What is a Cohabitation Agreement and Why Should I Get One?
Pre-Nuptial Agreements are contracts that couples enter into before they get legally married. A Cohabitation Agreement is a contract that couples enter into before they start living together or while they are already living together. The Cohabitation Agreement can also stay in effect if a couple decide to marry later on in the relationship.
Basically, these contracts let a couple opt out of various types of family law as they wish.
In Manitoba there is family law that normally applies when a couple separate, divorce or when one of them dies. These laws cover personal matters such as a sharing of assets on separation or death and spousal support. However couples are allowed to decide that this law will not apply to them, or that only some of the laws will apply to them, or they may want just small changes to the law that will apply to them.
Why enter into a Cohabitation Agreement?
The major benefit to an Agreement is that it should provide clarity and certainty for the couple if they separate or if one of them dies.
So often it is not until after a separation or the death of a spouse that one discovers how the asset division works or that there may be a spousal support entitlement. These nasty surprises or perceived unfair outcomes are what lead to anger, fear and litigation. An Agreement can set out how the assets will be divided (or not divided), what will happen with the marital home and whether spousal support is an option.
Understanding how a separation will work allows the couple to make informed decisions during the relationship. For example, if the wife owns a cabin and it will not be a shareable asset after separation, the husband will only use his own money to do renovations to it if he is prepared to not get any of that equity back. The wife will not use her bonus from work to buy a spousal RSP for the husband unless she intends to gift that money to him and not receive a share of it if they separate.
In the event one of the spouses dies, an Agreement should prevent arguments between the surviving spouse and the deceased’s family as the wishes of both spouses are clear.
Having this clarity and certainty also means that there is less likelihood of litigation after a separation or death.
What Can Go Wrong?
Every family situation is different and it is important to get legal advice before considering whether an Agreement is right for your situation. Generally speaking however there are two major issues to be aware of when entering into a Cohabitation Agreement.
First, the Agreement must be properly done and signed in accordance with the rules of contracts. Both spouses must be negotiating in good faith and providing full financial disclosure to the other. There must not be duress (such as threats of physical or financial harm, or forcing one spouse to sign the Agreement on the eve of the wedding) or attempts to mislead each other. Each spouse needs to have independent legal advice so they understand their rights and obligations as well as the implications of signing the Agreement. The Agreement cannot be “unconscionable”, which in law means that the terms of the Agreement are so incredibly unfair that it cannot be allowed to stand.
If the Agreement is not done properly in accordance with the rules of contracts, there is a risk that one spouse could apply to court for the Agreement to be set aside. Not only does that involve an expensive court case, but also if the Agreement is set aside the spouses are back at square one and bound by the family law they tried to opt out of.
The second major issue to be aware of is that parents have restrictions on their ability to enter into binding contracts with respect to their children. Judges always have the authority to overrule parents. In Cohabitation and Separation Agreements, and in Wills, parents can set out what they have agreed will be the arrangements for their children but either parent (or a guardian in the event of the death of a parent) can apply to court. The Judge can determine what is in a child’s best interests with respect to decision-making, parenting time, guardianship and child support.
What Should Be in the Cohabitation Agreement?
The first thing to consider is that these types of agreements will apply not only if the couple separate, but also in the event one of them dies (unless they choose to word the Agreement to the contrary). When asking the “what if” questions, both scenerios have to be considered.
The first discussion is normally about assets. Generally, the law says that couples only have to share assets they acquired during the relationship, including the increase in value of pre-owned assets. The question for the couple is how much sharing they want to have for assets they acquire during the relationship.
Do they want to share the increase in value of pre-owned assets as the law dictates? What about replacement assets, for example if the wife replaces her pre-owned car with a new car? Is that still exempt? What if she uses the money from the sale of her pre-owned car to buy a painting? Is the painting exempt from sharing if the couple separate?
The most extreme type of agreement would say that there will never be an accounting of assets. If the couple split up, or one dies, each spouse keeps any assets in their own name regardless of where the money to purchase it came from. If the couple choose to buy a car or boat together, they would put both names on it. Otherwise, it belongs to the named owner.
Sometimes the spouses would prefer there be some asset sharing if one of them dies, such as letting the spouse keep the household contents. These wishes can be in the agreement, but also their wills.
Couples need then to talk about the home they will live in. If it will be in the name of only one spouse, will the other have any claim to the home? What if they helped pay the mortgage or put money into renovations? What if the owner of the house dies? Can the owner of the house sell it without their partner’s consent? Couples also have to decide how they will share the bills for the house to make sure the outcome is not unfair.
Most importantly, if the non-owner partner invests a significant amount of money in the home, this must be addressed in the Agreement.
The next big decision relates to spousal support. Will one spouse be in a position of financial dependency? Should the door be open for a claim for financial support after separation? After the death of the spouse with the higher income?
Sometimes couples would like an expiry date in the agreement. If the relationship lasts a long time, perhaps some spousal support or assets sharing is appropriate. Or, the agreement might expire after a child is born to them.
Should I Get a Cohabitation Agreement?
Each family situation is different and everyone’s financial position is unique. There can be complicating factors such as wills and estate planning, designated beneficiaries on life insurance and investments, pre-existing contracts, trusts, survivorships, joint debts, the Homestead Act, pension legislation that will need to be considered before entering into an Agreement, so it is important to talk to a lawyer before entering into a Cohabitation Agreement.
Having an Agreement prepared and signed can cost anywhere from $1,000 to $5,000 depending upon how complicated it is but considering the cost of a years-long, contested separation in the courts, it is a wise investment.