Estate Planning for Blended Families
Do you have a blended family? If so, you need to take extra precautions to make sure that your estate plans are properly setup.
Blended families are families where some or all of the children in the family are not the natural or adopted children of both spouses. Even though they’re very commonplace these days, the planning required is anything but.
Challenging situations can be avoided by first considering everyone’s interests and then the needs of your personal estate plan. The main reason many blended families don’t structure their plans properly (which typically results in one branch of the family receiving the entire estate while the other receives little or nothing) is because many attempt to “make things simple” by placing all of their assets in joint ownership with their spouse.
The other common reason is due to the use of a “standard” will, which usually indicate that upon death of the first spouse, everything is to go to the survivor.
Let’s look at a few examples of how this could work. In our hypothetical scenario, John and Mary are married and both have children from previous relationships. They hold their home and non-registered investments in joint names, have designated each other as the direct beneficiaries of their insurance policies, TFSAs and RRSPs.
Here are a few possible outcomes:
1) If John dies first, Mary will inherit everything regardless of the terms of John’s will since nothing went through his estate. Mary’s will simply states that if John pre-deceases her, all of her assets are divided equally between her children. Without her step-children (John’s kids) specifically named on her will, it would be interpreted that the money goes to her natural born children only and John’s kids would be left with nothing – even though his will said that 50 per cent was meant to go to Mary and 50 per cent was designated for his kids.
2) John and Mary both have wills that specifically list the names of both of their children. John passes away first and Mary remarries a few years later which renders her previous will void (unless they live in QC or AB). Mary doesn’t sign a new will after re-marrying and dies a few years later which leaves her intestate. All of her and John’s assets will go to her new spouse and her children only since the intestate legislation does not include step-children.
3) If John passes away first and Mary re-marries but does sign a new will specifically naming John’s children, her new spouse could still have a first claim against a portion (or all) of the assets. This is a particular risk in the province of B.C. where the Wills Variation Act can lead to some strange outcomes.
4) Melissa may also choose to re-write her will after John’s death specifically naming her children only. Or she may choose to simply give away all of their joint assets before her death too. If you want the survivor to be bound by the original wills, then you should sign a contract agreeing not to change them (or not to change the ultimate distribution scheme in any later will) after the death of the first spouse.
Even if you sign wills that specifically contemplate all children and also sign a contract agreeing not to change your will, there are still a number of easy ways to disinherit a late spouse’s children. In many cases the surviving spouse does not choose to disinherit their step-children, but it happens entirely by accident.
A properly structured estate plan will determine how assets should be handled between a new spouse and children from a previous relationship. Possible solutions include spouse or common-law partner trusts, dividing the assets between the spouse and children, and using life insurance to satisfy all beneficiaries.
As you can see, estate planning is complicated for most Canadians and planning for blended families can become even more complex. Speaking to a qualified financial planning professional is important to make sure that you do things properly.
If you want some more information, I also recently hosted a one hour estate planning live webinar for some of our clients and a recording of that presentation can be found here: https://youtu.be/t1StR51nkZ0