Round Two: Blended Families and Estate Planning

One of the main goals that people have when they are estate planning is making sure their family members are taken care of when they are gone. This can be more complicated when you have a blended family, where there can be all kinds of additional considerations. How do you balance supporting a second spouse with leaving gifts to children of your first marriage? Do your stepchildren have any claim against your estate? How would a prenuptial agreement fit into the equation?

The Wills and Succession Act has its own system that allows children under 18 (or in post-secondary education) to make a claim against an estate for support. However, if you have not legally adopted your stepchildren, then they would not qualify as your “child” and cannot make a claim.

There is no “right” way to approach a blended family situation, as every family (and their relationship) is different. However, this article touches on some issues that commonly arise that you may want to consider as you plan for your own family.

Prenup or Cohabitation Agreement

When entering into a new long-term relationship, particularly after a divorce, many people will consider a prenuptial agreement. For couples entering into a common law relationship, in which their partner is called an adult interdependent partner or “AIP”, the equivalent is called a cohabitation agreement. These agreements are designed to govern how assets will be divided on the breakdown of a relationship, but they can also address the treatment of assets after death. One important fact is that such an agreement may not be determinative after death.

There is a legal obligation to provide financial support for your spouse or AIP after your death. If your spouse or AIP does not believe that they were adequately provided for by what they received from your estate, then they can bring an application to request that a larger share of the estate be provided to them for support. The court has the power to make an order for additional support to your spouse, notwithstanding any prenuptial or cohabitation agreement that may have been in place.

There are methods, such as the use of a trust, which may protect assets from a support claim after your death. While it can be effective, it can also be complicated to do properly. You should seek professional advice, to discuss your particular situation including potential tax implications, in order to determine whether it might work for you.

There is a legal obligation to provide financial support for your spouse or Adult Interdependent Partner (AIP) after your death.Even so, a prenup or cohabitation agreement can be persuasive in determining what amount of support might be appropriate, and can be an effective way on death to ensure that certain assets are not used to fund any support payable to your spouse against your wishes. If you have one, you should always discuss such an agreement with your lawyer when you are writing a will.

Providing for Your Children and Your New Spouse

Given that you have certain support obligations toward your new spouse, a common concern is how to provide for your new spouse or AIP, while also ensuring that your children from a prior relationship will receive a benefit from your estate.

One potential solution is to create a spousal trust. Some or all of the estate assets would be transferred into a trust, and your spouse (or AIP) would be entitled to all of the income generated in that trust during his or her lifetime. You may also permit the trustee to make payments to your spouse from the capital. No one else can receive benefits from a spousal trust while your spouse is alive; however, you can name your children as the beneficiaries of the remaining assets in the trust after your spouse’s death.

If such a trust is properly set up, it can qualify to receive tax benefits for your estate by deferring the tax payable on certain assets until your spouse’s death (meaning there would be more money available during your spouse’s lifetime).

The court has the power to make an order for additional support to your spouse, notwithstanding any prenuptial or cohabitation agreement that may have been in place.

There may be concern that the spouse would use all of the assets in the trust during his or her lifetime, and there would be nothing left after the spouse dies for the children from the first marriage, such as if the second spouse is relatively young or the assets in the estate are fairly modest. To ensure that your children get something, one solution might be to purchase an insurance policy that names them as beneficiaries of the policy. They would receive those insurance proceeds directly, and quickly, after your death.

One word of caution is to make sure that your beneficiary designations are in line with the rest of your plan. There are a number of assets that can have a designated beneficiary, such as insurance policies, pensions, TFSAs and RRSPs/RRIFs. If you name a beneficiary, that person will receive that asset directly. It’s not uncommon for people to make a designation when they first open the account, or first start a job and receive an insurance policy, and then lose track of them. There are even cases where a former spouse is still named–and receives the money–because the designation was never updated. If you make a plan, such as having a spousal trust, but then don’t ensure you have the proper designation for the assets that you were counting on to fund it, all of your good planning could be undone.

The court has the power to make an order for additional support to your spouse, notwithstanding any prenuptial or cohabitation agreement that may have been in place.

If insurance isn’t an option for you, another possible solution could be achieved by using your house. For most people, their house is their largest asset, and most often, it is held with their spouse as joint tenants. When two people own a house as “joint tenants” and one of them dies, the other person will automatically own house entirely in their own name. Another way that two people can share ownership of a house is as “tenants in common”. When two people own a house as tenants in common, each owns a 50% interest in the property. If one dies, they can leave that 50% interest in their will to someone else.

If you own property as tenants in common with your spouse, one way of balancing caring for your spouse and providing a gift to your children is to include a clause in your will permitting your spouse to live in the house as long as they want, or to sell it and buy a more suitable house. If you include a clause like this, when your spouse dies or sells the house without buying a new one, your children would be entitled to receive your share of the proceeds (and they would also be entitled to your share of any surplus proceeds if the house is sold and your spouse purchases a new home for less). The purpose of such a clause would be to ensure that your spouse is provided with a house for his or her lifetime, but your children would benefit when it is no longer needed.

Stepchildren and New Children

Each blended family is different, and planning for stepchildren doesn’t lead to one right path for everyone. It may be that your second marriage has happened late in life, after your children and your spouse’s children are all adults, and you may not want to include your stepchildren in sharing your estate. Or you might have a very close relationship with your stepchildren, perhaps even having raised them as if they are your own, and would want them included in sharing your estate.

There is no “right” way to approach a blended family situation, as every family (and their relationship) is different. Many people in a blended family are familiar with the idea of “child support” in the context of a marital breakdown. The Wills and Succession Act has its own system that allows children under 18 (or in post-secondary education) to make a claim against an estate for support. However, if you have not legally adopted your stepchildren, then they would not qualify as your “child” and cannot make a claim.

Similarly, unless they are legally adopted, your stepchildren would not be entitled to a share of your estate if you die without a will. The Act has a scheme for dividing your estate between your spouse and your descendants if you do not have a will, and your stepchildren wouldn’t fall within the definition of “descendants”. This situation could be particularly problematic if you spouse dies before you and leaves their estate to you, and then you die without a will, as your step-children could end up receiving nothing from either estate. If you want to ensure that your stepchildren are included, you should have a will.

If you and your new spouse have a child together, then there are even more considerations to provide for that child along with your children from a prior relationship. Again, trusts for spouses and children can often solve that problem, but they should be planned with a professional to ensure that the terms are drafted correctly and tax implications have been considered.

Talk to a Professional

No one wants to be second best, especially a new spouse or child. This can make estate planning in a blended family particularly difficult, as it can take more work to ensure that everyone feels like they are being treated fairly. Compromises are necessary, but if you speak to a lawyer, he or she can give you ideas and come up with a solution that can make everyone happy. And since no one wants their family to end up fighting in court after they are gone, planning ahead is the best way that this most important wish is met.

Authors:

Mandy England

Mandy England LLB, is an associate at Dentons Canada LLP in Edmonton, whose practice focuses on trusts, wills and estates.

 


A Publication of CPLEA