ESTATE PLANNING FOR SECOND FAMILIES

When a person remarries, careful planing is required to balance the interests of the new family with the interests, and the legal claims, of ex-spouses, and children from prior marriages.

Existing children of the new spouse must also be factored into the planning process. Planning tools which fit easily in the an estate plan in a traditional family, such as spousal rollovers, ownership of assets in joint tenancy, and beneficiary designations, have to be worked out carefully. All this must be done to distribute assets the way according to the plan, but with an eye to the tax man, and to potential legal claims. There are a number of factors which have to be taken into account on when one remarries:

1. When a person remarries, his or her will is revoked by law, in most cases.
2. Pension rights need to be looked at, as do designations of beneficiaries under RRSPs and insurance policies. Some of these may have been dealt with in a divorce, and may no longer be available for the new family.
3. Obligations to support a former spouse or children which are contained in divorce judgement must be taken into account. If a new will does not make provision to honour these legal obligations, the new will might be attacked in court proceedings, throwing the estate plan out of kilter.
4. Tax considerations must be looked at from different angles. A simple traditional will structure, which gives everything to the surviving spouse, is very tax effective, since any capital gains are deferred to the second spouse’s death. However, this means that the surviving spouse can then make a will which might not consider the interests of the first spouse’s children from a prior marriage.
5. A spousal trust might be appropriate. This technique leaves some assets of the estate in a trust, under which only the spouse can benefit during his or her lifetime. After the death of the spouse, the remaining assets in the trust go to the beneficiaries named in the will. This structure allows the person making the will to have control of who gets the assets on the second death, while still allowing deferral of capital gains until the second death. Note, however, that an RRSP cannot be transferred tax free to a spousal trust.
6. Selecting executors can be tricky, because of potential conflicts of interest. If there is a trust for a spouse, and children of a previous marriage gets what’s left over, it might not be prudent to name such children as the only executors. If both spouse and children are named, consider naming a neutral third party as well, and make sure the will is structured so that unanimity is not required in order to make decisions. The same considerations apply when appointing attorneys in powers of attorney.
7. Many people keep assets in joint names, with right of survivorship, to avoid probate taxes. However, this effectively takes such assets outside the estate, and leaves them to the surviving owner. Such assets pass outside the will, and therefore would not form part of a spousal trust, and would not be available for other beneficiaries.
8. The effect of the Family Law Act must be considered. A will which ties up too much in a spousal trust might be attacked by a surviving spouse, who had decided to take his or share under the Act, rather than go by what is in the will,
9. Life insurance policies can be used to provide for other beneficiaries. If left to a named beneficiary, the proceeds fall outside the will, are generally tax free, and will also normally not be susceptible to attack the way a will might be.
10. There are special types of life insurance available to fund support obligations under court orders or separation agreements. These can be cheaper than regular insurance, since they are not always permanent insurance - they can be structured to terminate when the obligation ends.
11. In might be appropriate to distribute some assets to children of the first marriage before death. In some cases, this can be done through an estate freeze - restructuring one’s holdings through use of a corporation. The current value of the assets can be "frozen" -converted into shares which are then given to (or held in trust for) members of the first family. The future growth of these assets can be represented by different shares, which may be owned by (or held in trust for) members of the second family. If set up appropriately, voting control can be maintained in the hands of the original owner for life, while getting the equity into the hands of other family members. This can be especially useful for dealing with a family business, where members of the first family are active in the business, and need to be protected, while still providing some equity for the second family, and allowing the original owner to maintain control and income.

These articles are provided as general information only, and should not be considered to be legal advice. For advice on a specific situation, please see one of our lawyers.