Co-Habitation Agreements Work

We plan for vacations. We plan a weekend.

However, many of us don’t plan when it comes to big ticket items, like financial planning when you decide to live with someone.

Why do you need one? After all, you’re both in love.

In this episode of Sara Makes Sense, Sara uses real life examples to walk listeners through the expensive landmines that can await separating couples who have not planned ahead.   

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough:
 Yeah, I'm completely not ready. So let's do this thing.
 
 Sara McCullough: (00:06)
There's a bit of hesitation at the beginning of the appointment. It's hard to talk to somebody else about your money. Part way through the conversation, someone shifts in their chair a little bit away. They don't look at the other person, just at me. And then they say what they want to happen. There's a silence at the end of that sentence, The other person looks just at me and their sentence usually starts with, I don't want that, or I don't see how that's going to work, or that's not fair. This is what love and money sounds like in my office when you're in love. In fact, you're ready to be all in either marriage or common law, you're committed. This is your person. And then one of you, because one person has to bring it up first, needs to talk about what's not in. What they mean is they want to talk about a marriage contract, a cohabitation agreement. Sometimes they're still referred to as prenups. This is beyond an elephant in the room. This is ugly in the middle of rosy perfection. This is doubt hesitation and how could you? before you've even really started happily ever after. Dammit!

Sara McCullough: (01:34)
Don't hit pause because it doesn't end at dammit! If you're single and have stuff and believe that you're someone is out there, keep listening. If you've met your someone and it's getting serious and you want to strengthen your relationship and give both of you the best chance of really, really long term committed, keep listening. If the love of your life dropped it on you, that they want or need an agreement. And you've been arguing back and forth for months in the privacy of your own homes, keep listening.

Sara McCullough: (02:12)
Done well, financial agreements like marriage contracts, cohabitation agreements, or pre-nups. Let each of you understand your own and your others financial position today, and their goals and dreams for tomorrow. You get to agree on how you're going to protect each other. And in many cases, your own and your others' children, if you do separate. And I believe that this conversation had early, can actually decrease your odds of separating in the future. Now that's a beautiful romantic thought. In today's episode of Sara makes I'm talking about the financial and legal agreements that you make before you say I do in whatever form you're saying I do. What to do when you're all in., and some of your stuff is staying out. In the last three episodes of Sara makes sense. We've talked about love and money at the back end, ending a relationship and dividing the stuff.

Sara McCullough: (03:08)
Today, we're talking about love and money at the front end. This is a hard conversation. When my clients get frustrated and upset and they're ready to give up on the whole thing I say to them, it feels hard because it is hard. There's nothing wrong with you or the relationship it's just hard. So, what is a cohabitation agreement or a marriage contract? Both of them cover property rights. Who gets, what if we split? And what did we bring into the relationship? Common law relationships have different legal property rights than merit relationships and location affects your property rights. These laws vary by province for each type of relationship. So why is an uncomfortable conversation at this point in your relationship important? Probably you're thinking can't we just forget the whole thing and move on. Yes, you can. But if you split, you can't do this backwards. You can't do it in hindsight. So, I'm going to use a number of examples in this episode and just a quick reminder that none of the names that I'm using are the names of my actual clients. So, when we talk about that uncomfortable moment where you're thinking, can't we just forget this agreement thing, we're in love. Let me give you an example.

Sara McCullough: (04:47)
Julia owns a business with her brother. Julia marries Steve. The business does well. It's a software company and Julia and her brother are really skilled. Steve has no role in the business shortly after the birth of their second child. Julia realizes that she doesn't want to deal with Steve's alcoholism and cheating anymore. She wants to separate. She's told by her lawyer that the value of the business will be included for property division. Effectively. her half of the business will be divided in half with Steve. A marriage contract could have removed that business from division. Julia didn't have one. However, Julia is a business owner. So, she tried negotiating with her lawyer. She said it felt grossly unfair that she was giving up 25% of the business value to someone who had not contributed to the growth of the business at all. She tried negotiating with her lawyer.

Sara McCullough: (05:44)
In fact, until her lawyer said, you can delay, you can try all the things you just said to me, but your choice comes down to you pay him $300,000 now, or $700,000 later. Those are your only options. In other words, this isn't a fight you're going to win. This is a fight that's only going to get more expensive. So, with the reminder that I'm not a lawyer and that you do need to work with a qualified lawyer to get an agreement done well, if it's relevant to your situation, let's talk a bit about what an agreement can do for you and how you would develop one. So, your agreement clarifies what will happen if your relationship doesn't last. At the time that you are agreeing to come together, and you're very happy as a couple, you're also building an agreement as to what happen if you aren't happy as a couple in the future. In Julia and Steve's case with a marriage contract, Julia could have specified that the value of the business would not be included in asset division in case of the marriage ending. So, what happens if you're living together? I said earlier, property rights are different. Often the property is not automatically combined and divided. Often, if you're coming out of a common law relationship, you take out what's in your name unless it's cloudy.

Sara McCullough: (07:21)
So let's take a look at Bob and Maria, Bob and Maria lived together for 10 years. They never married. Maria moved into Bob's house at the beginning of that 10 years. At the end of 10 years, they decided to go their separate ways. Bob thinks it's his house, he's not talking about paying Maria out for any of it. Well, who contributed what to the house, during the relationship? Who paid for upkeep renovations, all of the things that need to be done when you own a house? Did any of Maria's money build any value in the house? Who wants to figure that out after 10 years, a cohabitation agreement could have outlined how the division of an asset like a house would be dealt with in the case of the end of a relationship? Both of those are hard conversations at the end, but they're oddly harder at the beginning for the reasons I've talked about, it's hard to be happy and talk about an ending. So why are they worthwhile?

Sara McCullough: (08:36)
In my opinion agreements like this do three things. They protect people, particularly kids, particularly adult kids. They can protect businesses, particularly family businesses. They also protect the relationship. Each of you now knows what you own, what you owe and what is likely to happen if you separate. That releases each of you to make decisions together and separately without having a nagging feeling in the back of your mind that sounds something like, if I do this today and we split up later, what if I lose this? Or what if my kids don't get? I said that depending on your situation, cohabitation and marriage contracts are worthwhile. But again, that elephant in the room, they're difficult for the couple. In my experience, every time they bring up feelings of you don't trust me. You think we're going to break up. I would never take that from you. How could you say that?

Sara McCullough: (09:56)
One of the families that I worked with on their cohabitation agreement, it was a difficult process for both of them. And there was a time that they thought seriously about giving up on the agreement because it was causing so much tension. I started working with them partway through the conversation with their lawyers. And so, during our meetings, Angela, not her real name, really clearly said both what was bothering her and what she valued my role for what was bothering her the most was why isn't anyone excited that we're together. We're so happy. And everyone keeps talking about how we have to protect ourselves from the other one. And when they finally got through the conversation and the agreement was drafted and it fit their situation, at the signing in the lawyer's office, Angela said, you're the only one who saw us as a couple. That was so important to us. And it got us through the hard parts. And that's the kicker in this process. You are saying I love you and I want to be with you forever. I want to share my life with you. And I don't want to share that. And we might not be together forever. So, what's good about these agreements. Aren't they very one sided? Isn't there always one person who wants it?

Sara McCullough: (11:27)
Here's why it's good for both of you. You've had a discussion about what's important to each of you. You now have a thorough understanding of your own finances and the other one's finances and their values. Clarity actually gives you room to go do other things, amazing things that can bring you closer together. And it might mean that you never actually have to read that agreement in a lawyer's office down the road. Sound counterintuitive, still not convinced that there's merit in the process. If you have an agreement or you're talking about an agreement and you feel like this isn't what's happening for me at all, hang in for a little bit longer to hear a little bit more about how I work with clients in this space and why I believe it's important.

Sara McCullough: (12:25)
So let's go back to Angela. Angela and her partner, Don had been in a relationship for a number of years, but they had lived in different cities. Then the kids and the jobs changed enough that Dawn was going to move into Angela's house. That's when the cohabitation discussion with the lawyers started and got stuck, and a planning conversation started with me. When I met with Angela and Dawn, the initial piece was getting enough information so that each one could make decisions on what to say in the cohabitation agreement. If you've listened to Sara, make sense before, you've probably heard me say that 80% of the work that I do with clients in a year is connected to income and expenses, money in money out. Angela and Don's lawyers were asking questions about individual contributions to expenses and Angela and Don couldn't answer them because they didn't know.

Sara McCullough: (13:26)
They knew that Don wanted to pay Angela for half of the value of the house so that they were co-owners, but they didn't know how to divide expenses after that because Don's income had changed significantly, and he didn't now know what was affordable long term. Angela was still working. In fact, she was able to work more now that Don was living with her. So, she was able to expand her career because he took over some of the house and family tasks. So, what does that look like practically speaking day to day? So, for Don and Angela, this is where we spent time on regular financial planning, where the conversation sounds like you said you wanted to do this, this, and that. I'm going to work with the resource and the statements that you give me and show you what that looks like. And for Angela and Don, they had a number of goals both personally, together, and for their children. And there was a total of five children between them. So, we did a number of scenarios to prioritize their goals. And at the end of that process, they knew how much to spend, how much to save, how they were going to manage what they wanted for the house and what it could look like when Angela retired.

Sara McCullough: (14:52)
This made their conversations with the lawyers and including the right clauses for them in their agreement so much easier. Now, exclusions weren't exclusions. They weren't, I don't want to share this with you. They were here's how we best protect each other so we can be financially stable, whatever happens. So financially stable for them included being available to their children together or separate.

Sara McCullough: (15:28)
And another note on separate. What if death does you part. In my experience agreements that are done pre-commitment so either marriage contracts or cohabitation agreements work best for the families when the estate planning is done and included in the agreement, why? Because the clients are thinking of about it. The clients are worried about it, and it needs to be planned for, it's not easy planning, it's complex. It needs to be done well, and it can easily get missed. And if the estate planning is done entirely separate from the agreement, you are likely to have clauses that either cancel each other out when you read the documents together or there's confusion over which document should be used in the situation where one partner has passed away.

Sara McCullough: (16:31)
One of my conversations about this with the client got a little heated. This couple came to me for a marriage contract. She wanted it. He wanted nothing to do with it. They also needed wills. In our initial discussion, as I was reviewing their goals and what the next steps were. He got really frustrated with me. He owned a business and we were talking about what he wanted if he were to pass away. And he finally leaned over my desk and in a raised voice said, I told you what I wanted to happen with my business. I also leaned closer and I said, I heard you. And I'm telling you, unless you make specific arrangements and do this other piece of planning, not only will, what you want not to happen, it will tie up the management of your business. I know what you want. I would like you to get it unless you do this, it won't happen. And he leaned back and we continued the rest of the conversation.

Sara McCullough: (17:40)
In my experience, the most effective agreements include an estate section. The ones that don't, the clients aren't happy at the end of the process, these ones do seem to cause division, hurt feelings, and doubts that are not gone at the end of the process. And they're still not done protecting what they've worked so hard on, building a family. While it's tempting to shorten the process and just do the agreement that you need to do today, and the agreement that feels time sensitive, please don't please work all the way through and do that estate planning and talk about what you would want to happen. If one of you isn't here because of death.

Sara McCullough: (18:36)
We've covered a lot in this episode, but we can really boil it down to this. If money is one of the top two reasons that couples break up, reduce that risk upfront, understand your own money, understand your loved ones, money and make agreements. That's what this is about. You've spent months or years getting to know your loved one, get to know their money, get to know your own. We often don't and that's not just because we're defective or flawed in some way. We just don't always know our own money. This is about coming together in the most transparent way possible. If you do, and you work through the gritty uncomfortable stuff now, it's possible that you won't need that agreement because you won't get yourselves into a situation that you can't work through, and that breaks you up down the road. In life we all have pieces scattered here and there, and when you're bringing together, two people, bring your financial pieces together, too. That's really together. From time to time, we need someone who can cut through the noise. Someone who not only gets to know you as a person but can also really show and make sense of your financial plan, and not just the numbers, but truly what the numbers mean for you. You as an individual and you as part of a couple, this relationship, this plan, it belongs to you, not your planner. I'm Sara McCullough, thank you for listening to Sara Makes Sense.

Disclaimer: (20:18)
The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include: Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, and holding an insurance license.