Is it necessary to draft up formal agreements with the one that you love? How about… a prenup, that most dreaded of words? (no, this post won’t be about prenups :))
When we make deals with strangers and business contacts, we usually specify the details of our business arrangement in the form of a contract. Tenants sign a lease with their landlord, loanees sign a loan agreement with the bank, and employees sign a contract with their employer.
When it comes to family, friends, and lovers, however, contracts and promises tend to be informal and unspoken. Even before marriage, the promise that you will not cheat on your partner is there, and unwritten. The promise is implicitly acknowledged between both partners.
Sometimes, however, written contracts are necessary, even between partners. This is especially true when a third party is involved. Me and my girlfriend recently purchased a condo together, and we formalized this through contracts that we signed with the bank and with the builder. We currently don’t have a written contract with each other to specify what happens should one of us stop paying, get sick, or die. Our agreement with each other to hold up our own ends of the bargain is strictly unwritten and informal. We know that our lives would become a living hell should one of us skimp out.
Unforeseen events could happen that are out of our control. There are situations that can arise where a formal, written agreement is necessarily, especially in the event that one of us was to become incapacitated. An unwritten agreement between two people cannot be known or recognized by a third party. When large sums of money and property are involved, formalizing that agreement becomes important to insure against disaster and misfortune.
Here are three major life events that could take place:
- One of us could disappear or lose our ability to pay due to loss of income.
- One of us could get seriously sick.
- One of us could die.
One of us could disappear or lose our ability to pay due to loss of income.
Although I don’t see why I would stop paying, and I don’t see why she would stop paying either, strange things could always happen. One of us could lose our job and be out of work for a while, or one of us could simply go crazy and decide to become a bohemian and go hitchhiking across the country, leaving everything and everyone behind.
These things are probably exceedingly unlikely to happen, but just in case they do happen, it might be good to have a formalized agreement between us that specifies that the condo is owned 50/50 and each person is responsible for their share.
One of us could get seriously sick.
Should one of us get sick and be unable to work, that represents a huge loss of income and a huge weight on the neck of the other partner. We should set things up with our life insurance companies so that if something bad befalls one of us, the entire weight of the condo does not fall on the other partner’s shoulders. Although we can easily pay it down together, it would become a big burden if one of us became disabled.
One of us could die.
This, of course, is the worst case scenario. Not only does one of us have to deal with the loss of our life partner, but on top of it, one of us ends up with the entire weight of the condo on our necks. This also comes down to how we configure our life insurance, as well as a will for each of us that specifies how our remaining property should be divided.
Further Yakezie reading
- Well-Heeled Blog: Do You Need a Dating Prenup Before You Move In Together?
- Punch Debt In The Face: Wanna start a fight? Talk prenup
- Consumer Boomer: Do You Need to Buy Mortgage Protection Life Insurance?
So, it looks like I’m moving into another stage in my life. I never thought it would come to the point where formal agreements would be needed, but as the stakes rise, so do the potential pitfalls. I don’t think we’ll ever sign a prenup, but formalizing certain situations acts as a form of insurance against the worst kinds of events, so you aren’t just left hanging there in a sea of ambiguity! What do you think? Would love to hear even more of your stories of moving together, and moving from the boyfriend/girlfriend stage to “owning a home together” stage!
I’d want some great paperwork since you aren’t married yet…just to protect both of you from anything bad that may happen. I’d make setting up beneficiaries a priority.
Agreed. Setting up the beneficiaries is a “just in case” thing that we should take care of. We don’t expect such things to happen, but you never know… it’s just like car insurance!
I really have zero experience in this area since my husband and I got married right out of college. Therefore, I will try and put myself in your situation.
First off, would it be easier to just get married? If you get married, all this kind of just takes care of itself. However, I am assuming you would have already done this if it was a viable alternative at this time.
Since you are not getting married at the moment, it is almost like you have to treat this like you would if you were buying your condo with a friend, and protect yourself accordingly.
I guess we never really focused too much on that. She comes from a conservative family (relatively speaking), so marriage is a really big deal. It’s always about waiting for the “perfect time”, but there really is no perfect time. We just graduated a couple years ago, and it was never a subject before then; now, I think it will just happen whenever things fit into place and I put a ring on it 😉
Aren’t you legally common law partner if you live together? Which is essentially similar to being married. I can’t say that I know all the details though.
The reality is that if you both signed the papers with the builder and the bank, you are both liable and they will go after the one with money! It’s no different if you are married unless you go out of your way to contractually separate obligations. The law can be different in other provinces though.
Assuming you GF stops paying, you would have to pay. Assuming you want to sell, she would have to sign because she is on the title. Better make sure before she skips town to another country 🙂
These are some very interesting issues you raise. Without marriage, it is best to keep finances separate to avoid many of the issues you raise. For example, one person could own the condo, and the other person could “pay rent.” Not ideal, but it keeps things very clean. However, I guess in the aforementioned situation, you would have to protect yourselves (disability, death, disinterest, etc).
We thought about that, but I just can’t see myself paying rent while the other person builds up equity. It just seems unfair, and also creates a “master-slave” relationship. I’m all about trying to keep things equal, although it’s not always easy to do so and people’s idea of “equal” often differs.
That’s a tough one….sounds to me like you’re only choice is to just get married :).
Put a ring on it, eh? The day will come sometime 😉
From wikipedia (not quite the legal source but it’s a start). http://en.wikipedia.org/wiki/Common-law_marriage#Canada
According to the Canada Revenue Agency, as of 2007, a common-law relationship is true if at least one of the following applies:
a) the couple have been living in a conjugal relationship for at least 12 continuous months;
b) the couple are parents of a child by birth or adoption; or
c) one of the couple has custody and control of the other partner’s child (or had custody and control immediately before the child turned 19 years of age) and the child is wholly dependent on that person for support.
That would mean RRSP would split 50/50 in case of divorce/split too. It’s not just about the property and who pays for it. My brother’s marriage status is common law. They never married but by law, it’s as if they were married.
I don’t know if there are cases where young couples go to the law though …
That’s interesting; the situation does vary from province to province. I haven’t heard of the RRSP split before. AFAIK, I would be responsible for all of the payments if she skipped town, and I would be responsible for child support if we had a child together, but otherwise our property remains separate.
What I need to confirm is basically what happens in a bad situation, should one of us have trouble paying, and what should happen should we never need to draw on our life insurance :S
Also to note, if you have life insurance with your work place, who is the beneficiary? It might be something that you want to change to be each other …
Kevin, one thing to note when buying a prop together is that if one decides to default, it drags the other down with him/her providing the other party decides not to pay either. Gotta really be committed!
Or maybe just put a ring on it? 😉