A marriage contract can often be an essential component of estate planning. Often, the need for this contract and related discussion arises during a consultation with a client when the children of the first or second generation in a successful small family business begin to marry and/or establish families of their own, particularly where those children are also beneficiaries of a discretionary family trust that holds common shares in the family business. Those generations that contributed to the family wealth often come to require our services with the goal to protect assets from claims under the Family Law Act, R.S.O. 1990, c. F.3 (“FLA”), in the event of a marriage breakdown by the spouses of subsequent generations.
The treatment of the family home is often a central consideration when considering the appropriateness for entering into a marriage contract. If a family home is a “matrimonial home” for purposes of the FLA, it will be treated differently than other property if there is an equalization of net family property in the event of marriage breakdown. A “matrimonial home” is any property in which one of the spouses has an interest that is ordinarily occupied by the spouses as their family residence at the time of separation. There can be more than one matrimonial home. For example, if the spouses jointly own a primary home and one spouse also owns a vacation property such as a cottage, each property is a matrimonial home provided the other components of the definition are met. Seasonal use of a recreational property such as a cottage will usually qualify as “ordinary occupation” for this purpose.
When married spouses separate or when one spouse dies, either spouse (or the surviving spouse in the case of the death of a spouse), can make a claim for an “equalization of net family property”. The equalization is effected through a combination of a cash payment and/or asset transfer, known as an “equalization payment”, from the spouse who had the greater increase in net family property during the marriage to the spouse with the lesser increase in net family property during the marriage. The equalization payment equalizes the increase in value of property during the marriage, but it does not physically divide property. The amount of the equalization payment is 50% of the difference between the two changes in net family property, often referred to as net worth. For example, if Tom has an increase in net worth of $200,000 and Sally has an increase in net worth of $70,000, Tom makes an equalization payment to Sally of $65,000, which is 50% of the difference between $200,000 and $70,000.
A noteworthy exception to the general rule is when a matrimonial home is brought into the marriage and also owned on the date of separation. In this circumstance, the FLA does not permit a deduction from net family property for the value of the matrimonial home on the date of marriage, effectively equalizing the equity on the date of separation, as opposed to the increase in the equity during the marriage.
Let’s apply this reasoning to an actual situation. Assume Bob owns a home worth $1 million on the date of marriage, and it is a matrimonial home. Bob and Shirley also have investments of $100,000 on the date of marriage. Neither spouse has debts. Accordingly, Bob has a net family property of $1.1 million on the date of marriage and Shirley has net family property of $100,000 on the date of marriage. Bob and Shirley separate after 8 years of marriage. Bob owns the same matrimonial home as on the date of marriage, but it is now worth $1.6 million. Each spouse’s investments have grown to $200,000. Neither Bob nor Shirley has any debts. Therefore, Bob has net family property of $1.8 million on the date of separation, while Shirley has net family property of $200,000 on the date of separation. The growth in the value of Bob’s net family property is $700,000, while the growth in Shirley’s net family property is $100,000.
If the matrimonial home was treated the same as any other property, Bob would owe Shirley an equalization payment of $300,000, being 50% of the difference between $700,000 and $100,000. However, because Bob owned the same matrimonial home on both the date of marriage and the date of separation, its value on the date of marriage is not deducted. That means Bob has net family property of $1.7 million, as opposed to $700,000, and in fact owes an equalization payment to Shirley of $800,000 as opposed to $300,000. It is worth noting that if Bob had sold the original home after the date of marriage and the spouses were living in a different matrimonial home on the date of separation, the date of marriage deduction for the value of the original home would be permitted, and the equalization payment would be $300,000.
These differences in outcomes illustrated in the above example may seem unfair, especially to a spouse who is bringing a previously owned home into the marriage. Addressing the imbalance of how the home will be valued and divided upon marriage breakdown is often one of the central reasons for a party to decide the necessity of entering into a marriage contract as part of estate planning particularly for blended families or those entering into subsequent marriages.
Aubrey Sherman is the managing partner at Sherman Law LLP in Kitchener, Ontario. His practice focuses on family law, estate planning, and estate administration. The team at Sherman Law LLP in Waterloo Region has over 40 years of experience providing clients with creative and innovative solutions. If you wish to discuss your family law or estate planning matter in further detail, please contact our office to arrange for a consultation. We can be reached by phone at 519-884-0034 or by email.