This is the first of a three part series to help individuals prepare financially for separation and the financial planning details involved. Financial Planning is important for any phase of life – whether you are single, married, young or old. A large percentage of divorced couples cited finances as one of the major areas of marital conflict. Individuals have different financial goals, spending patterns and risk profiles, and for two people to agree perfectly on each of these areas requires a lot of understanding from each partner and may in fact never be agreed upon. Even if you think divorce is a remote possibility, to protect one’s self, it is important to have many of the financial planning basics covered. It is advisable to seek advice as well from your family lawyer and financial planner in advance of marriage.
Step 1
Separation preparedness is like earthquake preparedness – you hope it doesn’t happen, but it is best to have insurance in place so that you can deal with it effectively. As stated earlier, many relationship breakdowns occur due to matters related to unmet financial expectations. There is a perception that discussing financial matters before a marriage puts undue strain on the relationship but in reality it may build a stronger foundation if partners understand each other’s expectations before marriage.
A marriage agreement- called a Marriage Contract in Canada and called a Prenuptial Agreement in the U.S. – can identify each party’s expectations and states what obligations each partner will have in the case of divorce. The primary intent of the agreement is to document an arrangement between the couple on division of property. Agreements can be invalidate under certain circumstances so it is important to get professional advice when preparing such an agreement.
Step 2
Of great importance is recording your personal net worth at the time of marriage, and compiling a simple dated list of assets and liabilities backed up by a copy of statements is a good start. Division of property on the event of separation and marriage breakdown usually addresses the growth of assets during marriage or cohabitation. During marriage, gifts, inheritances,insurance proceeds and settlements for damages from personal injuries are examples of property that is excluded from equalization and care should be taken to not co-mingle these assets as it will be hard to separate in the event of a marriage or relationship breakdown. Additionally, where no pre-marriage agreement exists, the matrimonial home is the only exception to the value of assets brought into the marriage and your spouse is automatically entitled to share in its value should the marriage break down.
Step 3
Always have a financial checklist that is well detailed and regularly updated. First of all, make a list of your joint assets and liabilities. This would include records of your joint and singular accounts at your financial institutions including cash/chequing accounts, RRSPs, RESPs, In Trust accounts, TFSAs, insurance policies ( both term and whole life) and a record of any liabilities and terms for loans, mortgages and credit card debt. Records should also be kept of tax returns and an updated will is always recommended. A record of items such as air miles accumulated and any other loyalty cards can also be important to have on file.
Step 4
If you have children, decide child support and custody in the event of divorce (or death) so the courts don’t decide for you. Every child is entitled to financial support, regardless of whether or not parents were married. The payments involved for children are determined by the Federal Child Support Guidelines. This guideline is based on the payer’s income and the number of children involved. The amount is neither taxable to the receiver nor deductible to the payer.
Step 5
Keep records of expenses to get an understanding of your cash flows and what you could afford in a lesser income scenario. It is also important to keep a good credit history with timely bill payments so you can access credit if needed. Ensure you have your own credit card to build a credit history and check with the credit bureaus to make sure there are not any errors on their records. Credit bureaus in Canada include Equifax and Transunion.
Step 6
Possibly the largest asset accumulated by individuals are the pensions and RRSPs earned during the marriage and this is regarded as a family asset and subject to property division rules. Dividing pensions can be extremely complicated and it is highly advisable to accurately track your pension status during marriage and have a good idea of what it means to your future retirement plans. In the event of a divorce, it is highly advisable to seek out a qualified pension evaluator or actuary to work out all the options to consider regarding division of this asset.
I hope this information is useful. Look for Part two which will focus on the language of Separation and Divorce and an overview of the process of dividing assets and protecting ones self as much as possible.
Douglas Eickmeier, CIM
First Vice President, Investment Advisor
CIBC WOOD GUNDY
For more information about Douglas Eickmeier and how he can help assist you please click http://divorceangels.ca/vendor/douglas-eickmeier/?r=7275
