When was the last time you heard an accountant initiating a conversation with a client about the financial and legal aspects of dating, living together, engagement, marriage, separation, divorce and re-marriage?
According to Statistics Canada there are 146,000 marriages each year. Of those 38% of first marriages, and 60% of second marriages will end in divorce. The story these numbers don't tell is the one of the growing number of adults choosing to live together.
Larry Lipiec, a lawyer and author of the new book “I Had Dreams of a Happy House Now I'M A Former Spouse” published by helpmelarry.com, challenges societal taboos by addressing the legal and financial realities of relationships in the 21st century.
He points out that marriage and common law co-habitation are not just personal relationships but under Canadian law are treated as business relationships/partnerships. Lipiec questions “Why then should someone get married or enter into a common law relationship without doing the same due diligence that they would have done before entering into any other type of business relationship?”
Before marriage it would be worthwhile for a client and his/her spouse to sit down and create a financial plan. The plan would give both spouses a blueprint for how they will deal with current and future financial obligations. The financial planning process would enable couples to transition into commingling of assets, financial responsibilities and goals. This process would encourage each member of the couple to have involvement in their money management and financial planning.
During the financial planning process all the assets that both parties bring into the relationship will be recorded. Generally speaking assets brought into marriage are exempt from net family property. I knew this fellow who had $150,000 in his bank account before he got married. When he got divorced 12 years later he could not claim that money because he lost his bank book. Banks routinely destroy their records every 7 years. By cataloguing assets before a marriage in a financial plan and keeping a copy in a secure place, situations like the one mentioned above would be avoided.
If parents buy a home or give a down payment to the kids, the son in-law or daughter in-law will get an automatic half interest in the property. So if a husband's parents buy a house for the couple and the wife's parents give her stocks, if the two separate, the wife gets half the house and husband only gets half of the increase in the value of her stock.
Consider doing a credit check before marriage. In any other business partnership it is wise to know who you are commingling your financial obligations with. I know a story of a woman who married this guy after only dating for two months. Shortly after they got married he convinced her to put her house in joint name. What followed was the loss of her home because her new hubby was in debt up to his eye balls.
Prenuptial Agreements are very important in second marriages. These legal contracts set out what will happen if a marriage goes sour and frees the hand of each spouse when making his/her will. With a pre-nup, assets are labeled as his and hers. It allows spouses to give what they want to each other on death. Without a pre-nup a spouse must give at least half of his or her estate to his or her surviving spouse otherwise there could be a claim for dependant's relief.
If a client moves in with someone who has minor children, he or she could find himself or herself on the hook for child support in the event of a break-up, even though these children are not his/hers biologically. The courts, in most jurisdictions, are primarily concerned that children are not affected financial by the end of a relationship.
If a client's marriage ends it is wise for both parties to create separate financial plans. This will help both parties determine the short-term and long-term financial impact of any proposed divorce settlement.
These new financial plans provide valuable information on financial issues that are related to the divorce, such as the family investment portfolios, RRSPs, dividing pension assets, tax consequences, continued healthcare coverage, RESPs, children's education and weddings and a whole host of other financial considerations.
And, of course, a financial plan is also a tool to help prevent lump-sum-recipient spouses from coming back in the future to request lifetime spousal support payments.
As a client's primary financial advisor if you are not comfortable with starting the conversation about this tabooed subject, perhaps you might want to direct your clients to work with a lawyer or financial planner who specializes in these areas. Or better yet, give those clients each a copy of Larry Lipiec's book for this holiday season. Remember an ounce of prevention is worth more than a pound of cure.