Estate planning for blended families

Spousal trust protects children against being shut out.

Deanne Gage 8 January, 2016 | 6:00PM

When people marry for the second time, there's an emphasis on new beginnings and blending families together. But they also need to discuss estate-planning issues, since their circumstances are more complex than those of traditional families, says Leony deGraaf Hastings, a financial advisor at deGraaf Financial Strategies in Burlington, Ont.

"It takes more precise planning to ensure assets are distributed the way they expect to," she explains. "With blended families, it's not the same family bond that was there with the original family, so the stage is already set for conflict and emotion. So I talk to clients about planning ahead to avoid these pitfalls."

Step one is drafting a new will soon after the new marriage becomes official. That's because, generally speaking, any will drawn up before remarriage is automatically revoked, says Frank DiPietro, director of tax and estate planning at Mackenzie Investments. Failing to set up a new will means the remarried person will be considered to have died intestate (without a will).

As for setting up the new will, simply leaving everything to the new spouse is not recommended for blended families, where there are children from previous relationships on both sides, DiPietro notes. Most spouses want to see their respective children receive at least a portion of their assets.

Some may believe naming the new surviving spouse to inherit all the assets simplifies the process. The assumption is the new spouse would then give all the children their share of the assets. But that cannot be guaranteed, since the heir is legally entitled to use the assets as they see it, DiPietro notes. For instance, what if the surviving spouse favours his own children over those of the deceased? In that case, there would be "nothing to protect the new spouse from completely cutting out the children from the previous relationship, so you want to plan against that," DiPietro says.

A better idea is to come up with estate-planning strategies that provide for the spouse but also protect assets for the children. DiPietro cites spousal trusts as a way for blended families to achieve both of those goals. It works this way: a spousal trust could be set up in the will and become effective on the date of death. If one spouse dies, the assets go into the trust. The surviving spouse would be named as the income beneficiary, and no one other than the surviving spouse can access the capital of the trust. "Then when the last surviving spouse dies, some or all of the assets could go to the first spouse's children from a previous marriage," DiPietro says.

deGraaf Hastings personally understands the blended family dynamics. She and her husband each have an adult child from a previous relationship. When they went to draft their wills, her estate lawyer also engaged her in discussions about her business. "He wanted to see if I wanted my business treated any differently than our personal assets," she says.

When discussing estate planning with her blended family clients, deGraaf Hastings often hosts family meetings. She wants to understand client issues such as how long the couple has been together, whether they were together during the children's formative years and so on. "It's about respect and making sure everyone is acknowledged," she says. "I can put difficult discussions on the table for the family. It's far better to have those discussions now when the parents are alive versus when the will is being read and the parents aren't around to explain themselves."

deGraaf Hastings sometimes suggests naming an irrevocable beneficiary on accounts such as a registered retirement income fund. If Frank owns a RRIF, for example, he can name his wife Maria as the successor/owner and then have his children from a previous marriage as the irrevocable beneficiaries. When Frank passes away, Maria becomes the owner of the RRIF. Then when she dies, the pension benefits automatically are designated to his children. "I like that both spouses get the benefit of it during their lifetime but at least the assets are going to revert back to his children," she explains.

Life insurance can also play a role in equalizing an estate between the surviving spouse and children, she adds.

Finally, clients should review all their beneficiary designations and powers of attorney to ensure they still reflect their intentions.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.