I excitedly opened MoneySense magazine this month and came by an enlightening article about divorce. As the wedding vows state, marriage is forever. This is true in an ideal world, but sadly in the real world (North America), divorce happens in over 50% marriages.
As stated in the title, divorce is a wealth killer. Here in Canada, divorce typically results in splitting the assets 50/50, but there are some special circumstances. There is also the no-fault rule which states that it doesn’t matter what the “reason” is for divorce, the assets will be split accordingly.
Generally speaking, assets will be split down the middle, but items like houses and child support payments can be the sticking points. For example, if a spouse stays at home to run the household, while the other spouse is the main breadwinner, the stay at home spouse may be entitled to support payments.
Are there assets that can be held separate during a divorce? Unfortunately not many unless there was a pre-nup signed (see below). Here are a couple of assets that can be held separate:
- Corporate assets can be held separate from divorce proceedings if only one spouse is the shareholder. However, again, if the court determines that the non shareholder spouse has “contributed” to the business, then he/she will be entitled compensation. Thanks to The Money Grubbing Lawyer for this tid bit of information.
- Inheritance can be held separate if the money is not used for family purposes. Once the money is intertwined with the family finances, like buying a family cottage, that’s when it can get tangly. More on this below.
If divorce is the inevitable path:
- Seek a lawyer and get advice – This is a key step because a lawyer will give you initial advice on how to proceed according to the laws of your province.
- Arbitration instead of court – Discuss with your spouse the advantages of going through arbitration instead of going to court. The cost difference is dramatic. According to the Moneysense article, arbitration can cost around $15,000 where going to court can cost up to 10 times more.
- Keep inheritances separate – Inheritance received by a spouse is among the few assets that can be separated in the case of the divorce. That is depending on if the inheritance money was used for the for family or not. Lesson here? If you receive an inheritance, keep it in a separate investment/savings account.
- Sign a Pre-Nup – It’s a bit late for this one, but a good lesson for the possible next marriage. If one partner has significantly more assets than the other, it is often advised to sign a pre-nuptual agreement before getting married. That way, if the marriage goes to splitsville, the asset split will be pre determined.
As the title states, divorce is a wealth killer. It will cut your net worth by about half which can be financially devastating if you are closing in on retirement. Moral of the story? Be careful about who you marry and sign a pre-nup if one spouse is entering a marriage with signifcantly more assets than the other.
Note: I’m not a lawyer so please take the contents of this article as a starting point for your research.