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Domestic Contracts to Protect Family Wealth: Unassailable or Not?

When family wealth is at stake, parents may wish to encourage their children to enter into a domestic contract with their partners. The purpose may include to protect significant gifts and inheritances, a home owned at date of marriage, or a family business. With divorce rates at an all time high and the largest anticipated wealth transfer in Canada’s history of approximately $750 billion to millennials over the next several decades, these issues are a growing concern for many families.

In Ontario, domestic contracts, which include cohabitation and prenuptial agreements, are useful to protect parties upon a marital breakdown or death because they allow couples to agree on rights and obligations regarding property division and support. Although they are generally difficult to challenge because courts respect private agreements, domestic contracts can be invalid if they fail to follow the requirements under relevant legislation.

For example, in Ontario, upon a marital breakdown, married couples are subject to equalization of property as provided for in the Family Law Act (the “FLA”), which deals with property division and support. Couples can decide to contract out of equalization and spousal support by entering into a domestic contract, but in order to be valid, the contract must be in writing, signed by each party, and witnessed.

Under the FLA, the court also has discretion to set aside a domestic contract where there was:

(a) no full and frank financial disclosure of significant assets, debts or liabilities at the time of execution;

(b) failure to understand the nature and/or consequences of the contract; or

(c) grounds for setting aside a contract under contract law, such as misrepresentation, duress, or unconscionability.

If a domestic contract is voided by the court, the protection that is afforded under it will be eliminated, including subjecting assets that were supposed to be protected to a claim, or there may continue to be support obligations which were intended to be released.

Taking the proper steps is key to ensuring the contract is upheld. In addition to the provisions under the FLA, below is a guideline for couples to consider when entering into a domestic contract:

1. Independent Legal Advice

Couples entering into a domestic contract should have separate legal representation to avoid any conflicts, and to ensure that they understand the nature and consequences of the contract. Without independent legal advice, the court may call into question the validity of the domestic contract.

2. Support

Couples have the ability to waive spousal support and property rights for equalization under the FLA. However, they cannot deal with matters involving child support in a domestic contact. If the agreement is unfairly one sided, the FLA allows the court to set aside support provisions considered “unconscionable”.

3. Financial Disclosure

Couples are required to provide full and frank financial disclosure, including all assets, debts and liabilities. While there may be a concern about providing sensitive financial information, disclosure is necessary to ensure the objectives of the contract can be fulfilled and that the contract will be valid.

4. Adequate Time

It is important to allow sufficient time for preparation of a domestic contract. Not only do the couple need time to retain lawyers and gather information, they need to carefully consider a number of very challenging issues. They should start the process at the earliest possible date so they are not rushed. If matters are left too late, it can undermine the contract and even lead to an allegation that the contract is invalid because a party was under undue pressure or duress.

Although domestic contracts require time and financial resources to prepare, a domestic contract is an important option to consider to protect family wealth (as well as in several other situations, including blended families), in particular if a child owns a home at the date of marriage, has shares or another interest in a family business, has an interest in a trust or other significant assets at the date of marriage, or will receive significant gifts and inheritances after marriage.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.