Once married, twice shy
Oct 2, 2013 / 5:00 am
Divorce is a word that has become so common place we assume most people we meet will have been affected by it one way or another. Current Stats Canada data tells us that if we were to attend 10 weddings this year, four of them would end in divorce. While the emotional cost is substantial, the financial cost can also be devastating.
For most people, financial and estate planning is both complex and challenging. For blended families and married-again partners, it introduces a whole other set of considerations. Many which are emotionally difficult, as these marriages often involve children from previous relationships, grandparents with torn loyalties and legal obligations laid out in past separation agreements.
Probably the most difficult challenge is to stay objective and loyal to your new family, while making sure your own children or grandchildren don’t get overlooked in the process. Today, we’re going to look at an example of a second marriage with adult children from previous marriages on both sides.
Ricky and Lucy have been married for 7 years. Ricky retired 12 years ago when he sold his nightclub and invested the proceeds into a portfolio that has been paying him the income he lives on. Lucy retired from a management position with a pension and a decent portfolio of company stock from Hershey’s 10 years ago. They live in the home that Ricky has owned for almost 20 years.
They were both married previously, and each has a child from their past marriage: Ricky, a son named Ricky Jr. who is 41 years old and Lucy, a daughter named Lucile Desiree who is 37. Neither of them has updated their Will since they were married, and in those Wills everything is left to their own child. It’s been hard for them to sit down and discuss the details because they don’t want to say anything that might hurt their relationship, yet they also want to make sure their own kids are looked after when they die. The strategy to date has been to ignore the issue.
Their main challenge is to find a balance; a way to make sure when one of them passes on, that the other has enough money and a home to live the rest of their life out comfortably. At the same time, each of them wants to make sure that their own child receives their fair share of the inheritance after the second spouse has died.
The answers can be different for each situation, but four good options to consider are:
1. Registered funds (RRSPs/RRIFs): If it works, these accounts are best left to one’s spouse as they will transfer without incurring any taxes or probate. Left to adult children, the accounts are deemed to have been completely withdrawn and will become taxable as income to the estate.
2. Life Insurance: Life insurance can be used to provide an estate to the children while investments and other financial assets can be left to the surviving spouse avoiding taxable dispositions. Joint family policies can also be taken out that leave a settlement upon the death of each spouse, which could then be left to the individual’s own child, again leaving the physical estate to the surviving spouse.
3. A Trust: A trust can be set up to provide specific instruction to the use and distribution of assets. No longer just the domain of the wealthy, trusts can be an effective solution for anyone whose situation demands a more complex, enduring approach. You can appoint a trustee outside of the family or use a corporate executor. Solid legal advice is the safest route when considering establishing a trust.
4. Set up Ownership and Beneficiaries: Make sure property and other assets are in joint names where it’s applicable and that the correct beneficiaries are on file for your registered accounts.
There are many strategies available when making estate planning decisions in blended families; these are four ideas to consider when putting your thoughts to paper to create a fair and equitable estate. As always, make sure you talk to your lawyer, accountant or financial advisor before making any final decisions. The devil is always in the details and every family’s details are a little bit different.
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