Hello everyone, welcome again to the Retiring Canada Podcast. Today we're going to discuss the impact of blended families on estate planning. Specifically, we will cover:
- How inadvertent decisions can cut your kids out of the will
- The consequences of dying without a will
- The potential negative consequences of probate planning
- Straightforward considerations to protect your children from disinheritance
For all the links and resources mentioned in today's episode, please check out the link in the description.
First off, some of you may be asking, what is estate planning? To me, estate planning means creating a legacy, ensuring the people and organizations you care about are provided for upon your passing. If done correctly, estate planning can help minimize fees and taxes, set up inheritances, provide for loved ones, set up guardianship for dependents, and more.
As with any area of financial planning, the estate planning process will be unique to you and your family situation. Some estate planning goals may include preserving the value of the estate and paying the least amount of tax possible. Others may want to enhance the value of their estate by utilizing insurance planning strategies. However, the most common goal is to ensure the delivery of assets to the intended beneficiaries.
This is where things start to get tricky for blended families. A blended family is where one or both spouses bring children from a previous relationship. With this added family dynamic, drafting a proper estate plan can save your beneficiaries a lot of headaches and heartaches in the future.
In most cases, spouses typically name each other as beneficiaries on their assets. However, this is where issues can arise for the blended family.
Let's assume we have a common-law couple, Ken and Shirley, and each of them has adult children from a previous relationship. They both name each other as beneficiaries on their retirement accounts and their wills. Now, let us assume Ken passes away first. Shirley is the direct beneficiary and common-law spouse, so all assets, including the home, roll over to Shirley on a tax-deferred basis using the spousal rollover provision.
A problem now arises when Shirley dies. In the most usual situation, assets would flow proportionally to HER children, while her stepchildren may be disinherited altogether. This is likely completely inadvertent on Shirley's part, but if she dies without a will or with a basic will, the intestacy legislation will not include stepchildren in the division of assets. This is because the law only recognizes natural or adopted children, not stepchildren.
To take this example further, let's say Shirley gets remarried or she spends all of the assets and gives them to her children before she dies. As you can start to see, there are a number of ways children from a previous relationship can be disinherited, albeit inadvertently, by the surviving spouse.
Generally speaking, when we are chatting with couples with a blended family, although it may be important to leave some assets to your surviving spouse, it would probably be wise to leave assets to your children when YOU die, and not when your spouse dies, as you will have no control over the assets after your passing.
Let’s go through another example to give you a bit more context. In this scenario, Cheryl and Ted each have children from a previous marriage. They have their home together and have named each other as direct beneficiaries on their life insurance policies, TFSAs, RRSPs, and pensions.
Here are a few possible outcomes:
1) Ted dies first, and Cheryl inherits everything regardless of what Ted’s will states. This is because Cheryl has been named the direct beneficiary on the insurance and investment accounts, and their home is a joint asset, so it rolls over directly to Cheryl. Upon Cheryl’s passing, even if her will mentions “children” or “issue,” this would only include her children or adopted children, not stepchildren. If it is the intent to include stepchildren in the will, they should be listed by name or include wording such as “the children or issue of my spouse” or other such wording.
2) Even if they put this specific wording into both of their wills, if Cheryl were to remarry after Ted's death, it would render her previous will void. Before I move on from here, please be aware that each province has its own unique rules, so please seek legal advice. If Cheryl does not sign a new will after she remarries, she will effectively die intestate, meaning without a will. (Again, asterisk here based on what province you live in.) Dying intestate in this scenario means all of her assets will go to her new spouse and children only since the intestate succession legislation does not include stepchildren.
3) Even if Cheryl does sign a new will that specifically contemplates Ted’s children, Cheryl's new spouse could still have a first claim against a portion (or all) of the estate. In the more common scenario where Cheryl fails to specifically include Ted’s children, it is very likely that Ted’s children will not receive any of the estate.
4) Another possibility is that Cheryl could choose to give away her assets to her children or rewrite her will. If you want the survivor to be bound by the original wills, then you should sign a contract agreeing not to change your wills after the death of the first spouse. Without an agreement to this effect, it is possible that a court may not agree that the original will is still binding.
Even if you sign wills that specifically contemplate all of your children and also sign a contract agreeing not to change your will, there are still a number of ways in which children could be disinherited.
Individuals often use the technique of "probate planning" to avoid probate fees. This involves placing all their assets in joint ownership or naming their spouse as the direct beneficiary of their registered investments and insurance policies. For instance, Cheryl could remarry and reorganize her affairs so that her new spouse inherits everything outside of her estate. As a result, there would be nothing left in her estate to distribute to Ted's children.
As previously stated, it's clear that the spouse who passes away first won't have any say in whether their children receive a portion of their estate if they leave everything directly to the surviving spouse. Even though the surviving spouse may not intentionally disinherit their stepchildren, it can still happen accidentally. If you want to guarantee that both spouses' children receive a share of the combined estates, using standard wills may not be suitable.
OK, so here are a few options for you to consider that may help mitigate these types of issues. Please, do not take these at face value. Seek legal counsel before making any changes to your estate planning documents.
The first consideration is dividing assets between the spouse and children. This is fairly straightforward as you would leave a portion of the estate directly to the spouse and a different asset directly to the children. In doing so, you will want to fully understand the tax implications of these decisions and the rights of your surviving spouse.
The next option is to utilize a Spousal or Common-law Partner Trust. When a spouse trust is utilized, the capital held in the trust is distributed based on the will of the first deceased spouse, rather than the surviving spouse's will when the second spouse passes away. This is because the assets within the trust never become the property of the surviving spouse. Instead, they are owned by the spouse trust and can be distributed to the children of the first spouse after the second spouse's death. Even if the second spouse remarries or alters their will, the assets can still be given to the children of the first spouse. This is a complex strategy, and there are a number of limitations, so please consult legal counsel.
Lastly, consider utilizing life insurance to satisfy all beneficiaries. This may be an option for individuals who do not have sufficient assets to leave to their spouse or children and is often the simplest and most practical solution to create a fair and divisible estate at your passing.
Alright, I know that was a lot to take in. I hope I didn’t throw too much legalese at you, but I believe this is an extremely important topic to understand if you find yourself in a blended family.
So next up, your action items from today’s show:
**First**: If you or your spouse have children from a previous marriage, it's time for a candid conversation about each of your intentions. Will there be enough for the surviving spouse to live on if money is gifted to the kids? Are there concerns about one of the adult children receiving a large sum of money? These are just some of the questions you will need to ask each other.
**Second**: Dust off your will; it’s time for a review. This is especially true if your will is over three years old or your personal and financial circumstances have changed. A marriage, an inheritance, new property, childbirth… pretty well any major life event that changes you or your spouse’s financial position should trigger an estate planning review.
**Lastly**: Seek tax and legal counsel. Be sure to review your estate planning documents with your lawyer and follow up with your advisor or tax expert to gain a full understanding of the emotional, legal, and tax implications of your estate planning decisions.
Well, that's all for today. Thank you so much for listening. For the links and resources discussed in today's podcast, please check out the link in the show notes or visit retiringcanada.ca/2.
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.