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A blended family requires customized estate planning to minimize potential conflicts

par Susan Yellin | November 17 2016 07:00AM

Photo: Freepik

Constant clashes may be an unfortunate reality for some newly blended families, but it’s the last thing you want when dealing with the kind of intricate estate planning required to ensure spouses and all children are treated fairly.

“One of the overriding objectives that clients have, whether they think about it or not, is minimizing conflict because the potential for conflict in the second marriage or blended-family context is huge,” says Joel Cuperfain, vice president and estate planning specialist with RBC Wealth Management in Toronto. “Anything you can do at the front end that mitigates the risk of conflict is going to be a good thing.”

Cuperfain says advisors must first ask questions about what blended family parents hope to accomplish, particularly who gets what kind of inheritance and when. “Only then will you know what some of the objectives are and then you know what some of the issues are.”

Financial advisors say they are seeing an increasing number of blended families coming to them for financial planning help. There are no hard and fast numbers on blended families because Statistics Canada only keeps track of step-children in the same home as their parents, which can leave out a large chunk of blended family children long grown up and in their own houses.

Complex issues

A recent poll by CIBC indicates that among Canadians aged 55 and over, only one-third had spoken to a financial advisor or had plans to talk to one after either marrying or moving in together. Interestingly, it’s this age group and older that are more likely to have complex financial issues. “[And it’s] these factors, if not properly discussed in advance [that] can add significant complexity to the new relationship,” writes Jamie Golombek, managing director, tax and estate planning, CIBC Wealth Strategies Group, in a recent report.

Spouses of newly blended families often think they can take the same steps they did in their first marriages – that is, leave everything to each other. “But the biggest issue for many couples in a blended family is the fact that they need to have very customized estate plans,” says Christine Van Cauwenberghe, vice president, tax and estate planning with Investors Group in Winnipeg. “In many cases, the couples don’t even realize what the potential issues are until you draw them a very clear picture as to what may happen when one spouse dies.”

Van Cauwenberghe says many advisors know immediately that there could be long-term anxiety and problems if one spouse leaves everything to the surviving spouse because the tendency is for that person to then leave everything only to their children, basically disinheriting the other spouse’s children.

To deflect this situation, Cuperfain tackles a mound of paperwork, including new spouses’ wills, beneficiary designations for RRSPs, RIFs, TFSAs and life insurance. Many advisors also want to pore over documents such as pre-nuptial agreements as soon as they meet rather than deal with any problems in the future.

Future tax liabilities

Next comes what assets each parent owns, both jointly and separately, as well as what debts. This includes looking at future tax liabilities. If, for example, assets are to go to the surviving spouse, then taxes can be deferred until the second death, but if they then go to the children, there will be a tax liability. In both cases, says Cuperfain, some liquidity is necessary to pay those taxes.

“It’s especially important in the blended family context because you run the risk of assets going to one part of a family. Taxes can take a significant bite out of the assets that will ultimately end up on the other side,” he says. “Cash dollars [via tax-free life insurance] solve an awful lot of estate planning problems,” he says.

Joint ownership

Many of Van Cauwenberghe’s clients jump to the joint ownership conclusion because they seem “obsessed” with bypassing probate fees. (These fees vary from province to province.) She says adding on a spouse as a joint owner of all assets may not make sense even for family property reasons. In fact, she says, it may be better to keep those assets separate, especially for those who are getting married later in life. In cases of joint tenants with right of survivorship (JTWROS), these assets will go directly to the survivor, potentially leaving nothing to the children of the first spouse.

Van Cauwenberghe has had to explain to clients that should the surviving spouse marry again and want to bypass probate fees again by putting the new partner on as a joint owner on assets then that new spouse will actually end up inheriting all of the first spouse’s property.

“We have had to have some very pointed discussions with clients regarding what the risks are. In some cases, clients get defensive about it because they think that you are alleging that the surviving spouse will somehow be doing something nefarious to intentionally disinherit the children of the first spouse,” she says.

Spousal trusts

Spousal trusts are potential strategies, but they can be cumbersome in trying to control what will happen to those assets in the future, she says. Van Cauwenberghe is also a proponent of life insurance as a method of providing some sort of tax-free financial distribution after the first spousal death in a blended family.

Van Cauwenberghe says blended family parents are not usually doing anything intentional to hurt the other person or their children. Rather, it’s a complete lack of financial planning that results in these tricky situations.

But she adds that after many years of experience, she knows that unless specific steps are taken to contemplate both sides of the family, there will be long-term pain by those disinherited.

On top of that their anger is often directed at the advisor. Van Cauwenberghe says this is completely understandable because it’s hard to explain why a professional advisor would be instrumental in helping to leave everything to the new spouse and not contemplate the children from the previous relationship.

“It’s a huge mess,” she says. “I just think that in this day and age when you’re dealing with so many family types to slap on direct beneficiary designations without having a more in-depth discussion about the ramifications, is dangerous for the advisor.”

Shareholder agreements

In addition, if one of the spouses is a business owner, critical questions involve who will inherit the business or who gets the assets if the business is sold. A shareholder agreement is necessary if there is more than one shareholder in the company.

Another potential issue is who the spouses name as their executor. Should it be the new spouse or will there be problems as to how that spouse deals with assets that are intended to end up in the hands of the children? Should the adult children be executors? Do they have the emotional maturity to handle this or is there a risk of conflict with the second spouse?

“Often there is good reason to go to a third-party professional like a lawyer or a trust company [to be the executor,” says Cuperfain.

Thought has to be given as well to what will happen to the finances should the blended family parents get a divorce. In cases of these so-called “serial monogamists” it’s more important than ever to have a pre-nuptial agreement so both parties will be protected, he says. “Once bitten, twice shy. Both parties may be more inclined to have that domestic contract at the front end, recognizing that things do happen.”

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