When cohabitation agreements are inadequate

Marv and Estelle were as surprised as anyone to find companionship again in their late 60s after losing their spouses. They bypassed marriage out of respect for cherished memories and moved in together.

Their co-habitation agreement set out a 60-40 split of all living expenses and a 70-30 split for travel, country club membership and a kitchen renovation for Marv’s condo where they wanted to live.

Estelle sold her small bungalow, moving from small town to city lights.

Read: Advise common-law clients to plan for split

Things proved happy over the next 15 years. They enjoyed golf, bid euchre at the community centre and trips to California and Italy.

Today, though, dementia is robbing Marv of his dignity: he’s legally incapacitated at 82. Everyone agrees selling the condo, his biggest asset, will cover his specialized care. Luckily, it’s a hot seller’s market.

Estelle digs up the co-habitation agreement and meets with a lawyer. He says she may have no share in the condo: common-law couples do not have the same property rights as married people.

A major difference

Legislation frequently equates common-law with married couples. But the lawyer says property brought into a common-law relationship usually belongs to the registered owner.

Estelle is not on title, and the cohabitation agreement doesn’t mention property rights. So she cannot share in the condo sale proceeds. That leaves her without a place to live, and not enough cash to buy another property or pay rent.

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She explains that 15 years ago, they figured they’d sell when the condo proved too much and downsize to a seniors residence with a meal plan. They agreed – but not in writing – to split the remaining profits.

Marv wanted a simple agreement: his wife’s battle with cancer had exhausted him, and there was no hidden agenda. It was too painful for Marv and as uncomfortable for Estelle to negotiate end-of-life care and death in drafting the agreement.

Estelle wonders, “Where will I live? What can be done to ensure Marv’s care won’t deplete his resources? What will happen to the estate of the first one who dies?”

She needs a place to live immediately, so she moves in with her daughter for several months. Years ago, Marv had executed a simple Power of Attorney-Property while preparing a basic will, naming his son. With this, Marv’s son sells the condo.

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Estelle could sue Marv for ownership share in the condo, which would hold up everything. She doesn’t, and there are no other clear legal alternatives. With little money to fund an uncertain lawsuit, it’s the best decision for everyone.

Fortunately, the graciousness is returned: Marv’s family gives Estelle $300,000 from the condo sale proceeds to fund a solid investment strategy.

Inadequate agreement

Toronto lawyer Leslie Giroday says the co-habitation agreement failed to diagnose inevitable future problems.

“Nobody sat down and coordinated the financial and legal dimensions — and this failure happens far too often,” she says. She adds there’s greater willingness today among lawyers and advisors to co-ordinate planning efforts, which helps avoid such issues.

Read: Getting couples on track

Giroday also recommends that each member of the couple retain separate counsel to ensure their own interests are protected.

Back on track

Marv transitions comfortably into long-term care as the condo sells and closes without a legal battle from Estelle. Marv’s son helps put Estelle on the financial footing he believes his father always intended. The co-habitation agreement certainly failed Marv and Estelle, but with the condo sold, it’s no longer a factor. Everyone is relieved to move on and keep alive happy memories.

As for Estelle’s next move, “There are good reasons for her to consider renting an apartment over buying another condo, even a smaller one,” says Bev Evans, vice-president at Richardson GMP Limited. “She may want to simplify her life and downsize. Emptying a rental apartment will be easier when she dies.”

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Evans, co-author of What Next? Navigating Later Life Transitions, recommends dedicating no more than one-third of the asset to an annuity structure. This allows for client flexibility to change gears or adjust the investment strategy.

“Any financial contracts should be written with clearly articulated beneficiary options,” says Evans. Giroday adds Marv’s son must ensure beneficiary designations for contracts written on Marv’s life remain consistent with his will.

“Be sure to take into account annuities or segregated funds that offer death benefits and designate a beneficiary,” says Evans, who suggests Estelle choose her daughter.

With $300,000 available, Evans says Estelle should invest $200,000 in a traditional income-producing portfolio and put the remaining $100,000 into annuities.

Evans works backward to determine how much to invest by first figuring out how much monthly income is needed: shelter costs for Estelle could eat up almost half of her monthly total. So index these costs to cover rent increases and other growing cost-of-living expenses.

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Since Estelle is 76, Evans recommends an annuity with a 10-year guarantee to provide a monthly income of just over $700. Government pension and Estelle’s modest pension from secretarial work will help top up her bank account for rent, groceries and so on.

As for healthcare, seniors face a conundrum: if they’re healthy enough to live at home, they shoulder more costs, such as in-home healthcare. If they have an assessed medical need that falls under government-provided healthcare such as Ontario’s Ministry of Health and Long-Term Care, most of their care is covered.

Read: Clients unprepared for long-term care: CLHIA

Fortunately, Marv meets all the criteria for provincial coverage and there’s more than enough from the sale of the condo to cover $2,200 a month for his nursing care.

If Estelle wants to live independently in the years ahead, she should budget for a personal support worker (PSW) to help with personal grooming, home-making, social companionship and attending medical appointments. PSWs who work through home-care agencies are bonded, pre-screened and certified. Ontario agencies typically charge blended hourly rates between $20.00 and $30.00.