Estate Planning for Blended Families

By Theresa Arsenault, Q.C.

There are a whole new set of challenges when making an estate plan for a blended family. Spouses may want to first provide for each other and then have the assets they brought into the relationship go their own children. The interests of the spouses may not be consistent. There may be concerns that the surviving spouse may not look after the children of the deceased spouse, if the surviving spouse gets all the assets by joint ownership.

The tools that are available to help with planning for blended families include: mutual wills, joint ownership, named beneficiaries, life insurance trust declarations, alter ego and joint partner trusts, spousal trusts in a will, and marriage and cohabitation agreements. There are benefits and disadvantages to each, depending on the circumstances.

Often a spouse will leave everything to the other spouse by joint ownership, as a named beneficiary, or in a will. They expect that the surviving spouse will look provide for the children of the first to die, along with their own children. That doesn’t always work out as planned, and if the surviving spouse does not make any provision for the children of the first spouse to die, the children of the first to die spouse may be out of luck to challenge the actions of the surviving spouse, as the right to apply to vary the will to get a share of the estate is only the right of a spouse or child of the deceased (not a step child). So if the children of the first to die spouse did not apply to challenge the will of the deceased on the death of their parent, they are out of luck on the death of the step-parent, as they have no right to challenge the will of a step-parent.

Mutual Wills

Ways to deal with this inequity include putting a clause in the will that requires the surviving spouse to not change the will after the death of the first spouse (mutual wills). This doesn’t always work, as the agreement to not change the will can be made worthless by gifting the assets in the estate away before death, or otherwise removing the assets from the estate of the surviving spouse.

Joint Ownership

Putting property into joint names with your spouse, makes the property pass automatically to your spouse on your death, but doesn’t protect your children if your spouse decides not to provide for them.

Putting property in joint names with your child(ren) to ensure they get it when you are gone, raises a whole host of other potential problems. Adding your children to title can result in a partial disposition for capital gains purposes, if the property put in joint names is not your principal residence, and it can result in property transfer tax being payable. Putting your principal residence in joint names with your children can result in you losing the principal residence exemption from capital gains tax for any increase in value for the portion transferred after the date of the transfer. Assets owned jointly with your children can also be at risk of a claim by a creditor or spouse of your child. There are ways to protect against creditors or spouse claims using trust declarations, but you need to think carefully about whether a joint tenancy is the way to go.

A joint owner who is not intended to be the sole beneficiary of the property can also cause issues if they deny that any other party has an interest in the property on the death of the parent. Make your intentions clear using a deed of gift or a trust declaration.

Many people also unintentionally foil a carefully thought out estate plan which incudes a spousal trust or alter ego trust, by putting the property meant to be held in the trust in joint names after the other planning is done, without consulting the lawyer who did the plan.

Named Beneficiaries

If your assets include RRSPs, RRIFs, TFSAs, life insurance or segregated funds, you can provide for your spouse and for your children of your earlier relationship by naming one or more beneficiaries of that asset, and by naming alternate beneficiaries. You may choose to provide for your spouse by using the RRSP or RRIF as it will roll over tax free to your spouse, while providing for your children using life insurance or TFSAs, which don’t get the rollover treatment. There are cautions again, though, as the estate will have to pay the tax on a RRSP/RRIF if the spouse doesn’t claim the rollover.

You must also be careful to avoid naming a minor as a beneficiary of life insurance or other asset with a named beneficiary, as the asset could be held by the court and then paid out to your child when they turn 19, which is likely not your intent. Better to appoint a trustee to hold that asset for your child until the age at which they can handle the funds, with discretion to advance as they need it earlier. It is important to provide evidence of your intention in your will or in a trust declaration or deed of gift.

Spousal Trusts

A spousal trust contained in a life insurance trust declaration or will, can provide for your assets to be held in a trust for your spouse for their lifetime, with the balance going to your children on the death of the spouse. The spousal trust can provide for income only to your spouse or income plus the ability to encroach on capital. Your choice of trustee of the spousal trust will be important as the trustee must make decisions about how much to give to your spouse and what to preserve for the benefit of your children. A good impartial trustee and a letter to the trustee stating your wishes can be very helpful.

If you use a spousal trust in your will, probate fees will be payable on the assets in your estate, but if your assets pass outside your estate, such as in a trust created and in effect during your lifetime, the probate fees can be avoided on those assets. As well, assets passing in a trust created by a will are subject to challenge under the wills variation legislation in BC, but assets passing outside your estate through a trust created in your lifetime are not subject to challenge, except in limited circumstances.

Alter Ego and Joint Partner Trusts

If you are over 65 and a Canadian resident, you can put your assets in a joint partner trust or alter ego trust, without triggering capital gains tax on the disposition of the assets to the trust. During your lifetime (and that of your spouse in the case of a joint partner trust (JPT)), only you (and your souse in a JPT) can have the use of the income and capital of the trust. If you are wanting to preserve capital for your children after the death of your spouse, a good tool to use for both probate fee planning, and avoidance of claims against your estate is an alter ego trust which contains a spousal trust for your spouse during their lifetime and a gift over to your children of the capital on the death of your spouse. This can be the best tool for a number of reasons, if you qualify on age and residency, but you need to get tax advice to be sure it will work with the types of assets you own.

Cohabitation and Marriage Agreements

Marriage and cohabitation agreements are an effective way to prescribe the division of assets on a separation or death. To be enforceable, there must be full financial disclosure of all assets and liabilities of the parties, and each party must get independent legal advice. The agreements can specify what is to be provided in an estate for the spouse and each party’s own family. The agreement must be fair at the time a court is considering it, in order to avoid a variation of the terms of the agreement by the court.

In considering the above tools and creating your estate plan, be sure to get advice from a lawyer experienced in estate planning to be sure your plan will work to protect your spouse and your children.