Protecting clients in second marriages

“All you need is love” is probably not what Beatle Paul McCartney hummed after his $50-million divorce from Heather Mills in 2008. In hindsight, he also needed a prenuptial agreement.

According to the latest Statistics Canada research, 43% of marriages are expected to end in divorce before the 50th wedding anniversary. In a 2009 study by Dr. Anne-Marie Lambert of York University, of those individuals facing divorce, approximately 70% of men and 58% of women will remarry. Remarriage is more common among immigrants than Canadian-born citizens, and in Quebec, remarriage has become a minority phenomenon because of a preference for cohabitation.

A divorce can lower personal wealth, so creating a strategy to preserve individual wealth for those embarking on a second marriage is even more important, as their first marriage has likely eroded their net worth.

Fortunately, most individuals who are willing to say “I do” a second time are more cautious and in turn, open and pragmatic about exploring “what if” questions with their financial advisors.

Kathryn Jankowski, vice-president and financial divorce specialist at T.E. Wealth in Toronto, says most people lose assets or access to children as a result of divorce.

“You’re already talking to someone who’s gone through a period of loss,” she says. “They’re more prone to want to protect what they rebuilt or maintained. A first-time married couple probably doesn’t have anything, so they’re starting on equal footing.”

Protect premarital assets

According to Dr. Lambert’s study, second remarriages are at higher risk of dissolution since partners who have gone through a divorce once are more accepting of using this form of resolution again. (Dr. Lambert also noted, however, that remarriages that endure often outlast a first marriage.)

As the possibility of a divorce cannot be ruled out, your clients should draw a strict line between personal premarital assets and family assets to ensure individual wealth is not further compromised in the event of separation or death. Make sure clients document all their premarital assets and do not commingle them with family assets.

This can be more challenging than people think, says Jonathan Ruben, a Toronto-based chartered accountant and CFP. Even minor contact with family assets can put premarital assets at risk.

For example, if one partner had rental property or a family business prior to the marriage, those assets can form part of family assets if any of the associated maintenance costs, such as condo fees, are paid for by income generated during the course of the marriage.

To keep the property separate, your client should use pre-marriage income, such as that from a solely owned investment portfolio, to support the property or business.

Safeguard against an unfair split

For most people, the family home is their largest lifetime purchase. Yet in second marriages, partners often contribute funds unequally to a home purchase. Jankowski suggests some tactics to ensure each partner gets proportionate entitlement according to his or her premarital contributions.

To help provide for a proportionate division of the home (e.g. 70% owned by one partner, 30% by the other), such an arrangement should be clearly stated in a marriage contract. The couple should also consider registering the ownership of the home as tenants in common, rather than joint tenants.

As tenants in common, when one spouse passes away, his or her share of the home does not automatically go to the other spouse. Instead, the share can be given to an alternate person such as a child from a first marriage or an elderly parent. The proportionate ownership of the home should also be stated in the deed on the home.

While this is not a bulletproof approach to preventing a partner from making a disproportionate claim for the home, it is a precautionary measure Jankowski uses personally and recommends to her clients.

Gene Coleman, a Toronto-based family lawyer and principal of the Gene C. Family Law Centre, says these precautionary measures are good steps, but should be done in conjunction with independent legal representation.

The Family Law Act has provisions governing division of the matrimonial home. Proper legal guidance and representation helps to ensure any contracts the couple draws up are enforceable.

Be fair

If conditions in the marriage contract are considered to be unfair, particularly to the economically disadvantaged partner, it risks being changed by a judge, warns Coleman. Therefore, including provisions that do not economically deprive either partner will strengthen the contract.

Coleman points to a recent marriage contract drafted by a colleague in an attempt to insulate the husband from a spousal support claim. The contract stated the husband had to contribute a certain amount into a spousal RRSP every year to help with his wife’s “financial self-sufficiency.”

There’s no guarantee this arrangement won’t be changed by a judge, says Coleman, but by taking steps to build his wife’s financial self-sufficiency, it may take some pressure off on the need for spousal payment in the future.

This is a no-lose strategy: if the marriage lasts, both partners can enjoy the spousal RRSP. If it dissolves, the wife is in a position of greater financial self-sufficiency that may help alleviate the need for spousal support later.

Coleman stresses the contract must be negotiated well in advance of the wedding. Otherwise, it’s possible the contract may not be upheld later, because the more economically dependent party could argue he or she felt pressured to sign.

What happens next

Whether or not your clients have enacted wealth protection strategies, after a marriage dissolves, an advisor’s next step is to create a new financial plan. By taking divorced clients through financial scenarios and future projections, you’re putting them in the right frame of mind to move past a difficult period, says Jankowski.