Given the changes in the law in BC, a good cohabitation agreement (also referred to as a “cohab”) can reduce or eliminate disputes on separation. The cohab should deal with (a) who owns/owes what at the time the relationship began or the time of the agreement and the values of each asset or debt; (b) financial plans for the cohabitation period; and (c) how the property and debts should be divided if the couple splits.
Cohabs are feared because they come across as unromantic at best and even worse it can signal that there is mistrust regarding the motives of a partner. The fact is, cohabs are unromantic insofar as it is an acknowledgement that the couple may not live happily ever after. Most people avoid thinking about a cohab, let alone discussing one. It takes a lot of optimism to embark onto a serious relationship and therefore people just do not want to touch the implied negativity of a cohab. The very topic can sometimes be painful and cause strife in new family relationships.
On the other hand, making a cohab together can be an important aspect of the couple’s future financial hygiene. The couple, knowing where they stand and what they can expect in the future, can pave the way for open communication about financial matters (even if the relationship never ends). One of the major causes of relationship failure is discord over financial matters. Early discussions about money matters can be framed as “romantic” in that the couple is actively setting a pattern of openness about this very important subject. Also, to take some of the “sting” out the discussions, cohabs can be viewed as “temporary” insofar as the couple can revisit the agreement and revise it if need be. For example, the couple can review it at designated intervals (such as every five years) or at specific milestones (upon marriage or the birth of a child). This approach can make the agreement more fair and reasonable because it can evolve as the couple’s relationship evolves. If the term “cohab” is too daunting, the couple can call their agreement a “Financial Agreement” or if it is a second or subsequent relationship where a spouse wants to preserve assets for his or her own children, it can be called a “Family Legacy Agreement”. When one individual has large interests, assets that are tied to third parties, or interests that are increasing in value due to long-standing efforts or investment strategies, a cohab can help achieve clarity and trust, and dispel suspicions. Finally, in order for a spouse to feel comfortable and respected during these discussions, the agreement has to address that spouse’s legitimate future needs so he or she can live reasonably should the relationship fail.
If you are a parent wishing to protect your wealth from a son or daughter’s common-law spouse, insisting that the cohabiting couple enter into a prenup may not be the most effective approach, and is likely to cause emotional rifts. Consider instead some other vehicles for protecting the legacy. If your legacy has yet to be transferred to your son or daughter, then you should consider a family trust structure designed to protect the legacy. If your son or daughter is already wealthy by way of your gifts to him or her, you need only be concerned if these assets are increasing in value. If so, the common-law spouse will have a claim to half the increased value. If you are more familiar with the values of these assets than your child is, it is of assistance to document the values at the commencement of the cohabitation (or as close as possible). If the assets already transferred to the child are increasing in value (such as real estate or shares), if the assets owned by the child are tied to the interests of third parties, such as your other children, or if it is a second relationship for your child, then that child probably needs a cohab. If your child is reluctant to spring this idea onto his or her common-law spouse, have the child say “my parents’ financial planners are insisting.” If the couple absolutely cannot face the idea of a cohab, then all you can do is leave the division of the increased values to the FLA and focus on protecting the remaining legacy.