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.

Blended Families are Twice the Estate Planning Fun…Even with a Marriage Contract

I have received numerous requests to write about estate planning for blended families. I thus asked Katy Basi, my resident wills and estate planning contributor, to write about this topic. Katy has graciously provided a two part post on estate planning for blended families. Today she writes about situations where there are marriage contracts in place and next week she discusses the issues that arise when you do not have a marriage contract. So without further ado, here is Katy!

Blended Families are Twice the Estate Planning Fun…Even with a Marriage Contract 

By Katy Basi

 

In any list of situations that create complexity in an estate plan, “blended families” are near the top. Given the number of potential issues involved, this post will address situations in which the currently married spouses have entered into a valid marriage contract with each other waiving all potential claims against each other's estates. My blog post next Monday will address cases in which no such contract is in place.

Note: All discussion is based on Ontario law – the relevant law in other provinces may be different.

Even in the simplest blended family situation, where there are no children from past marriages or common law relationships, the provisions of any contracts or court decrees relating to the prior relationships must be taken into account in creating the estate plan for the current spouses. Let’s take the example of married spouses Kurt and Brigit. This marriage is the first for Brigit, but Kurt was previously married to and divorced from Amber, and has ongoing support obligations to her due to Amber’s inability to work.

There are no children from Kurt’s first marriage. Kurt and Brigit want to leave their entire estates to each other, failing which to their children. However, Kurt has forgotten about the provision of his separation agreement with Amber requiring him to maintain a $500,000 term life insurance policy for her benefit. He used to have such a policy in place, but inadvertently let it lapse a number of years ago.

Kurt’s estates lawyer advises him that unless he reinstates the policy, Amber will have a $500,000 claim against his estate. This claim would greatly reduce his current family’s inheritance and lead to additional complexity, delay and cost in the administration of his estate. Kurt therefore puts an insurance policy in place for Amber’s benefit as soon as possible.

Now let’s take the example of John and Olivia, both of whom have children from their first marriages. John’s children from his first marriage are self-supporting adults who have finished their post-secondary education. Olivia’s child from her first marriage is still a minor, and she is required by her separation agreement to pay child support. This support obligation lasts until the child is 18 years of age, or, if the child is still in school, until the child attains age 25. John and Olivia also have two minor children together.

As John and Olivia have a marriage contract, each is free to create an estate plan without worrying about a claim by the other against their estate (it is also assumed that each of John and Olivia is self-supporting, and therefore would not be able to make a claim for spousal support against the estate of the other).

Olivia is therefore free to split her estate among her minor children from both marriages, if she so desires. She is under a legal obligation to provide for her child from her first marriage, as that child is a dependent of hers and could otherwise make a “dependent’s relief” claim against her estate through a litigation guardian.

John is under no such obligation with respect to his adult children, as they are not financially dependent on him. However, John may wish to leave part of his estate to his adult children, and he is free to do so as long as his estate plan provides for his minor children from his current marriage.

My next blog post will address these scenarios where there is no marriage contract. If we think of these testators as having a number of estate planning balls to juggle, failing to have a marriage contract adds a flaming torch into the mix!

Blunt Bean Counter Note: As per this post on recent changes in legislation in relation to the taxation of trusts, the new legislation can impact on estate planning for blended families. Thus, you may wish to confirm with your estate lawyer, that your will does not need to be amended in light of these tax changes.

If you enjoyed this post by Katy, you may wish to check out some of her prior guest posts such as: Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets. She has also posted on the family cottage and wrote a very well received post titled, An Estate Fairy Tale.

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. 

How Not To Move Back In With Your Parents - Book Review and Giveaway

Rob Carrick of the Globe and Mail is one of my favourite finance writers. Back in March, he had the audacity to release his latest book, How Not To Move Back In With Your Parents, during income tax season. As such, I wasn’t able to read the book until recently, but, as they say, better late than never. Rob has been kind enough to provide me with two copies to give away to readers (see the details at the end of this post).

The book is promoted on Rob's website as a book that speaks not only to late teens and 20/30-somethings, but also to their parents. Rob states “There’s a lot parents can do to help their kids develop good financial habits, and to strategically assist them as they graduate, move into the workforce and start a family”.

As a father of a 22 and 20 year old, I was intrigued by the book’s premise.
I just finished reading the book and quite enjoyed it. Rob is blunt (a trait I certainly admire) and I really appreciate his no-nonsense, give it to them straight-up approach in providing advice to both parents and their children. While his approach would seem to resonate with parents of my generation, Rob also seems to have a finger on the pulse of the younger generation, which is reflected in his humorous and informative case studies.

Personally, I think Rob may be slightly ambitious with his dual objective of speaking to parents and young adults. It is not that I don’t think he does an excellent job in reaching both audiences; I am just dubious that the younger audience will take heed until they have made many of the mistakes he tries to save them from. I know that when I try to give my son financial advice, it is like talking to a wall, a wall that has eyes that roll up and down and I know a little bit about finances. Hopefully, I am wrong and young people have/ will embrace this book, because it is definitely an excellent guide for them.

Chapter Outline

Below is a chapter summary. I have noted my favourite comment Rob makes in each chapter. I just find them insightful, practical and several caused me to chuckle.

Chapter 1: Affording College or University – “Unless your parents are okay with you being loaded down like a mule with student debt, they should be paying as much attention to RESPs as to TFSAs and RRSPs”.

Chapter 2: How to Handle Debt, Both in School and Afterward – “Shrewd handling of credit is one of the things that defines a financially successful person”.

Chapter 3: You and Your Bank – “Banks are basically stores that offer financial products for sale. They are in business to sell you stuff, not to be your adviser, your partner or your friend”.

Chapter 4: Saving, Budgeting and What to Do if You Have to Move Back Home – “A little parental support at a key moment can help position you for a lifetime of success”.

Chapter 5: Looking to the Future: RRSPs and TFSAs – “A moderate, steady approach to retirement saving is the best present you can give your future self”.

Chapter 6: Mobility: Or, Cars and You – “Stay car-free as long as possible after you graduate”.

Chapter 7: Buying a Home – “Renting can be the shrewder move than buying if you cannot properly afford the full cost of buying and owning a home”.

Chapter 8: Weddings and Kids – “Arrange the best wedding you can afford”. Also, I could not resist this nugget on engagement rings that probably alienated half the females reading the book: “Men, don’t buy that crap about spending 3 months’ salary – spend what you can afford and remember that you can always buy a nicer ring later on as an anniversary present”.

Chapter 9: Insurance and Wills – “Young adults starting a family have a lot of expenses and term life is the most economical way to provide for a family in case of disaster”.

I am going to give away one free copy of Rob’s book to both a young adult and a parent. To enter the book giveaway, in the comment section below, please provide your first name and the first initial of your last name and identify yourself as a parent or young adult. Then, either provide a comment on the blog post, or give me your best financial tip for a young adult from a parents perspective; or if you are a young adult, the best tip you would give to another young adult. For my more social savvy readers, you can tweet your comments to me, including the hashtag #BluntBC. I will announce the two winners next Wednesday on my blog and twitter account.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.