DO I NEED A COHABITATON AGREEMENT?
What is a Cohabitation Agreement, which used to be called a Pre-Nuptial Agreement?
A Cohabitation Agreement is a written contract between two people in contemplation of their common-law relationship or marriage which states that they agree to alter how the law regarding common-law or marriage will apply to their assets. Currently, when two people live together or get married, any assets they accumulate during their relationship are shareable if they separate. In addition, should one of them die, the law states how the assets are to be divided if they do not have a Will or if the Will does not adequately provide for the other partner. A Cohabitation Agreement allows the couple to decide how their assets will be divided upon death or separation.
Why a Cohabitation Agreement?
If one or both people have assets that they have accumulated prior to their relationship, a Cohabitation Agreement can be used to simply identify the fact that those assets were pre-acquired, and in some cases, agree on the value of those assets. This type of Cohabitation Agreement can by used by younger couples to identify assets and indicate whether those pre-acquired assets will be dealt with in a different manner than is set out in the law. For example, if the wife owns a business on the date of cohabitation and the parties were to separate ten years later, under the current law, any increase in value of that business would be shared between the parties when they separate.
Also, if the business owned by the wife undergoes a change, for example, if she sells that business and buys another business of the same type, the new business is now an asset purchased during the relationship and possibly can be shared in its entirety should the parties separate. A Cohabitation Agreement can clarify what the parties intend, which might be that her business or any replacement business retain its character as being a pre-acquired asset. The parties would also choose whether or not they would like the increase in the value or decrease in the value of that business or of any replacement business to be shared if they were to separate.
Another common scenario is when the parties are entering into a second relationship and each have adult children from their previous relationships. In this fact situation, the parties may have each acquired assets during their lifetime that they want to leave to their respective families. It is quite common in this situation for a Cohabitation Agreement to state that the parties will not share their assets if they separate or claim assets from the other’s Estate if one of them dies.
In addition to deciding what the couple wants to do should they separate, couples often give consideration to what would happen should one die before the other. As in the case of the second relationship scenario discussed above, where both parties have adult children, the couple may decide that the survivor can continue to live in the home that is owned by the person who died. In this case, the couple will often make arrangements in the Cohabitation Agreement as to how long one of them might be allowed to live in the house after the owner dies. Typically, the couple would agree to an appropriate period of time for the widowed spouse to get his or her affairs in order and find reasonable accommodations.
In other cases, they may choose to have a clause in the Agreement which allows the surviving spouse to purchase that house from the deceased spouse’s Estate. With second relationships, a Cohabitation Agreement can be used to clarify what will happen with a jointly owned asset. For example, the parties may choose to each sell their own home that they had acquired prior to the second relationship and to use the proceeds from the sale of their respective homes to purchase a jointly owned home. They could then say in the Agreement who would be re-paid, how each would be re-paid and the formula for calculating re-payment in the event of a separation or in the event that one person dies.
Who needs a Cohabitation Agreement?
Anyone entering a common-law relationship or getting married where one or both has accumulated assets on their own or people entering into second relationships should consult with a lawyer to determine whether or not a Cohabitation Agreement would be appropriate in their circumstances. A couple that has no assets in their respective names and has no children from previous relationships may not need a Cohabitation Agreement.
Do you need one?
To determine whether you need a Cohabitation Agreement in your specific circumstances, it is appropriate to sit down with your partner and review whether either of you has any pre-acquired assets and/or one or both of you have children from a previous relationship and how you would like those assets dealt with if you separate or upon death. Once you have had preliminary discussions with your partner, then one or both of you will want to consult a lawyer to get advice on your specific circumstances. During a consultation, you should expect to receive:
– an explanation of how the family property and Estate laws apply if there is no Cohabitation Agreement;
– suggestions to deal with your assets, if separation occurs or when one of you dies; and
– advice on other issues to discuss with your partner.
There are situations where a Cohabitation Agreement is not required. A lawyer is only able to make this determination after meeting with you and reviewing your specific circumstances. In addition, it is very important to be aware that a common-law relationship may have an effect on your Will and a marriage cancels any existing Will unless your existing Will was made in contemplation of your relationship or marriage.
What if you want to change the Cohabitation Agreement at a later date? Are you stuck with what you signed?
If your Agreement is never changed, it remains a binding legal document. However, you can always change an Agreement by having an Amendment prepared or change the character of an asset by changing how it is owned. For example, you may have stated in the Cohabitation Agreement that a pre-acquired asset, such as the farm, would remain a pre-acquired asset even if it was sold and a new farm was purchased in its place. Twenty years into your relationship, you and your partner decide that you want to remove that restriction and should the two of you ever separate, based on the work and effort both of you have put into the farm, that it would be shared equally. You would consult with a lawyer to determine whether an Amendment to the Agreement had to be prepared or how best to alter that clause in your Agreement.
Another situation might be in the case of a house that is owned by the wife and where the couple has decided to live. This scenario could be a situation where each of the partners had accumulated assets prior to the marriage and had decided that, although they were going to live in the house owned by the wife, it would always remain her house and should she die, the husband would be allowed to live in the house for a specified period of time. At that time, he could purchase the house from her Estate or move out of the house with the money from the house being given to her children. Five years into the relationship, the couple may have altered their asset portfolio so that the value of the house is being left in investments to the wife’s children and have agreed that the house should become jointly owned property with the husband. Once again, the couple would seek advice from a lawyer.
In this situation, they would not need to change their Cohabitation Agreement, but would instead have the house transferred from the name of the wife alone to the husband and wife jointly. The result would be that should the parties separate, the value of the house would be shared equally between the husband and wife, or, if the wife were to die, the husband would own the house outright and no probate fees would be charged to the wife’s Estate.
When should you consult with a lawyer?
You should consult with a lawyer at least three months prior to your wedding date or prior to commencing cohabitation. This will give you time to digest the information the lawyer gives you, to discuss the information with your partner and make decisions, and to allow time for the lawyer to draft the Cohabitation Agreement
It is important to remember when considering whether you need a Cohabitation Agreement that the law presumes that everybody should be treated the same and that our assets are to be divided equally if we separate or upon death. We are very familiar with the area of Wills and that we have the right to state how we want our assets distributed upon our death. A Will allows us to have our assets distributed differently than how the law states. A Cohabitation Agreement does the same, it allows a couple to dictate how they want their assets dealt with upon separation or death. A Cohabitation Agreement and a Will are wise planning devices and should be given consideration when commencing a relationship.
If you would like more details or have any questions regarding the preparation of a Cohabitation Agreement, Will or other documents please call our office at 204-239-8710.