Just before Christmas, I wrote a blog post about the questions people should ask before getting engaged. I wanted to explore how you can protect yourself from financial problems, particularly if the partnership fails. A friend of mine asked a great question in response to the post: “I’ve heard a lot of people say that in Canada, whatever you have before the marriage continues to be solely yours. Is this correct?”

I used to think that too. In reality, it’s not so simple.

I turned to Jennifer Reynolds, a divorce lawyer and founder of Fresh Legal, to dig into the details of who gets what when a union falls apart. What follows is a simplification for illustration purposes. Please bear in mind that the rules vary from one jurisdiction to another. I strongly recommend that you reach out to a lawyer with experience in marriage contracts for more details.

In general, if an asset has your name on it at the time of marital breakdown, chances are you’ll keep it. However, any appreciation in value from the day you moved in together to the day of your split gets thrown into the distribution pot. Let’s call this the Marriage Pot.

When you decide to split up, you throw everything that you’ve acquired together into that pot. As mentioned previously, you also include any increase in value on the assets that you owned coming into the relationship: real estate holdings, stocks, pensions, and so on.

So on Day 1 of your union, let’s say your solely-held assets were worth $100,000. When you part ways, your assets are now worth $175,000. In this scenario, the additional $75,000 of value would go into the pot for consideration and equalization, which essentially ensures that both parties get their fair share of assets. This process requires a lot of negotiation – who gets what to balance things out – and it can get quite messy if the increase in value is attached to an asset that you can’t easily liquidate, or if one party doesn’t have sufficient cash to “buy out” the other party.

Let’s say Mary owns an investment property and John has a portfolio of stocks when they get married. Six years later, the marriage is in ruins. Mary’s investment house is in a city that has experienced tremendous growth and it’s now worth $125,000 more than it was when she married. John’s portfolio has also grown in value by $65,000. In this scenario, assuming all other things were equal, Mary’s asset is worth $60,000 more than John’s, and she would likely have to pay him $30,000 to balance things out. What if she doesn’t have that cash lying around? Mary might be forced to sell the building in order to pay John his share of the growth, in this example.

What about the matrimonial home?

Let’s consider another scenario. Janet owns a house when she marries James. They decide that the smart thing to do is to live in Janet’s place since she got it for a good price, has fixed it up nicely, and it would save on moving costs.

Unfortunately, a few years down the road, they discover that they are not compatible and decide to divorce. Does Janet get to keep the asset that she brought into the marriage, minus the growth in value, as discussed above? No. The matrimonial home is 100% up for grabs and goes into the Marriage Pot for equal distribution. It doesn’t matter who paid for it initially and who brought it into the marriage; it gets split 50/50.

Do I keep my inheritance?

Maybe. It depends what you did with it. If, after receiving your inheritance, you kept the funds separate from your jointly-owned assets, then you stand a better chance of ensuring that you will keep it. If, however, you took the $50,000 that Grandma left you and used it to pay off your mortgage or renovate your house, then odds are that it will be considered part of the Marriage Pot.

Is a will sufficient when I die?

I used to think that the way to ensure your wishes are respected after your death is to create a will. I even wrote a blog post entitled Where there’s a will, there’s a way to outline the importance of having a valid will. I stand by that advice, but after speaking with Jennifer, I would add that a will isn’t sufficient.

Here’s the deal: a will is one-sided. You can create your will, with instructions on how to distribute your assets, without ever consulting your spouse. As Jennifer pointed out, there is only one signature on your will – yours; you don’t need your spouse’s agreement. Wills can be, and are occasionally, contested.

Is this relevant for you? It certainly is if you have children from a previous marriage and you want to leave them the bulk of your assets upon your death. Here’s the rub: the laws favour your spouse, not your children from a previous marriage. If you leave everything to the kids, your spouse may contest your will. The net result is that money will be spent on the legal fight and your wishes may not be respected if the court sides with your spouse.

What can we do?

In previous posts, I have recommended prenuptial agreements. After speaking with Jennifer, I’m all the more convinced of their utility, and I now refer to them as marriage contracts. Here’s what I learned about marriage contracts:

• As part of the process of drafting up a marriage contract, there is full, financial disclosure. You have to list everything that you own and everything that you owe. Perfect! We should know exactly what we’re getting into before we intertwine our lives with someone else.
• You are required to get independent, legal advice; no sharing a lawyer. That means that each person has a lawyer looking out for their best interests and ensuring that they don’t sign a document that will leave them vulnerable.
• If you do this at the start of a relationship, you are doing it when, presumably, you’re disposed to be fair and thoughtful. If your partner starts to get defensive or behaves in way that you feel is unfair during this process, that’s probably something you should know about him/her before you bind yourself in marriage.
• It adds an extra layer of protection for you since both signatures are on the document. If you agreed that you would keep the house that you brought into the marriage, including its appreciation, and your partner-to-be signed off on that, then it’s harder for him/her to contest it if the marriage falls apart. It’s not impossible, just harder.
• It helps to ensure that you’re on the same page with respect to finances and assets. Note that children are a whole other matter; decisions regarding their care are not addressed in a marriage contract.
• A marriage contract saves a lot of money if you divorce.
• Every marriage necessarily ends with the death of a spouse. At least one of you will have to deal with the end of the marriage, even if there is no divorce.

If the protection of your assets isn’t enough to sway you, consider the costs. Today, a so-called good divorce – one that’s collaborative and uncontested – costs between $5,000 and $10,000, whereas a bad divorce will cost you anywhere from $1,000 to $1,500 per month per person. I know people who have spent anywhere from $25,000 to more than $100,000 fighting their ex. It’s heartbreaking.

A marriage contract, on the other hand, will cost a couple a total of $3,000 to $5,000, depending on the complexity of the situation and the number of assets in play.

This isn’t just about wealthy people anymore; it’s about every day people ensuring that they are on the same page as their partner and protecting themselves.

Plan for the worst and expect the best. But do plan. And if you’re thinking of leaving your spouse, consult a divorce lawyer before you say a word.