My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, November 16, 2015

Blended Families are Twice the Estate Planning Fun…What, No Marriage Contract?

Blended families add complexity to any estate plan. Last week, my special guest contributor, Katy Basi, addressed situations in which married spouses entered into a valid marriage contracts with each other, thus waiving all potential claims against each others estates. Today Katy discusses what happens when there is no such contract is in place.

Blended Families are Twice the Estate Planning Fun…What, No Marriage Contract?
By Katy Basi

 

Upon the death of a spouse, the surviving spouse has the right to inherit from the deceased at least the amount that the surviving spouse would have received as a “property equalization payment” if the spouses had separated or divorced (assuming that no marriage contract is in place waiving this right). The calculation of this amount can become fairly complex, and there are a number of rules to be followed. In addition, only married spouses have the right to make this equalization claim – common law spouses are left out in the cold.

You may remember married spouses Kurt and Brigit from my blog post last Monday. In order to meet his contractual obligations under his separation agreement with his ex-wife Amber, Kurt has acquired a $500,000 term life insurance policy on his own life and has made Amber the beneficiary of the policy. Upon Kurt’s death, Amber will receive the $500,000 life insurance proceeds. As life insurance proceeds are “excluded property”, this amount would not be included in the calculation of any equalization claim made by Brigit against Kurt’s estate. Therefore, life insurance is a fairly safe way to provide for a beneficiary like Amber. Kurt should also, of course, ensure that the remainder of his estate is large enough to provide for Brigit and their children.

John and Olivia’s situation is far more complex. Olivia has minor children with John and a minor child from her first marriage. She is legally obligated to support all of these children.

Let’s assume that Olivia wants to leave her estate to her children in equal shares, in trust as they are minors. John does not inherit any part of Olivia’s estate, but he is named as the trustee of the funds held in trust for their children, and Olivia’s sister is named as the trustee of the funds held in trust for Olivia’s child from her first marriage. Olivia figures that John is self-supporting, and that he will benefit financially from having his support obligations for their children reduced by the funds he holds in trust for them under the provisions of her will.

In this case, John would have the right to make an equalization claim against Olivia’s estate. The calculation of the amount of the claim requires a fair amount of investigation and information. Depending on the facts, the amount of the claim can be as high as half of the value of the Olivia’s estate (in the unusual case where John owns no property and none of Olivia’s property is “excluded property” (e.g. certain gifts and inheritances)). Similarly, if John wants to leave his entire estate to his children, Olivia may have the right to make an equalization claim against John’s estate.

Equalization claims are costly, create uncertainty, and delay the administration of an estate. Therefore, in this scenario an estates solicitor would normally recommend that a client leave a carefully considered inheritance to their spouse. The amount of the inheritance should be calculated to ensure that the spouse would likely not receive more if they made an equalization claim against the estate. This amount is a constantly moving target, as asset values are always changing, so the estate plan should be reviewed on a regular basis.

In my practice, I have had a few clients who have wanted to cut out the spouse and leave their entire estate to their children. After explaining the potential for an equalization claim to be made by the disinherited spouse, a common client response is “oh, he/she would never do that….” I then point out that, while that may currently be the case:

1) the disinherited spouse may feel very differently once my client is deceased, or

2) the disinherited spouse’s new partner may encourage the claim to be made, or

3) if the disinherited spouse is mentally incapable of making financial decisions when my client dies, the attorney for property of the disinherited spouse may feel legally obligated to make the equalization claim, as part of the attorney’s obligation to act in the best interests of the disinherited spouse.

Finally, while it is common for spouses to see an estates lawyer together to make their estate plans (known in the law biz as a “joint retainer”), this arrangement does not always work well in blended family situations. In a joint estate planning retainer we have a “triangle of confidentiality” (the three points of the triangle being the two spouses and the lawyer). While no one outside of the triangle has the right to hear about any information or decisions, there are no secrets within the triangle. If one spouse wants the lawyer to keep something secret from the other spouse, the lawyer cannot comply with that request. Therefore, it is fairly common in blended family scenarios that each spouse retains their own estates lawyer to advise them and to draft their will and powers of attorney. While two lawyers are clearly more expensive than one, the higher level of confidentiality and privacy and the benefits of having a lawyer completely “on your side” are often worth the extra fees.

If you enjoyed this post by Katy, just type her name in the "Search This Blog" box on the right side under the Hire The Blunt Bean Counter badge and you will find numerous excellent blog posts she has contributed on wills and estates.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.