First you say “Yes,” then you say “I do.” But between those two momentous events, some couples are choosing a third way to seal the deal: signing a prenuptial agreement.
Planning a wedding may leave little time for anything else, but consider this: A prenuptial agreement (also called a domestic contract or a marriage contract) may be as critical a negotiation as the price of food at the reception. And think about this: 43.1% of marriages end in divorce before a couple reaches their 50th anniversary, according to Statistics Canada’s 2011 snapshot on the topic of divorce.
Even couples who live together but aren’t married should consider having a cohabitation agreement. If you do marry, you can convert it to a prenup. Some couples arrange postnuptial agreements, which accomplish the same thing but are signed after the marriage — in some cases, years later.
When drafting and signing these agreements, both sides should have independent legal counsel.
Talking about finances, including how marriage or a common-law partnership will affect your taxes may seem pessimistic because it presumes the possibility of a divorce. But look at it as a form of insurance. People don’t buy a home assuming it’ll fall apart, but they buy homeowners insurance. Safe drivers buy auto insurance and healthy people have health and life insurance. It just makes sense. Prenups protect both spouses.
One way to ease the potential discomfort of broaching the subject is to say that your accountant or legal counsel insists you have a written agreement as part of your financial and estate plan.
So what exactly is a prenup? It’s simply a legal agreement that outlines how you’ll divide your assets in the event of a divorce. And it isn’t just for wealthy people. It works for everyone.
Blending Your Finances
Financial disagreements are one of the leading causes of marital problems. So, it’s important to consult with your tax advisor, banker and legal counsel before you tie the knot to get a handle on your financial, tax and estate planning strategies as a joint household. Here’s a checklist of important steps to consider:
1. Candidly discuss joint finances. For example, how much debt is each of you bringing to the marriage? What about savings? How is your credit rating? The older you are, the more (good and bad) financial baggage you may have.
2. Decide on joint or separate bank accounts — or both. Your banker can walk you through what will be needed to combine checking, savings and money market accounts.
Even if you decide to maintain separate accounts, it’s often helpful to have at least one joint account to pay for shared expenses, such as the costs of a mortgage or rent, household expenses and childcare. This account can be used for your combined needs, and it allows you both to keep track of how you’re spending money.
A joint account can also help avoid trouble and delays in case of death. If a spouse or common-law partner dies and there are separate accounts, the survivor could be unable to access the account until the estate goes through probate. That could take months.
3. Update deeds, wills and power of attorney documents. An attorney can discuss the full array of estate planning tools, such as various trusts, which might be relevant once you’re married.
4. Plan financial goals as a couple. Create an annual budget, as well as a contingency plan in case a spouse gets laid off or becomes disabled. Make sure you have several months’ income saved as an emergency cash reserve. Designate who’ll be responsible for paying the bills and reconciling the checkbook. Also look beyond your current financial situation. For example, discuss what you envision your retirement will look like, and whether current retirement account contributions are sufficient to achieve your long-term goals.
5. Review beneficiaries and the amount of life insurance policies. As your marriage progresses and if you have children, remember to update the beneficiaries of policies as well as retirement accounts. These assets will be distributed to your named beneficiaries, regardless of the terms of your estate planning documents. Coordinate designations with your estate plans. Review how much life insurance you hold. Do you need more to ensure that any children are treated fairly and equally?
6. Check property titles. Jointly owned property automatically passes to the co-owner.
Once you’ve determined how to split assets in the event you separate or divorce, turn your attention to taxes. Among the tax benefits are:
- Spousal credits. You may claim this credit if, at any time in the year you support your spouse or common-law partner, you weren’t living separately because of a breakdown in the relationship, and his or her net income is less than $11,474 in 2017. However, if you claim the family caregiver amount for your spouse or partner, his or her net income must be less than $13,595. The amount is reduced on a dollar- for-dollar basis by the dependent’s net income. This credit could save you as much as $1,745 in federal taxes.
- Transferred credits. Taxpayers whose income is too low to benefit from certain tax credits, may be able to transfer some to their spouses, including the age, pension, caregiver, disability and tuition (up to $5,000) credits.
- Pooled medical expenses. You may claim medical expenses for your spouse or common-law partner when you file your tax return. You may get a bigger tax credit if the partner with the lower income claims all of the medical expenses for the couple. This is because the tax credit for medical expenses is based on a percentage of your income.
- Pooled charitable contributions. You’re entitled to a 15% credit on the first $200 of charitable donations and a 29% credit for every dollar over $200. By pooling your donations together, you can reach the $200 threshold faster. As a first-time donor, you and your spouse or common-law partner may share the First-Time Donor’s Super Credit in a specific tax year. However, the total amount of donations that may be claimed for this credit can’t exceed $1,000. When it can’t be agreed on the amount of the credit that each of you will claim, the CRA may apportion the credit.
- Split pensions. Up to half of eligible pension income can be transferred to your spouse or common-law partner. You’ll both be able to claim the pension credit and tax savings can be significant. Note: You and your spouse or partner don’t have to split the same percentage of pension income every year.
Tax-free rollovers. Designate your spouse as beneficiary of your Registered Retirement Savings Plan and Tax-Free Savings Accounts and then tax-free rollovers will be available after one spouse dies. In addition, when you die, you’ll be deemed to have sold all your assets. That can generate a capital gains tax. If you leave the assets to your spouse, taxes will be deferred until your spouse dies, or sells the assets.
Get Independent Professional Advice
Make certain you discuss all of these issues independently with your advisors before you commit to a life together.