Nobody plans to get divorced when they enter into a new relationship but, with divorce rates being so high, it is a risk and like any risk, the more prepared you are, the less susceptible you are to the negative repercussions. Furthermore, by protecting your assets you can ensure that you will maintain your quality of life as you grow old.
One of the main tools used in this situation is a prenuptial agreement but sometimes, even when all the necessary steps and precautions are taken to set-up a marital agreement, courts will overturn your contract and reward a portion of your assets to your spouse.
There was recent one case, where a husband had signed a pre-nuptial with his bride. Twenty-five years into their marriage, the wife suffered from alcoholism and needed treatment. After a series of events, they ended up divorcing and the wife made claim against her ex-spouse’s assets.
The court determined that she couldn’t have known, when she signed the pre-nuptial, that she would become ill and so, they rewarded her with a proportion of the sheltered assets. More specifically they awarded her a portion of his family’s land and because land is not in cash, the family had to sell a large portion to cover the settlement as well as the lax liability that resulted from the influx in income. Had the family had a trust in place, for the inheritance, this would not have happened.
You see, a trust is a vehicle which separates ownership of an asset from the ability to benefit from the asset. Essentially, you are taking something of value and placing it into a trust so that it’s not legally yours. It is a separate legal entity that is safe from probate, increased tax liability and the risks associated with you becoming divorced or being sued.
The trust will be in the name of a trustee, it will be managed and controlled by the trustee but it is there for the beneficiaries use. You can benefit from it. Your children or grandchildren can benefit from it. Even a charity can benefit from it – so long as they are beneficiaries. The key is that the asset is not legally your property so in the event of a creditor claim (a divorcing spouse being a creditor in the case of a divorce), the asset is protected from that lawsuit.
In the event of a divorce you would have the trust to rely on because, it is not your asset, it is owned by a trust. It is certainly there for your benefit but it also benefits your children and grandchildren. Possibly even your parents or other parties involved so it can not be a matrimonial asset and it will not be subject to division.
Now the critical element is that the trust must be established before rights are accrued. You cannot create a trust simply for the purpose of defeating a known claim. There was a case decided in Alberta, where the use of a trust was challenged in the matrimonial setting and the court essentially said - you can’t use a trust simply to defeat a matrimonial claim. Therefore, the best time to create a trust, particularly around matrimonial planning, is sooner rather than later.
As a result, it is generally recommended that a person of affluence plan in the moment. If they have not become common law, or been married yet, the ideal time is to structure their estate in a trust knowing that they may move forward into a new relationship. That way when they meet their new partner, they are already protecting their assets. They can still layer it with the pre-nuptial arrangement if they want to, but they don’t have to get an agreement because their estate is already protected through the trust.
