it is likely that spousal support will be owing by the higher-earning spouse if the relationship ends. In addition, if the higher-earning spouse dies then their estate may owe dependent’s support to their surviving spouse. While there are many circumstances where spousal support or dependent’s support is appropriate and reasonable, couples may want to limit or define possible support obligations in advance in a marriage contract or cohabitation agreement. 

8. One partner has significantly more assets or debts

Couples are often surprised to learn what the law states about how assets should be divided when a marriage ends. In a very simplified nutshell, the law in Ontario provides that married couples who separate will equally share the increases in their net worth from the date of marriage to the date of separation. 

Let’s say you bring $500,000 worth of assets into the marriage and your partner brings $100,000. Over the course of the marriage, both portfolios double. At the time of your separation, you now have $1,000,000 in net worth and your partner has $200,000. In this simplified scenario, you would have to equalize the increases to your portfolios during the marriage, by paying $200,000 to your spouse. For many people this does not sound fair, but in order to avoid this happening to you if your marriage ends, you will need a marriage contract that opts out of the law regarding property equalization on separation.

If you’re planning a trip down the aisle or considering moving in or buying property with your partner and you want to learn more about whether a marriage contract or cohabitation agreement is right for you, give us a call at Morgan and Phillips LLP. We will help you understand the legal implications so you can determine what is best for you and your partner.

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by Anita Phillips

Anita Phillips has extensive experience as a family and estate law lawyer. She has particular expertise in negotiating and drafting domestic contracts and in developing estate plans for clients with blended families and for business owners.