The Modern Family
Don’t (Unintentionally) Disinherit Your Loved Ones
Stepfamilies have become common, but planning for who gets what after you die is anything but routine. When families come together, each with their own possessions, how do you ensure your assets go where you want them to?
Marianna admits that her family life isn’t as idyllic as she’d like. She loves her new partner, but she has a strained relationship with her two grown stepdaughters. Her own adult daughter doesn’t get along with her two step-sisters either. “The break-ups with our previous partners were not amicable,” she divulges. “The kids appear to have a lot of animosity, and have not been supportive of our new family.”
The hostility has made things difficult for Marianna and her new husband, particularly when it comes to figuring out how to plan for their estate. Marianna worries that if her husband dies first, a fight for his assets will ensue between herself and her stepdaughters. She also worries that if she dies first, her husband might inherit her property, remarry, and leave her daughter with nothing. “We’ve been planning for some time how to make sure everyone is cared for, even after one of us is gone,” she says. “And since we both came into the relationship with our own wealth, we want to pass our own assets on to our own children.”
The last Canadian census reported couples that come together with children from previous relationships represent one in eight families.1 TV sitcom scriptwriters would have you believe that Dad would have left everything equally to Mom, all the stepchildren, and of course, their beloved housekeeper; in reality, blended families rarely work that way. It stands to reason that many people who remarry may want to protect the wealth they came into the relationship with, and although they want to ensure their significant other is taken care of when they’re gone, they want to pass down their wealth to their own children as well.
It’s common for people in blended families to leave everything to their new partner. Although your intention may be for an inheritance to go to your kids after you and your partner are gone, there is nothing to stop your surviving partner from writing a new will that leaves everything to his or her heirs, or spending it — effectively disinheriting your kids.
So how do you ensure your estate goes to your children while leaving enough for your spouse?
“It is exponentially more complicated,” says Nairika Varza, a Wills and Estate Planner at TD Wealth. “Each spouse will want to protect their children and their children’s inheritance while navigating what the law requires and what their moral and emotional obligations are to all parties. This may be harder to accomplish with blended families.”
“Each spouse will want to protect their children and their children’s inheritance while navigating what the law requires and what their moral and emotional obligations are to all parties.”
Harder to accomplish maybe, but not impossible; here are some tools in your estate planning toolbox that can help you protect your own wealth and assets, while providing for loved ones as you intended.
A Battle of Wills
Most people believe a well-worded will can execute their wishes perfectly once they are gone. Without a will, your loved ones will likely find it difficult to manage your estate, and your wishes for your children and their care. Spouses often create reciprocal wills, where the wishes of the husband and wife are exactly the same. So in essence, assets are left to the surviving spouse, and then, once they are both gone, any leftover assets are distributed to the children in equal proportions. Sounds fair, right? Well, think about the possibility that a surviving spouse remarries, and a new spouse squanders away the inherited assets, leaving the stepchildren with nothing. Even if the surviving spouse fulfills the wishes of the deceased spouse and wills the step-children as beneficiaries, assets that are spent and gone are gone, and can’t be passed on.
And, even though a will allows someone to distribute their assets any way they wish, the law may throw up other issues. Legally, spouses and biological or adopted children (not necessarily stepchildren) have rights to an estate after death.2 Because of that, opposing members of blended families can end up fighting after someone passes away. “Biological children and stepparents can end up in a tug-of-war over assets,” says Varza. “While a will can be a very important part of estate planning, it may not be the be-all and end-all.”
A Matter of Trust
In addition to a well-worded will, the use of trusts can be an effective tool in estate planning — and may be a good strategy for blended families. A testamentary trust that is created in your will takes effect upon your death. You can place assets in a trust, and then dictate the use of assets, as well as the ownership — and users and owners can be different. This may be an appropriate solution in the case of a family home where a surviving spouse would live, but would ultimately be owned by the stepchildren down the road.
Marianna would like the family home to be used by her husband until his death, after which the home would be sold and proceeds split 50/50 between her child and her husband’s daughters. A trust may allow her to do just that. “Spousal trusts are often used to provide for a second spouse while, at the same time, ensuring that the money or assets will ultimately flow through to your children and descendants. This way, assets can only be used the way you intend and are protected from third-party claims, your new spouse’s own wishes or remarriage or poor planning,” says Varza.
If you have money or investments that you want to directly pass to your children or spouse, many people also use joint accounts as a form of estate planning. Marianna has an investment account with her daughter that will be owned by the last to die. With a joint account, it is a common misconception that the account won’t become part of the estate to be distributed and that it would be passed down directly instead.
The fact is that there are no guarantees that a joint account between a parent and adult child will escape becoming part of the estate. Some case law suggests where the joint account holders are a parent and adult child, there’s a presumption that the money in the account is there to deal with the management of an elderly parent’s finances.
“Biological children and step-parents can end up in a tug-of-war over assets.”
After death, a probate court may view the proceeds as part of the parent’s estate and distribute it to those who have a claim to it. “For this reason, where the survivor of joint account holders believes they are entitled to the balance of the account upon the first death,” says Varza, “it’s necessary to get legal advice to establish that intention of the right of survivorship from the get-go.”
Carefully listing beneficiaries on registered accounts, pensions, and insurance is a good way to direct assets to the people you intend. The beneficiary designation is powerful, meaning that even if a will or other legal document spells out that your assets are to go elsewhere, a designated beneficiary will trump that. On assets where a beneficiary is named, such as life insurance, RRSPs and RRIFs, those assets will bypass your estate, going directly to the beneficiary. This is why it is so important to keep your beneficiaries up-to-date. “If an ex is listed as a beneficiary on a pension, registered account, or insurance,” states Varza, “they could very well get a payout, even if you are now single or remarried.” Listing someone as a beneficiary can ensure that your assets go where you want them to go, without the threat of a legal challenge.
Give It Away Now
For many, in blended families or not, giving away assets before you die is becoming increasingly common. You can see the effect of your gift, and specify use while you are still living. With proper financial planning, it can minimize any taxes upon death, and even reduce your taxes now. For those in blended families, an asset will go to exactly who you want it to go to.
Of course there are some downsides — namely the possibility that you may need those assets before you die, particularly if you live a long life, or have significant care needs down the road. You also will have little control over the future use of the assets once gifted, so if you wish to gift money now for a child’s future education, there is no guarantee that the money will be used for that purpose after you are gone.
Marianna is confident that she and her new partner will provide for each other in their estates, but really hopes that whatever bitterness there is now between the children and stepparents dissipates. “I get the feeling that once we are gone and the estate is settled, the children will go their own way,” she says with a sadness. “We forced them to be family. When we’re gone, those family ties will be too. But at least everyone will have what they’re entitled to.”
— Denise O’Connell, MoneyTalk Life
- Statistics Canada. 2011 Census Families and Households Highlight Tables: Census family structure including intact families and stepfamilies for couple families with children in private households. Ottawa, Ontario. 2012↩
- Fortenberry, J. Rights of Stepchildren to Assets of a Deceased Parent in Probate. Lexis-Nexis Legal Newsroom. January 16, 2013. lexisnexis.com/legalnewsroom/estate-elder/b/estate-elder-blog/archive/2013/01/16/rightsof-stepchildren-to-assets-of-a-deceased-parent-in-probate.aspx?Redirected=true↩