Establishing a spousal trust provides the surviving spouse with an income stream for their lifetime but it also preserves capital for future heirs of the deceased spouse’s choosing, such as biological and stepchildren.Getty Images/iStockphoto
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
With one in four adult Canadians getting married for a second time in their lives, according to recent Statistics Canada data, developing an estate plan that works for their new circumstances is becoming more crucial to protect their individual assets, trust and estate, experts say. That’s especially important if both partners have children from their first marriage.
While some may want to set up a marriage contract in advance, others may want to take care of their affairs later with an estate lawyer.
“You’re merging different families and they all have expectations,” says Akua Carmichael, director of tax and estate planning at The Empire Life Insurance Co. in Toronto. “When you have kids involved, it can get complicated very quickly.”
Updated wills are paramount, especially for second marriages, as the formula for asset distribution differs if a second-marriage spouse dies intestate, she says. In that situation, the rules differ depending on the province. However, Ms. Carmichael notes that estate assets will be divided between the surviving spouse and any biological or adopted children. Stepchildren would not be entitled to any part of the estate.
Ms. Carmichael, who previously worked in private practice as a wills and estates lawyer, says it was common for second-marriage couples to decide to make promises of their intentions to each other to simplify the issues. Specifically, when one spouse dies, everything is left to the surviving spouse, who will then leave everything to all their kids, whether biological or stepchildren.
But without careful planning and specific measures, nothing in that circumstance can stop the surviving spouse from changing their will upon the first spouse’s death. The surviving spouse could decide to not include the deceased’s biological or adopted children in the new will, a more common scenario than not, she says.
Ms. Carmichael says second-marriage couples can consider setting up mutual wills, legally binding contracts that the couple agrees “on how assets will be distributed, and that they’re not going to alter or revoke those wills after the death of either spouse. With this type of will, the surviving spouse is legally bound to stick to that agreement.”
As for asset distribution, Ms. Carmichael says establishing a spousal trust provides the surviving spouse with an income stream for their lifetime and it also preserves capital for future heirs of the deceased spouse’s choosing, such as biological and stepchildren. To avoid family squabbles and conflicts of interest, she says an independent trustee should manage the trust.
Getting separate legal counsel
Andrew Torbiak, partner at Tradition Law LLP Estates & Trusts in Winnipeg, says some clients will eschew setting up trusts and estate plan agreements because they cost more than standard wills. In those cases, Mr. Torbiak will have clients sign a disclaimer that he discussed what can go wrong when “falling back on faith and hoping the second-to-die spouse does not change the will after the death of the first spouse.”
He notes that while second-marriage spouses will often draft the wills from a blended family perspective, “many are still unwilling to go into those difficult areas of conversation for fear of offending or hurting the feelings of their spouse.”
In more complex cases, Mr. Torbiak might advise the spouses to seek out independent legal advice as part of the planning process. Using the spousal trust as an example, one spouse might want to have their rights explained to them by a lawyer not representing both spouses.
“There’s an added element of protection because the independent lawyers were not obligated to look out for the joint interests of both spouses; only the individual circumstances of one spouse,” he says. “That plan is stronger in that if someone wants to attack the plan later on, they cannot say one spouse was leading the other spouse by the arm when the wills were signed.”
That’s especially the case if one spouse is a business owner and children from a previous marriage are also shareholders – great care must to taken to protect their interests, says Kevin Wark, managing partner of Integrated Estate Solutions in Toronto and the author of The Essential Canadian Guide to Estate Planning (3rd Edition).
“Family businesses and second marriages can create some interesting and difficult interpersonal and financial issues that often require the assistance of professional advisors with experience in this specific area,” he says.
Facilitating meetings and mediation
Advisors can help their blended family clients by ensuring they have updated wills for their new circumstances. If they don’t or the estate plan warrants a review, they can refer those clients to a lawyer in their network who specializes in blended family estate planning, Mr. Torbiak says.
“[Blended family planning] is a niche area … and advisors can take it a step further by facilitating a phone call and meeting with the planning lawyer,” he says.
Ms. Carmichael adds that other financial planning opportunities include updating beneficiary designations and possibly naming biological and/or stepchildren as beneficiaries of life insurance policies or annuities, for example.
“This strategy provides children with assets quickly and there’s no need to wait for the surviving spouse to pass away before receiving assets from a spousal trust, which in some cases can be several years or decades,” she says.
Finally, to avoid future family fights between the surviving spouse, biological children and/or stepchildren, Ms. Carmichael says adding a clause in the will requesting that beneficiaries agree to mediation if they cannot work out their issues and differences can go a long way.
“A letter of wishes could also be included for all the beneficiaries that says, ‘If conflicts or disputes arise and you cannot all agree, I would like you to sit down with a neutral independent third party to work out the issues and make every effort to avoid litigation,’” she says.
For more from Globe Advisor, visit our homepage.