How a Prenup Protects Your Money (and Heart)

Popping The Real Question: Should You Have a Prenup?

Suggesting a prenup may feel awkward or even scary. But it can actually be a symbol of mutual respect for each other's best interests — now and in the future.

So your partner popped the big question and you’ve said “Yes.” Congrats!

But before heading to the altar, consider getting on the same page about who gets what if your happily ever after doesn’t work out.

A prenuptial agreement, or “prenup,” is a legal document that specifies what happens to your property, debts and other financial obligations if you and your significant other part ways. This can remove a lot of the friction in a divorce — and be more economical for both parties in the long run, says Paul Riley, managing director of the Riley Divorce and Family Law Firm with multiple locations in Ontario.

While planning for a future separation might feel unromantic or even downright pessimistic, it can actually promote financial transparency in your relationship and provide peace of mind as you prepare to combine your lives.

How prenups work

Whether you’re living with a partner, engaged or already married, you can put a legally binding contract into place that spells out who gets what in the event of a separation or divorce.

A cohabitation agreement, prenup and marriage contract are different names for the same document; they’re just drafted at different milestones in a relationship, Riley points out.

Ideally, you’d get a prenup, file it away for the next 30 years and never need it, Riley says. But if promises are made about how things will be handled and there’s nothing in writing to prove it when the relationship ends, you could be headed for a drawn-out court battle.

“And that is what gets terribly, terribly expensive,” Riley says, adding that he’s seen weeklong family law court proceedings reach $150,000 or more in legal fees. “I think it makes sense to spend $3,500 and get a [cohabitation] or prenuptial agreement done. And I think whoever you’re partnering with should be okay with that. And if they’re not … that is a red flag.”

What to include in a prenup

Your first step in getting a prenup is having a clear understanding of how your province’s family law treats certain scenarios in a divorce, says Natasha Knox, a certified financial planner and founder of Alaphia Financial Wellness in the Greater Vancouver area. Without an agreement in place, the provincial family laws where you live will determine how things are divided up if your marriage breaks down.

Here are a few key items to address in a prenuptial agreement:

Joint and individual property. Couples might enter marriage with assets of their own that they want to protect in a divorce. A prenup can specify how that property should be split — or what items are off limits. The prenup should also spell out what happens to property and assets acquired jointly during the marriage.

“Property” could include:

Real estate.
Furniture, heirlooms or other personal effects.
Jewelry.
Pension accounts.
RRSPs.
Investments.
Cash.
Bank accounts.
Canada or Quebec Pension Plan credits.
Pets.

Debt. If you bring debt into your union or plan to accrue it jointly, you’ll need to agree on how that debt is treated in a divorce. For instance, if one partner has significant student loan debt, the couple might agree that they’re solely responsible for repaying the loan. Check your individual credit reports to ensure there are no errors or major debts that you haven’t shared with your partner.

Inheritances. Typically, money or assets you inherit from someone are protected if you’re named as a direct beneficiary. However, be careful that you don’t commingle money from an inheritance into joint financial assets or ventures, otherwise, that money could become marital property in a divorce.

Riley sees it in his practice time and again, often with devastating results. He recalls a past client of his who inherited a cottage that had been in his family for generations. Without a prenup in place, the cottage was considered another matrimonial home in the client’s divorce.

“After 120 years in the family and a short marriage, this guy had to divvy up his family’s cottage because it wasn’t protected in the form of agreement,” Riley says.

Spousal support. According to the federal Divorce Act, spousal support is often requested to:

Pay a spouse who lost their ability to earn income during the marriage (e.g. leaving a career to raise children);
Compensate a spouse for ongoing childcare above and beyond child support; or
Help a spouse who encounters financial hardship due to an impending divorce.

Some couples stipulate they don’t want spousal support in a divorce, but if one spouse encounters a job loss or a cut in income later on, they’ll have a harder time getting spousal support if it’s not in the prenup, Riley says.

“You will have to try to bring what’s called a change in circumstances type of application to the court to say, ‘Hey, when I did that, this was the situation and now things are drastically different and I need a little bit of support.’”

Business ventures. Without a prenup in place, business owners who get a divorce may be forced to liquidate or sell their business to satisfy the divorce settlement. Even if your business is profitable and successful, the absence of a prenup could put the business in jeopardy and destroy years of hard work and future earning potential.

Awkwardness fades, finances are forever

Suggesting a prenup to your partner may feel awkward or even scary. However, having the conversation well before you marry can reveal valuable information about how your partner handles money — something that will be essential to the health of your relationship moving forward.

Before getting a prenup, each spouse should consult with their own lawyer for legal advice, Knox suggests. Having your own legal counsel not only protects your interests if you split up, it also ensures you cover all the bases in a prenup, including providing a full disclosure of all financial assets and liabilities, Riley adds.

Strive to decouple your emotions from the conversation and decisions at hand: A prenup shouldn’t be about greed, suspicion or planning for failure. It should be a tangible symbol of mutual respect for each other’s best interests — now and in the future.

DIVE EVEN DEEPER

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