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Prenups: a plan for failure or simply smart planning?


Prenuptial agreements have a bad reputation. They come with the connotation that the couple is planning for divorce and therefore they set the wrong ambience for the wedding. Celebrities sign them, rappers rap about them and lots of jokes are made. Most people think of the prenuptial agreement as being stingy and controlling, so that in a divorce, there would be no division of property. However, often the converse is true. Prenuptial agreements can have very generous divisions of property but, the advantage to the prenuptial agreement is the certainty of the division and the great savings in legal fees because the rules of the game are known in advance.

In this article I will focus on marriage but all of the concepts apply to cohabitation agreements for unmarried couples as well.

People often speak of the high cost of divorce actions. The high cost has nothing to do with the actual divorce. In Canada, our no fault divorce laws make divorce quite perfunctory after a one-year long separation. The cost often comes in the division of the property. Thus, if the divorce is easy and the division of property is determined by a prenuptial agreement then the costs are greatly reduced. The stress, anxiety and emotion of a divorce are also greatly reduced.

The Alberta Matrimonial Property Act provides that on separation, a person may take with them what they brought into the relationship and need only divide with their partner the increase in the value of their property. Some couples are generally happy with this division. The problem becomes determining the value of the property that the couple brought into the relationship. A prenuptial agreement has the advantage of including schedules of the property that each person brings to the relationship and thus there is certainty about that issue. If detailed records are not kept and the relationship lasts beyond seven years, the banks will not have records and thus it will be very difficult to re-create the net worth of the individuals at the time of the marriage. Much time, effort and legal and accounting fees will be spent trying to determine the net worth of the individuals at the time of the marriage.

The prime candidates for prenups are:

1. couples entering into a second marriage who have children from prior relationships and who wish to make sure that their respective children will receive assets on the death of the parent;

2. couples in which one person has a business to protect, especially where there is a desire to pass that business on to the children of the business owner;

3. couples in which there is a disparity in the value of the assets owned by each person; and

4. couples in which at least one person is older and he or she may not be able to recover to provide for retirement if the assets are split.

In each of these cases, the couples can be generous with each other on separation or divorce but still achieve the goal of protecting certain assets. Thus, the business owner will say that on separation or divorce, his or her spouse will not be able to claim any portion of the business nor any increase in the value of the business, but that personal assets can be equally split. Successful business owners often have substantial personal wealth and therefore the division of assets may still be generous even though the business interests are protected.

Older persons may have saved prudently for retirement. If they had to divide their assets on a divorce, they might not be able to work long enough to recover those assets. Thus, they may wish to protect their RRSPs, RRIFs, pensions and investments but may be prepared to divide interests in their houses and life insurance policies. The ability to satisfy the goals of the couple with respect to the protection of assets and which assets will be divided is only limited by the couple's imagination.

Don't think of prenups as bad news. Think of them as smart planning. We all buy fire insurance on our houses because that is smart planning. We do not expect our houses to burn down. We prepare the prenup in case of a divorce, not because we plan for divorce to happen.

Doris Bonora is a partner with the firm of Reynolds Mirth Richards and Farmer LLP and practises in the area of wills, estate planning, estate administration and estate litigation.
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Title Annotation:Special Report on Marriage
Author:Bonora, Doris
Date:Jan 1, 2010
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