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Common Risks for Common-Law Relationships

10/15/2014 05:19 EDT | Updated 12/15/2014 05:59 EST
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Ariel, 26, lived with her boyfriend in Oakville, Ont. for two years. The two planned on getting married, so they pooled their savings together. They accumulated about $26,800 in a tax-free savings account. When they realized that the relationship wasn't working, they split the money down the middle and each left with $13,400. For furniture and belongings, they each rotated on buying big-ticket items, so it was simple to divide assets.

"It was an amicable split, so it went pretty smoothly. But, I've heard horror stories of a partner leaving with all the joint savings, and it takes forever to get anything back," Ariel said.

From a legal standpoint, property rights are the main difference between being common-law and being married. When a marriage ends, the net family property is divided up based on a formula called equalization, says Christine Vanderschoot, a family law lawyer at the Toronto firm Jordan Battista LLP.

On the other hand, when common-law couples split up, the theory is that each person gets back what he or she brought into the relationship. This sounds simple enough. "But in reality it can be very hard to do that, especially when you start intermingling your funds, such as with a joint line of credit. Then it gets more complicated," Vanderschoot says.

She recommends that people obtain a cohabitation agreement, similar to a marriage contract (sometimes known as a pre-nuptial agreement), that outlines responsibilities and obligations early on.

This seems like a good idea, considering that marriage is on the decline in Canada and that cohabitation is on the rise. In 1961, less than 1 per cent of families lived in a cohabitation structure; now almost 20 per cent of families are spearheaded by common-law couples.

Here are three things to consider before you shack up:

Household and living expenses

There are obligations to meet such as rent and bills. Does it make sense to pool your resources to meet those expenses, or is it better to keep track of who pays for what? Robert Stammers, director of investor education for the CFA Institute, says that, unfortunately, there is no definite answer because there's nothing to indicate that one way is better than the other. A good idea may be taking a page out of Ariel's book and evenly distributing big-ticket purchases or keeping receipts. Vanderschoot says another way to divide living expenses is by room -- one person pays for the bedroom furniture and the other pays for the living room, for instance.

Debt

This topic has the ability to easily make or break any relationship. As with living expenses, you have to decide whether you wish to join your debt with that of your partner or have each person remain responsible for paying down his or her own debt. This can become especially dicey if one partner has bad credit because it can force the couple to take on new debt together by having the partner who has good credit co-sign for the one who doesn't. If the relationship goes sour, both people are then equally responsible for this debt.

Also, the reimbursement of debt during the relationship is treated differently depending on whether you are married or common law. "In a marriage it's assumed the debt was paid down using family money, so in the event of a divorce the amount of debt paid back will be added to your net worth on the date of separation and so be subject to the equalization process," Vanderschoot says. In essence, you will be giving your spouse credit for having paid half of your debt during the marriage. "Since there is no automatic joint property or equalization for common-law couples, each partner is responsible for the debt that is in their name." This means if you help pay down your boyfriend's student loan, for example, you can't expect him to pay you back if you split up, unless you had an explicit agreement to that effect.

Financial plan

We all need one. You need to sit down and figure out your short-term and long-term goals and whether you'll be saving together or independently. But that's not the only consideration. What are your respective investment philosophies? Are you going to use an advisor or stick to DIY investing? What's your risk profile? Stammers says risk profiles tend to change when people merge from singleton to relationship, as thinking switches to the long term.

After these discussions, if you are feeling somewhat uneasy, bring up a cohabitation agreement. Vanderschoot says this may be the best route to take in order to protect each person's assets, especially if one person is wealthier than the other.

Stammers emphasizes that overall the key to successful cohabitation, as in all relationships, is communication, because the more honest you are about your finances, the better off the relationship will be.

The legal definition of a common-law partner: A common-law partner is a person to whom you are not legally married, with whom you are living in a conjugal relationship, and to whom at least one of the following situations applies. He or she:

  • has been living with you in such a relationship for at least 36 continuous months;
  • is the parent of your child by birth or adoption;
  • or has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.

This article originally appeared on www.morningstar.ca.

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