Divorce Proof Your Retirement

Divorces devastate many people’s finances. Yet because it is uncomfortable to discuss, we avoid the topic. Easier for me to write, and for you to read, another article about early retirement health care, safe withdrawal rates or tax planning. No risk there.

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How A Marriage Contract (Pre-Nup) Can Protect Your Retirement Assets from Divorce

The above scenario is an overly simple explanation of how assets are divided after a separation in accordance with the law. This occurs if a marriage contract does not exist. Spouses can contract out of the relevant governing legislation, which determines how assets are split, through a marriage contract.

A marriage contract (prenuptial agreement) is a domestic contract where spouses outline how their assets and income are treated if a separation occurs. Many people are unaware that marriage contracts can be entered into after you are married, so you can protect your family assets even if you have been married for years.

Marriage contracts can be drafted in a number of different ways and your and your lawyer’s imagination are one of the few constraints. Only want to protect specific assets, like your tax advantaged retirement accounts? You can do that.

This is not to say that merely drafting a marriage contract and having your spouse and you sign it will ensure that the contract is enforceable. To best ensure the marriage contract will be upheld if challenged, make sure that both spouses have received independent legal advice and that full financial disclosure has been exchanged. As noted, every legal jurisdiction is different.
How To Bring Up a Marriage Contract With Your Spouse

To be honest, having a talk with your spouse about a potential marriage contract will likely be awkward. Having the talk as early in your relationship as you reasonably can is recommended; the longer you wait the more your spouse may wonder why this conversation is suddenly occurring.

Encourage them to be involved in the drafting and brainstorming of your family’s specific contract. Having your spouse heavily involved makes the contract more palatable on a personal level and has the added benefit of making it less likely to be set aside by the court.

Additionally, focus on the benefits of a marriage contract. Specifically, that a good and fair contract benefits both parties. Contrary to popular belief, a well drafted marriage contract can help protect the lower earning spouse just as much as the higher earning one.

Regardless of the difficulty in broaching the topic with your spouse, I strongly recommend you speak with a qualified family law lawyer practicing in your specific jurisdiction about a marriage contract. Many local bar associations will help you find a lawyer that you can speak to for up to 30 minutes for free, which is well worth your time! If you need further help finding a lawyer, I recommend you follow these instructions.

Ronan Blake is a family law lawyer practicing in Ottawa, Ontario, Canada.
My $.02 on Divorce Proofing Your Retirement

Thanks to Ronan for taking the time to write this informative piece. I appreciate his understanding of the legal aspects of marriage, divorce and asset protection in a way that I don’t. We like to think of our marriages as romantic relationships, but in the eyes of the law they function more like business partnerships. We need to understand and consider this.

More importantly, thanks to Ronan for pushing me out of my comfort zone and forcing me to address this important, but uncomfortable topic. It has forced me to ask three hard questions that many of us should be asking.
Do You Understand Risk and Relationships?

I avoid lawyers and legalese at all costs. That may be a naive way to approach life and relationships. It has worked well for me to this point, but that may represent being lucky with a small sample of key personal and professional relationships rather than utilizing a solid decision making process.

My wife and I do not have any type of marriage contract as recommended by Ronan in this blog post. After reading his post, I’m not sure a marriage contract would reduce the financial risk for either of us.

We more or less entered the relationship on equal footing and were equal financial partners throughout our marriage. I don’t see where the cost and effort of developing an agreement justify the hassle of spending money and mental energy worrying about complicated contracts.

Besides, I prefer to live my life this way rather than involving lawyers to negotiate every scenario. However, I have to acknowledge that this opens me up to unique risks and requires me to answer the next question.

Are You Truly Financially Independent?

Seeing Ronan’s example makes me realize that a divorce is likely my largest financial risk. It would cause substantial financial distress for each of us in the short term.

We have a great degree of financial independence as a couple. Most likely, neither of us would be financially independent if we had to split our assets and support independent lives and households with them.

Regardless of the specifics of your situation and whether a marriage contract would be useful, an important question to ask yourself is whether your financial “independence” is actually dependant on the stability of your marriage or whether each of you is independently financially independent in the event of a divorce.