By Michael G. Cochrane, LL.B. and Nancy Kurn, CPA, CDFA®, JD, MBA

If you're thinking of taking the plunge for the second time, you should consider whether you need the protection of a marriage contract.

A marriage contract is an agreement signed before or after a wedding that provides a private and custom-made set of rules for dividing the couple's property should they separate and divorce or die. In fact, a marriage contract can overlap in many of its functions with a Will. A cohabitation agreement is essentially the same thing as a marriage contract, but it's designed for people who intend to live together—or who are already living together—who wish to set out some rules to govern any separation that they may experience. A cohabitation agreement is automatically converted into a binding marriage contract if the couple gets married. Marriage contracts and cohabitation agreements can also establish some rules and regulations for how the couple manage their day-to-day marriage, not just their separation.

In every province, marriage creates economic partnership, the fruits of which will be divided between the spouses should they decide to separate and divorce—unless a couple agrees otherwise in a marriage contract. A marriage contract allows couples to opt out of provincial law with respect to property.

A marriage contract, if drafted and signed properly, is legally binding. In order to have a properly drafted and executed agreement, you must follow four simple rules

• The agreement must be in writing;
• It must be signed by both parties;
• The signature must be witnessed; and
• There must be full disclosure and honesty in the negotiations leading up to signing of the contract.

Limitations

Generally, two parties can agree to anything that does not violate any law or oppose public policy (interest). For example, contractually encouraging someone to divorce would be against public policy and invalidate the agreement. A marriage contract has several limitations:

• The parties must fully disclose their assets to the other party. Otherwise, one spouse is giving up rights to assets that he or she knows nothing about.
• Child support cannot be limited pursuant to a marriage contract. Anything limiting child support to less than guideline amounts cannot be enforced.
• Any agreement regarding child custody or visitation in a marriage contract is invalid.
• A judge could deem the agreement void based on typical contractual theories such as fraud, misrepresentation, duress or coercion. A unique circumstance with the marriage contract is the timing of the signing of the agreement. If one spouse takes the agreement to the other the night before their wedding, then they could certainly argue that the agreement was signed under duress, or that they were coerced into signing it. To avoid the argument that the agreement was signed under duress, it should be signed long before the wedding takes place. Some would argue at least 30 days and others recommend before the wedding invitations are sent to the guests.
• The marriage contract cannot be unconscionable. If one spouse is left destitute, the court may decide that the agreement is not valid, because it is unconscionable.

Benefits

Marriage contracts are not just for the wealthy. They are particularly useful in second marriages, where one or both spouses have children from a previous marriage.

Mike and Carol are going to be married. Mike is a widower and has three sons. Carol is a widow with three daughters. Both of them have assets that they are bringing to the marriage, including the death benefits they received upon the death of their first spouses. Mike and Carol are contemplating hiring lawyers to prepare a marriage contract to ensure that the assets they received from their deceased spouses will go to their respective children.

A marriage contract has numerous benefits. Some of these benefits include:

1. The certainty it provides as to what happens in the event of a divorce or the death of either spouse.
2. Protecting children from a prior marriage.
3. It is prepared, in theory, when there is harmony instead of at a point when the relationship is very contentious.
4. The parties can negotiate the terms of the agreement; instead of having a third party (a judge) and provincial or territorial laws decide how to divide the couple’s assets.

Challenging a Marriage Contract

If you’re going to have a marriage contract, you should each hire a lawyer to ensure that it is valid and will hold up in court. Do not try to prepare one yourselves!

A marriage contract can be successfully challenged in the following ways:

1. By proving the other party did not fully disclose their assets.
2. In some provinces, by proving that you were not represented by independent counsel. Each party should be represented by his or her own lawyer.
3. By proving that the agreement was unconscionable when it was signed.
4. By proving that the agreement is now unconscionable based on today’s circumstances.
5. The agreement can be challenged based on duress, due to the timing of the signing.
6. It can be challenged on any other typical contractual theory such as fraud, misrepresentation, or coercion.

Additional Issues to Consider

Each spouse should draft their estate plans so that they conform to the terms in the marriage contract. You do not want to force your children and surviving spouse to get involved in litigation involving your estate. The costs could result in everyone getting significantly less.

You may also want to consider using life insurance to replace assets that go to either your children or your spouse. For example: Mike and Carol purchased a new home with the proceeds from the sale of Mike’s previous home. Mike wants Carol to have the home upon his death. He can purchase insurance, naming his sons as beneficiaries, to replace the proceeds from the sale of his previous home.

Case Study: Sarah and Brad

Sarah has a technology business that she thinks is worth approximately $1,000,000. In 2003, it had gross sales of approximately $750,000 with profits of approximately $300,000 (including Sarah’s compensation). The income has steadily increased at about 20% annually. She is about to marry Brad. This will be the first marriage for both of them, and neither of them have children. Brad’s net worth is approximately $50,000 and his annual income is approximately $40,000 and increases at about 3% per year. Should Sarah have Brad sign a marriage contract to protect her business?

If Sarah wants to protect her business and its future growth, then she should have Brad sign a marriage contract. Otherwise, any future increase in the value of the business during the marriage would likely be split between both parties. Sarah must hire an expert to perform a business valuation; better still, she and Brad could jointly decide on the expert that will perform the valuation, or each of them could hire their own expert and then average the two valuations. If this is done, then Brad would have a difficult time challenging the value of the business.