I was like most young people when I got married – no real financial resources and I really had no idea what to expect when I started sharing my finances. In fact, I don’t think I even gave it much thought! Imagine my surprise when I later discovered that financial matters are the #1 cause of marital tension. Now that I have a few more dollars to my name and even more lines around my eyes and gray in my hair, here are the things I would do if I moved in with or married a special someone:
- Talk finances and financial expectations over with my partner before we moved into together (let alone get married!) If the #1 cause of relationship-related nights on the couch is money, it makes sense to see what you’re getting into in advance before deciding to share a mailing address. There are many different money personalities and it is important to know how your future future envisions your financial future. Whose career takes priority? What happens if you have children – not everyone wants the pressure of becoming the sole working parent from that point onward and not everyone is willing to sacrifice a career to become a stay-at-home parent until the kids go off to college. What sort of lifestyle do both of you want to enjoy now, in 10 years and at retirement and what steps and sacrifices are each of you willing to make for this to happen? What are your attitudes on work and lifestyle balances and retirement ages? Any potential future financial obligations on either of your radar screens, such as providing for parents or financing educations for children from previous relationships? Do you want to keep separate bank accounts or combine everything? How do your respective finances look like going to this relationship? A frank conversation now may mean the end of a relationship, but (unless one of you has already completed law school) at least no lawyers will be involved!
- When learning about each other’s financial styles and goals, develop a mutually acceptable game plan for meeting both partners’ needs and addressing potential sources of conflict before they become major problems. For example, spending habits and investment risk tolerance can often lead to friction. I suggest establishing some ground rules (such as what type or what dollar value of purchases or decisions need to be discussed in advance), setting a budget and sorting out financial responsibilities (i.e. how much will each of you commit to future savings) in a way that is both realistic and which both of you can accept. On the other hand, you might discover that you both have similar financial blindspots. If this is the case, I suggest that you look at getting someone else to help you in these areas before you run into problems.
- Do a Cohabitation Agreement / Prenuptial Agreement. Many people don’t think these things are worth the hassle but the courts seem to feel differently so long as each spouse gets independent legal advice, there aren’t any material changes in circumstances between signing and divorce and not too much time has passed since the agreement was signed or updated. Admittedly, these agreements are not iron-clad but the courts are more willing to enforce them than in the past, depending on the circumstances. These agreements should also cover how you plan to distribute your estates at death, especially if you plan on providing for children of previous relationships or people other than your spouse, as this can reduce the chances of your spouse successfully altering your Will. A friend of mine also indicated that he found that getting a Cohabition Agreement done was useful in helping set future financial expections for both spouses. Realistically speaking, these agreements tend not to get done after a couple starts cohabitating (until they set a wedding date) or are married. Some people in common-law relationships without children and two working partners don’t think there are any financial responsibilities after a break-up. Unfortunately, as someone I know recently discovered, this is a very expensive misconception! Most provinces recognize spousal support obligations, allow common-law spouses to claim support from a deceased’s estate and, at the least, may allow common-law spouses to claim a share of mutual property under the law of ‘unjust enrichment.’ Moreover, at the time I write this (June 2011), common-law spouses in British Columbia are poised to get even more rights. It appears likely that these common-law spouses will soon have essentially the same property rights as married spouses which is far easier to establish than an ‘unjust enrichment’ claim. Accordingly, although moving in together doesn’t automatically confer common-law status in most situations, it still makes sense to either get a Cohabitation Agreement done at that point or at least indicate that you will expect to get one done once your relationship approaches common-law status. On a final note, I also suggest diarizing a date to review any Prenup or Cohabitation Agreement after it is executed, as there is a better chance of the agreement being enforced if it is updated along the way. I strongly suspect that a suggestion to review a pre-existing agreement made out of the blue will set off all sorts of alarm bells in the mind of the other spouse in most circumstances. Accordingly, I suggest having a pre-existing date that you have both agreed upon to discuss the agreement and, even better, having someone else contact you about it at that time so that it doesn’t appear like one spouse is suspiciously keen to reopen the agreement!
- Get my Will updated. At this point, your Will is automatically void if it was not done when you were married to your current spouse or the Will contemplates your future marriage. This may change, but the reality is that it is still really important to get your Wills updated. Likely, your old Will is likely out-of-date. Moreover, if you don’t have a valid Will, the distribution formula provided by the government may not match your wishes. It is even more imperative if you have or are planning on having children, as otherwise they will inherit their money at age 19 with no restrictions on what they do with it! You also lose the chance to leave your heirs with a tax shelter as well as an inheritance. A good Will can minimize taxes at death as well as for the next generation as well as providing potential protection to your heirs from themselves, their creditors or from divorcing spouses. It can also be used to provide for a spouse while making sure that whatever is left goes to your other chosen heirs rather than to whomever your spouse decides. In some cases, it might even be necessary to work out an estate plan that gifts outside the Will if there is a chance of a Will fight, which is more common for blended families.
- Review my life, critical illness and disability insurance and change beneficiary designation forms for existing policies, RRSPs, TFSA, RRIFs and pensions, including work life insurance and medical plans. I would want to make sure that I now had enough coverage to provide for my new family. If I am likely to become the sole breadwinner, such as if my spouse wants to have kids and stay at home, I would likely want to increase both my life, critical illness and disability coverage. I would also look at leaving my life insurance to a trust rather than directly to my spouse, as this could make the insurance money go a lot further due to the tax savings.
- If I was the parent of engaged child, I would likely redo my own Will so my child got his or her inheritance in trust, as this may provide more protection than if he or she inherited it directly. If property is kept in a trust, there is a better chance of your children keeping all or more of it in the event of a divorce and if they have creditor issues. I would also likely want my future grandchildren named as potential beneficiaries of the trust or trusts for tax purposes as well. Ultimately, leaving your children’s inheritance to them to a trust that they or another family member can control both provides protection from others claiming a share of the inheritance while also providing a tax shelter that can allow this inheritance to go further.