Article written by Chris Coulter
Relationships are challenging at the best of times. So, bringing two entire families together under one roof can create additional challenges.
The fluid dynamic between the kids still moving between both parents’ homes, accountability to possibly three or more parents, and now having to learn to live with new brothers and/or sisters can make both families lives infinitely more complicated.
What happens with inheritances, presumed entitlements and equalization amongst all the parties involved? How do you deal with estate planning for blended families in Ontario?
Remember that this applies to not only personal, but to corporate assets as well.
Avoid Disinheriting Your Children
In today’s family, it is not unusual for spouses to enter the marriage with children from previous relationships. Parents work hard at getting these children to live and grow as one unit to create a happy family environment. Often overlooked is what would happen if one of the parents were to pass away. In most cases, special consideration for estate planning is needed to avoid relationship loss and possibly legal action.
Typically, spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children. The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.
The Family Home
In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately.
Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.
Registered Retirement Savings Plans
To take advantage of the tax-free rollover from their RRSPs, spouses should consider naming each other as beneficiary. If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.
Other Assets and Investments
If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could ensure that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs. Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.
Choose a Trustee Carefully
With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee. For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance. Some situations may call for multiple trustees, or perhaps the services of a trust company.
Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step-parent. Life insurance may be the ideal solution. Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.
Life insurance can act as a cost-effective vehicle to help equalize any discrepancies amongst the kids as it relates to inheritances. Here are some other benefits that life insurance may remedy when it comes to estate planning with blended families.
- It can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;
- A death benefit is tax-free and could be creditor and litigation proof;
- You have the ability to name contingent owners and beneficiaries (including testamentary trusts);
- A death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;
- With a named beneficiary, proceeds pass outside of the will so the decision cannot be challenged under any will variation action;
- It provides for a significant measure of control and certainty as to when and where the proceeds will end up.
The Elephant in the Room
It is important to remember that whatever planning options are used, open, transparent communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs. Full disclosure will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.
Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children.