Get covered when living together: Planning strategies for cohabiting common-law couples

Holidays are a time for families to get together. Cohabiting couples now make up a growing proportion of Canadian families. This
column focuses on common-law couples who face unique legal, tax and financial planning issues. Unfortunately, they are often the least likely to formalize their relationships to protect their individual and joint interests.

As an independent insurance and investment professional and financial planner, I help families at every age and stage protect
their interests and meet their financial goals. I am not a lawyer, and this general information should not be relied upon as
legal advice. For legal advice, consult a qualified lawyer, and contact me directly with your financial questions.

Couples living together in conjugal relationships are considered spouses for tax purposes after one year by Canada Revenue
Agency, and as common-law spouses with obligations for support and legal separation in Ontario Family Law after three years (or
sooner if they have children).

Married couples enjoy certain automatic legal rights and responsibilities, including: the right to make medical decisions for
one’s spouse; to inherit property if one’s spouse dies without a will; and rights to support in the event of separation or

Some couples with differing levels of assets draft pre-nuptial agreements to plan for the division of assets in the event of separation or divorce. The courts have found that pre-nuptial agreements must be fair to both parties and legally enforceable, even where there are disparities in income or assets.

Common-law status does not convey automatic rights to support if the relationship dissolves, nor the right to make medical
or financial decisions for one’s partner if he/she is incapacitated, nor the automatic right to inherit one’s partner’s property
should he/she die without a will. For this reason, it is essential that common-law couples seek independent legal and financial advice and draw up wills and powers of attorney (financial and medical) and related cohabitation agreements that could form the basis of any future settlement on separation.

Cohabitation agreements must be legally enforceable and fair to both parties, even with disparities in income or assets between the partners. A will outlines your intended distribution of assets and future plans for your estate in the event of your death. It is also advisable for common-law couples to designate their partners as beneficiaries on life insurance and investments.

A power of attorney for finance designates your common-law partner (or someone you specify) to make financial decisions
and transactions and investments for you if you are temporarily or permanently incapacitated. A power of attorney for health-care designates your common-law partner (or someone you specify) to make health-care decisions for you if you are temporarily or permanently incapacitated.

These documents can include a living will section outlining your wishes for ongoing life support, organ transplantation, funeral arrangements, etc. These documents should be reviewed and revised periodically with any changes to relationships, births/deaths of children, purchase or liquidation of major assets or real estate, separation or death of the common-law partner, etc.

To avoid future complications, couples should plan their finances carefully and get legal documents drawn up at the outset of
the relationship. Although people often find discussions of finances and planning uncomfortable, any couple moving in together or planning marriage and a family must have a full and frank discussion about finances, life goals and their philosophies of investing and spending. Such discussions should outline any assets and debts they bring into the relationship, their plans to purchase shared assets such as homes, vacation properties, vehicles or businesses, as well as jointly held investments, insurance and benefits, their investment preferences and tolerances for risk, and planning for the changes life can bring.

Finances are often a major source of conflict in any relationship, and it is helpful to be clear early on to prevent trouble down
the road. There must be full disclosure of all financial assets and liabilities. Failure to disclose may be considered by the courts as material grounds to invalidate any related legal agreements, and could be interpreted as deliberate intent to mislead.
Some issues may affect common-law couples moving in together earlier in life (with fewer assets, no children, no property) versus those doing so later in life (who may have support obligations for former spouses and children as well as established assets
and property).

Those beginning live-in relationships at any age should keep their assets separate to avoid property disputes, and have clear
discussions and documentation for the purchase of jointly shared household items and other assets, such as investments or
real estate.

One spouse’s poor credit history can negatively affect the other’s credit, as well as joint credit. It is useful to have frank discussions and keep separate bank accounts, perhaps using one joint chequing account for shared household expenses, to which each partner contributes as a proportion of income.

As the relationship grows, each partner should seek independent financial and legal advice to protect their interests, and consider drawing up a cohabitation agreement to determine what will happen to shared assets should the relationship dissolve. If
the partners plan to purchase a home together, in addition to any cohabitation agreement, they should consider drawing up a real estate co-ownership agreement.

This agreement should specify the proportion of property ownership contributed by each partner, and how the real estate property and/or any proceeds of sale will be distributed in the event of the death of one partner or their separation. Is one partner
expected to buy out the other if the relationship dissolves? Are there provisions to have the surviving partner inherit the property? If one common-law partner is the key breadwinner and the other has key responsibilities for caring for the home, this may become a constructive trust and investment by the lower earning homemaking spouse, which could be considered in any future
settlement by the courts.

Real estate co-ownership agreements include choices of ‘joint ownership with rights of survivorship’ and ‘tenants in common’. Under ‘joint ownership’, if one partner dies, the other inherits the property. Under ‘tenants in common’, each partner owns a specified portion of the home. In the event of death, the share owned by the deceased partner goes to whoever is specified in the deceased’s will, not necessarily the surviving partner. If there is no will, the deceased’s share goes automatically to his/her next of kin, not necessarily the surviving partner. Should the relationship dissolve through separation, there should be specific
terms outlining how the property will be disposed and divided.

Tax treatment for common-law and married spouses is similar in Canada, and both types of relationships are eligible for spousal tax credit, sharing charitable and other deductions, RRSP and income sharing, first-time homebuyer and other tax credits, and ability to transfer assets on a tax-deferred basis. Older common-law couples blending households, with past relationships, children, support obligations, and extensive assets require even more careful planning.

These are a few examples of different family types requiring advice tailored to each individual situation. Contact me directly to discuss customized investment and insurance planning for your family. Happy holidays and happy 2011!

Posted by Robyn Latchman