Why reality dictates the need for pre-nuptial agreements and secured loans
“Till death do us part” is not the sacred oath it used to be, with predictions suggesting 40% of those married will divorce before they turn 30.
So what does this mean for the broken-hearted couple’s assets? And what should parents do to protect their family money in case their son or daughter experiences a painful break-up?
Planning for the worst requires tact and sensitivity from an advisor but Kathryn Del Greco, vice president and investment advisor, TD Wealth, said measures need to be put in place early when romance and optimism is strong. After couples fall out – often bitterly – it can be too late.
Del Greco said: “You don’t want to go into this with a pessimistic attitude but the realities are unfortunately a number of marriages don’t work out.
“Before the marriage occurs, one of the most common legal documents between spouses is the pre-nuptial agreement, which is something we would encourage if there is a large pool of assets.”
A “pre-nup” outlines how money, property and assets will be divided in the event of a divorce. While parents don’t set these documents up, they can encourage their children to obtain legal advice on how to best establish one.
Del Greco said: “This is the first thing that should happen at the outset, specifically when you are speaking about advisors’ clients who have a business interest or have large real estate assets and there is inequality between the two children.”
She added that the stigma around organizing a “pre-nup” is less of an issue these days but that it depends on how an advisor positions it.
She added: “ Each individual will take that differently but it’s becoming far more commonplace and I think it can be presented in such a way that it can be quite practical, and it is certainly a way to identify before the marriage contract if there’s going to be a problem down the road.
“And I would think that if someone was going to challenge the intention of signing this, that means there needs to be more conversations around the intentions of the marriage.”
Another issue that needs to be dealt with is trusts. If parents own a property they’re not living in and are willing to have their child and partner live in it, the parent could implement a “fully discretionary trust”, which would stipulate under what conditions the property can be used and would stay in control of the trustee (the parent). In the event of a marriage breakdown, the property then wouldn’t be split between the child and the spouse.
Del Greco said: “In this day and age there is a lot of real estate investing and speculation, and if the children were then to move into that, you would want to makes sure you retain control of that property and it doesn’t fall under the matrimonial home.”
However, she added that by far the most common issue when it comes to parents is when they help their children get a head start with a down payment on a house. She said this is probably 90% of where issues potentially arise if they suspect the marriage won’t work or they simply want to be practical.
To avoid having their money sink away in a divorce because it’s part of the marital property, parents can make a formal “secured loan” to their child, which is secured against the property with a clearly defined payback schedule, rate of interest and date when it will be paid back. In the case of a divorce or separation, the loan should be excluded because the money has been documented as a loan, not a gift.
Alternatively, if a parent wants to give a gift of cash to a child - but not for buying a home – they could ensure its safety through a “deed of gift”. Drawn up by a lawyer, the gift wouldn’t be considered family property and would be protected in the event of a divorce or separation.
Del Greco said: “Given what real estate prices have become and affordability, it is the common thing. It’s a very kind gesture to help your children out and let them enjoy the benefits of your contributions but do it in a way that is not going to compromise that asset should an eventual separation or divorce occur.”