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Mediating “Prenups” and “Postnups”: Protecting Your Money While Preserving Family Harmony

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The landscape of marriage has changed dramatically over the last few decades.  People are marrying later, deferring children and home ownership until their mid-to-late 30s, struggling with debt, and divorcing in record numbers.

When married people separate, the division of family assets can be one of the largest legal minefields they face.

The Ontario Family Law Act, which governs the division of property on marriage breakdown, provides that all property and debt acquired between the date of marriage and the date of separation is to be “equalized”, or shared equally.[i]

This provision was meant to ensure fairness, and to recognize and compensate both spouses for all contributions to the marriage – both financial and non-financial.  Unfortunately, however, the result can often feel very unfair.

Why?  Because under the legislation, not all property is treated equally.

Specifically, there’s a loophole in the law that can come as a rude surprise:  While separating spouses generally don’t have to share any pre-marriage, inherited, or gifted property with their exes on marriage breakdown, there’s one major exception that people usually don’t know about.

That exception relates to the “matrimonial home”.

Here’s the law:  If you bring equity in a home into the marriage, and you and your spouse are still living in that home on the date of your separation, guess what?  Your spouse gets half the total equity on the date of separation…including half of the equity you built in the period prior to marriage.  And if you inherit or receive money during the marriage and use it to buy or add equity to a matrimonial home (and this includes a cottage – you can have more than one matrimonial home), the inherited or gifted money also goes into the family pot on separation.

This rule can lead to some very unfair outcomes.

Here’s a fictitious scenario I’ve encountered, in one form or another, many times in my practice.  Jane and Bill, who are in their late 30s, receive a loan of $400,000.00 from Jane’s 65-year-old mother to buy a house.  The loan is not properly documented and no agreement is signed.   A year later, Bill leaves Jane for another woman –  and takes $200,000.00 of Jane’s mother’s life savings with him.  He denies that the money from Jane’s mom was a loan, and since Jane can’t prove it, the judge’s hands are tied.

Now imagine that Bill also received a gift of $400,000.00 from his parents during the same period.  Bill could have used that money to pay down the family’s mortgage, but he didn’t.  Feeling ambivalent about his marriage at the time, and having wisely sought legal advice, Bill kept the money invested in a mutual fund, so that it would be excluded from division if and when he ended his marriage.

Thus, as a “reward” for his duplicity, Bill walks away with $600,000.00 – all of his money plus half of Jane’s mother’s money.  On the other hand, Jane still has a $400,000.00 debt to her mother but now only has $200,000.00 with which to pay her back.

Sadly, I see variations on this theme all the time.

The only way to avoid these outcomes is to negotiate a solid marriage contract (or “prenup”/”postnup”) before investing any “separate” funds into a matrimonial home.  Anyone who brings money into the marriage, inherits money, or receives money from family, and doesn’t negotiate and sign a prenup/postnup is taking a massive risk.   And any parent who gifts money to his or her child and doesn’t insist on a prenup/postnup is also taking a massive risk.

But negotiating prenups and postnups can be very thorny.

9675846_sTraditionally, the spouse who wants the contract (or that spouse’s parents) hires a lawyer to protect his or her assets.  That lawyer usually prepares the contract in his or her office, according to the client’s instructions, and then presents it to the less wealthy spouse in a manner that is often perceived as cold and insensitive.  This leads to hurt feelings, ill will, and potentially irreconcilable, long-term family conflict.

A mediator, on the other hand, takes a different approach.  A mediator who is also a lawyer not only knows the law, but can also help the parties negotiate a fair agreement together, on terms that satisfy everyone’s financial and emotional interests, and in an atmosphere that allows each party’s goals and needs to be expressed honestly and productively.  Each party still gets independent legal advice at the end, but because they feel they’ve both had a voice in the creation of the document, the advice is often a ‘rubber stamp’ rather than the first step in an adversarial process.

Study after study shows that parties are more likely to respect and adhere to a contract they’ve both had a voice in negotiating – as opposed to one they feel has been imposed.  As if that weren’t enough incentive to use mediation, the process itself costs a small fraction of the amount people spend on traditional legal processes.  Best of all, a negotiated agreement gives families peace of mind, which is priceless.

Mediation has been used successfully for decades to resolve the legal issues arising from marriage breakdown.   For all the reasons discussed above, it is high time forward-thinking families used this process to negotiate marriage contracts as well.

Rosanna Breitman, B.A., LL.B., LL.M., Acc.F.M. is a partner in a Toronto law firm specializing in Family Law. She is also affiliated with the court-based family mediation clinics in both Toronto and Brampton. Her practice is restricted to family mediation and personal and organizational conflict resolution consulting.  She can be reached at rosanna@torontofamilylaw.com

[1] The discussion in this article pertains only to legally married couples in Ontario.  The scheme for common-law couples differs, and the legislation pertaining to married couples varies from province to province.

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