What is a marital property agreement?
A marital property agreement is an agreement between spouses or individuals who are planning to marry that sets forth the terms of their property rights during their marriage or at the time of divorce (or death) . Although there are many possible scenarios, the most common would involve the future spouses establishing their respective rights during the marriage and/or at the time of divorce or death when one spouse has significant premarital wealth.
Types of marital property agreement
There are two main types of marital agreements that can help regulate the division of even the most complex or simple property – the prenuptial and postnuptial agreements. A prenuptial agreement is entered into prior to the marriage taking place and a postnuptial agreement is entered into after the marriage has already begun. Parties may also enter into "separation agreements" after the marriage has broken down completely. Although the postnuptial agreement and separation agreement often function to divide property in anticipation or as the result of a marriage breakdown, a prenuptial agreement can be used during the course of a marriage, but the parties to a prenuptial agreement must do so knowing of the potential for an early marriage breakdown.
The primary function of the prenuptial agreement is to protect the legal rights of the marrying parties by clearly setting out the ownership interests of each of the parties. The very nature of the prenuptial agreement forces parties to fully disclose their assets before they marry. Otherwise, the prenuptial agreement is not valid. In Canada, once parties have signed a prenuptial agreement, a court will not interfere with its provisions, even if one of the parties to the contract feels that it has become unfair due to changed circumstances. Courts will set aside an agreement where parties have not made reasonable financial disclosure. An agreement can also be set aside if the party seeking its examination into its validity can satisfy the court that the terms of the agreement are unconscionable (i.e., it is manifestly unfair).
A postnuptial agreement is an agreement that the parties enter into after the marriage has taken place. It can concern the division of property, decisions regarding debts and the custodial arrangements of the children. In Canada, the law regarding the validity of postnuptial agreements is not as clear as the law regarding prenuptial agreements. The only Canadian decision on the enforceability of a postnuptial agreement set out the requirements for an enforceable agreement. All conditions must be satisfied, including the party seeking to set aside the agreement having had full knowledge of the others property and financial position at the time he or she agreed to the terms of the agreement. He or she must also have been represented by independent legal counsel or waived that right and the agreement must be fair to both.
Requirements for a legally valid marital property agreement
In order for a marital property agreement to be valid and enforceable, the agreement must first satisfy certain essential legal requirements. In addition to the substantive requirements of honesty and fairness that we discussed in the previous section, there are common legal requirements. Marital property agreements must be in writing. While it is true that a partner could voluntarily transfer ownership of property without an agreement saying so, a contract for the transfer of real property must be in writing to be enforceable (by either a partner). A partner may determine that they do not want to own property any longer and instead convey their interest to the other partner, but absent a legal agreement that outlines the intent to transfer the property from one partner to the other, an enforceable contract does not exist.
A marital property agreement must have legal consideration to be enforceable. For example, in the context of a divorce, one spouse has the ability to transfer property to the other as part of a legal arrangement. The benefit for the spouse transferring the property is that they then have fewer assets to marshall in a divorce settlement. The benefits to the spouse who receives the property is in having ownership of a particular asset without having to go through the often necessary but sometimes contentious processes of (1) dividing jointly owned property into separate property, (2) determining the ownership percentages of complex assets, (3) finding a buyer for such an asset, and/or (4) actually selling the asset. Thus, the action of transferring an interest in property involves the alteration of rights and obligations, and the exchange of property, and can be undertaken as part of a valid marital property agreement.
In many jurisdictions, marital property agreements should be notarized. However, if notarization is not possible, several courts have held that notarization is not needed if there is sufficient evidence of the existence of the agreement, such as affidavits, deposition testimony, and documentary evidence.
Pros of a marital property agreement
A marital property agreement, or "marital estate protection agreement," can provide you and your spouse with many benefits, both during your life and in the event of divorce, death or disability. Specifically, a properly drafted and implemented agreement will:
- define the parties’ obligations toward each other with respect to their assets and debts;
- identify the beneficiaries of the parties’ individual and shared estate; and
- set forth the percentage of ownership that each party will hold with respect to their jointly titled assets.
Without a marital property agreement, disputes between spouses regarding each party’s legal and equitable interest in the property may not be resolved until costly litigation occurs. In the absence of agreement and consensus, a court may be forced to apply the laws applicable to unmarried persons (as opposed to application of the laws of marriage), or may simply be unable to resolve the issue itself. The lack of clarity with respect to property ownership, debt obligations, management of assets and other financial issues can result in major frustrations within your marriage or serious estate matters upon your death. Such frustrations and complications do not result from well-drafted marital property agreements, which are tailored to the specific needs of you and your spouse.
Cons of a marital property agreement
Marital property agreements can be an effective tool for couples who want to protect their premarital property or assets they may bring to a marriage. However, as with most tools, there are potential drawbacks to consider. Such agreements may create an emotional distance – not only for one spouse, but for children from a prior marriage – if the steps taken in your 50s or 60s appear to show that you’re planning for not making it to your 70s.
And the need for creating a marital property agreement can sometimes counteract the very reason why you’re planning for the future in the first place. Arrangements that seem simple can become complex fairly quickly: It’s not uncommon for people to purchase something as a couple , but then later divide it simply between them when they divorce. Creating a prenuptial or postnuptial agreement, however, can divide whole ownership of an asset that can’t be split in two.
Also, depending on your state’s laws – and the requirements for what needs to be included in the agreement – the drafting of the marital ownership agreement can create an undue and potentially negative burden. For example, some states require couples to thoroughly disclose their finances to each other before they create an agreement. Couples who haven’t already discussed their finances with each other may now have to do so: awkwardly and in a non-clinical fashion.
Creating a marital property agreement
With the understanding that the decisions relevant to the agreement should be made by the parties themselves, and without coercion from outside influences, the steps required to create a marital property agreement include the following: Discussing and evaluating the potential avenues for agreeing to asset division, taking into consideration the type of property and any particular needs of the parties or their family; Having an attorney draft the property exchange agreement; Meeting with the attorney to discuss concerns regarding the draft and the need for changes to the agreement; A second meeting with the same attorney to sign the documents if there are no major changes to be made to the agreement; Or hiring two separate attorneys to review the agreement and then signing the documents. If there is any suspicion of unequal bargaining power, if either party is under duress or unable to competently sign, if there are contingent provisions in the agreement that cannot be agreed to without duress, or if there is any contractual speculation, a court will most likely view the marital property agreement as non-enforceable.
Marital property agreement examples
To better understand how marital property agreements function, it can be useful to consider some real-world examples.
Jennifer and Nick were both in their late twenties when they met. Nick was the son of a successful attorney and Jennifer came from a wealthy family, so they had a lot of money to protect from one another. They both wanted a prenup, but Nick was too embarrassed to tell his parents. So Jennifer designed an agreement that stipulated she would receive $1 million in the case of divorce. During their marriage, they paid off all student loans and bought a $300,000 home with a 40-acre lake. When they finally divorced, Jennifer received her full $1 million. If she had not specified an amount, Texas law would have made the marital property agreement invalid and forced them into longer, costly litigation.
A big issue for Alice and Brad was that they both came from second marriages. Her ex-husband was a successful businessman whose business nearly went bankrupt. Brad’s ex-wife had racked up hundreds of thousands of dollars in debt. That convinced them to get a prenup that kept their finances separate, with no inheritance or alimony for either of them. After the settlement, Brad filed a suit against Alice for receiving more than her 50% allotment of marital assets according to state law, despite their contractual agreement. The court sided with Alice since their agreement was legally binding. That would not have happened if the agreement had not been formalized through a lawyer and signed by a notary. The prenup did not extend after death, so the inheritance went to Alice’s two children and left nothing for Brad, whose two children were then sued by Alice’s children for the property they received from her. That is why creating separate wills for each spouse is so important. Inspired by these case studies, most people want to create their own marital property agreements as soon as possible.
Marital Property Agreement FAQs
Frequently asked questions about marital property agreements:
I have heard this referred to as a prenup or a post-nup, what is the difference and does it matter?
A simple way to look at it is a prenup is an agreement that is entered into by parties prior to marriage. While many couples refer to such contracts as a prenup, in Ontario we use the term marriage contract instead of prenup. A post-nup refers to an agreement that is entered into by parties after their marriage. There is no difference in the substantive law, regardless of what you want to call it.
Do we have to use lawyers to prepare the agreement for our situation to be legally binding?
No, what is required is that the agreement be in writing, signed by both parties and witnessed. However, in order for the agreement to be binding on both parties, it is important that both parties have independent legal advice. It is not sufficient that only one party retain independent legal advice. Furthermore, if you are not the party who prepared the contract, you will also need to have a neutral lawyer explain the agreement to you before you sign, to ensure you clearly understand the terms of the contract. The reason to get independent advice is that the court will look at more than just whether something is fair at the time the agreement is signed. The court will also look at whether there has been a material change in circumstances that warrants departing from the terms of the agreement. In other words, even if you entered into a contract that was fair at the time, if something unexpected happened, the circumstances may have changed such that it is no longer fair and you can ask the court to change the terms of the contract to make it fair.
What happens if my spouse refuses to provide financial disclosure to me?
If your spouse refuses to provide the financial disclosure you need to obtain independent legal advice, you will be unable to sign a marriage contract that is enforceable . This is because you will not have sufficient information to understand the true impact of what you are signing and therefore not enough information to understand the risks you are accepting.
Is there a time limit on when an agreement can be signed with respect to the date of separation or divorce?
There is no time limit and it is not necessary for a marriage contract to be signed at any particular time. It can be signed at any time during the marriage while the couple is living together. However, the advantage to entering into an agreement more shortly after your marriage than later on is that the court will not be as likely to say that you ought to have known what it was going to cost you to live independently before marriage if you enter into the agreement shortly after tidying up the details of the marriage. Whereas, if the agreement is entered into several years later and immediately before separating, it may be viewed as an attempt by the party to determine what the minimum they would need to support the other spouse would be and not sufficient to be binding on the other party.
Is an agreement binding forever? What happens if the circumstances change?
The agreement is certainly binding but not forever. It is also not sufficient to just show that something has materially changed, the change must be such that it would be unconscionable to hold the parties to the agreement. An example of what would be unconscionable would be if the parent of one of the parties dies shortly after the agreement is signed, leaving their son or daughter the bulk of the estate, such that going from the financial position at the time the agreement was made, to the financial position after the inheritance would leave them in an even better position than before the marriage or the same position as before the marriage. In that situation, it would be patently unfair to enforce the agreement. Otherwise the test is stricter than just some sort of change.