What is Mine Might Not be Yours: Estate Planning Consideration for Blended Families
Post-divorce, many Canadians are lucky enough to find second relationships, whether it is cohabiting leading to a common law partnership or another trip down the aisle. According to a 2011 census data release by Statistics Canada, blended families (where one or both spouses have children from previous relationships) have become a national norm, representing about one in eight couples’ families with children. This blog takes a closer look at the type of estate planning issues that blended families can face.
As new relationships are formed with the new spouse’s family, estate planning becomes more complicated and steps must be taken to ensure that your intentions to protect your children from the prior marriage and/or for your new spouse to be protected upon your death, and that your estate will ultimately be distributed to the intended beneficiaries.
Some couples decide not to get married for a second time and instead choose common law partnership. It is important to be aware that in Ontario, common law status does not have the same effect as marriage when it comes to inheritance laws. For example, common law spouses do not have an automatic right to raise a claim on their spouse’s estate if one spouse dies intestate; therefore, common law spouses should consult an estate planning expert and have their intentions clearly expressed in their wills.
Protecting Your Children from a Previous Relationship
Most individuals who marry into a blended family want to ensure that their children and their new spouse will be protected once they pass away. However, a typical estate plan may not be ideal if the couple does not share common biological children. The key to estate planning for blended families thus become balancing the interest of your new spouse and your children as well as asset protection. Without careful planning, one serious consequence is the potential disinheritance of children from a previous relationship.
To illustrate such a consequence, let us assume a common scenario: A and B each have two children from previous marriages. They agreed that upon the first to die, everything will go to the surviving spouse; when the second spouse dies, the estate will be divided equally among all four children. Mirrored wills are drawn up accordingly. Upon first glance, this plan appears to be the most fair to all parties involved, especially when both spouses have good relationships with their stepchildren. However, keep in mind that if A were to predecease B, there is nothing preventing B from changing his will. Every family has its conflicts, and B might decide to leave the entire estate to his own children, contrary to A’s intentions.
One possible solution for A to make sure that B is taken care of upon her death while ensuring that her estate will ultimately be distributed fairly is to create a spousal trust through her will for B. Spousal trusts are flexible and can contain restrictions, such as distributing only the income to the surviving spouse during his or her lifetime and reserving some or all of the capital for the intended children beneficiaries.
Protection of Assets from the Ex-Spouse
It is possible that your new family may require protection from the rights of the ex-spouse. During divorce proceedings, couples typically focus on the division of marital assets and custody arrangements for the children, yet little attention is paid to how this major change affects estate planning. In Ontario, while divorce does not revoke a will altogether, it has the effect of removing the spouse as executor as well as revoking any gift in the will left to the spouse. In comparison, a new marriage has the effect of revoking an existing will as per Section 15 of the Succession Law Reform Act, which can have unintended consequences as intestacy rules kick in.
If the couple separates without legally divorcing and one spouse subsequently dies, however, the surviving spouse maintains his or her entitlement under the will. If the spouse dies intestate (died without leaving a will), the separated spouse will inherit based on Ontario’s intestacy rules, which may lead to the surviving spouse inheriting the entire estate, contrary to the deceased’s intentions. As a result, it is important for wills to be revised when spouses separate.
Real Estate Across the Border
When people enter second relationships, they often already own real estate that is brought into the new family. Estate planning for such assets can be more complicated if either spouse owns property across the border, as do many of our Canadian clients. Consider A and B, the married couple in a blended family from the previous example. Before his second marriage, B purchased a vacation home in Florida and took his two daughters there every winter. After A married B, A and her two sons joined B and his daughters on their annual Florida vacations. In the event that B passes away first, he would like A to have access to the Florida house until she dies, but he wanted the house to ultimately go to his daughters only.
Since B owned the house in his personal name on this death, the property will be subject to Florida’s probate proceedings. Probate is a legal proceeding that enables the decedent’s estate to be distributed, but the proceeding will effectively freeze B’s estate, subjecting his surviving spouse, his daughters, and his stepsons to a potentially costly and time-consuming procedure. In a blended family, there are naturally more potential issues that can arise between stepparent and children as well as among step siblings. If B does not make his intentions well-known, the probate proceeding may be further prolonged as the parties litigate. Additionally, B must take into account that if he leaves the house to A outright, A may subsequently choose to sell the house and leave the proceeds to her sons as part of her estate.
To avoid such an outcome, B can transfer the Florida property into a cross border trust that avoids Florida probate and guardianship proceedings (in the event that B becomes incapacitated). If structured properly, such transfer should not trigger any capital gains tax where the property has appreciated nor any Florida land transfer tax. A trust provides the flexibility of allowing the surviving spouse continued use of the property while ensuring that the property is distributed to the intended beneficiaries upon his or her death. With careful drafting, a trust will also allow A to sell the property and earn interest on the capital, while making sure that the capital is left to B’s children as he intended.