Estate Planning for Blended Families in BC

After separation or divorce, many people move on to form new relationships. With the steady rise in the number of second marriages and blended families, we have seen a corresponding rise in the number of estate disputes. 

If you are in a blended family situation, the interests of your new spouse, your children from your first relationship, your stepchildren, and any children born of your second marriage may clash. This can lead to bitter disputes over property and money after you die or become incapacitated. 

The good news is that these types of disputes can be avoided by having a comprehensive estate plan in place. With careful consideration and trustworthy legal advice, you can prepare and estate plan that protects you and each of your loved ones. 

Issues to consider: Estate planning for blended families

What is a blended family?

A blended family is a family unit formed when two people enter a relationship, and one or both of those people bring a child or children from a previous relationship. 

Blended families are also sometimes known as stepfamilies. The couple can be legally married or common law. They may have a child or children together after forming their blended family. In some cases, there can be significant age differences between the children and step children from previous relationships and/or the new children born of the second marriage. 

Unique estate planning concerns that arise in blended families

Estate planning for blended families requires careful consideration of assets and relationships. The issue of who brought what into the relationship is significant; it may be that one spouse brings considerably greater assets into the second marriage which were accumulated during their first marriage. That spouse may wish for their earlier-acquired wealth to benefit only their natural children and not their stepchildren (especially if the stepchildren are already adults when the family became blended). 

Perhaps the most significant challenge in a blended family is ensuring that the new spouse is provided for financially while also ensuring that children from the first marriage receive their expected inheritance. https://onyxlaw.ca/inheritance-law-bc/ Typically, when one spouse dies, they leave their entire estate to their surviving spouse. The estate is used to support the surviving spouse and raise the children. There is an expectation that whatever is left when the second spouse dies will go to the children. That is not usually an issue when the children are common to the parents. 

The situation is different if some of the children aren’t the natural children of the surviving spouse. There is a risk that the surviving spouse will drain assets during their lifetime, so there is little to nothing left for the deceased’s children when the surviving spouse dies. There is also concern that the surviving spouse won’t treat all the children equally.  Even if the second spouse makes a mirror will which states that they will treat all the children equally, there is nothing preventing the surviving spouse from making a new will that differs from the mirror will after the first spouse dies.

Are stepchildren entitled to inheritance?

In BC, step children have no right to inherit from their stepparent’s estate, unless the step children are specifically named as beneficiaries in their stepparent’s will. So, if the surviving spouse changes their will after the death of the first spouse and doesn’t make provision for the children of the first spouse, the children of the first spouse are out of luck. 

Step children have no right to challenge a stepparent’s Will. Only spouses and natural children or legally adopted children have the right to apply to vary a Will to get a share of the estate. 

Estate planning tools for blended families

It’s crucial for blended families to implement a suitable estate plan—including incapacity planning—to prevent disputes in the future. There are many ways to arrange your affairs to provide for all of your loved ones—including  your stepchildren if you wish—while providing additional security for your natural children.

Mutual Wills

The general rule in BC is that a will-maker is entitled to revoke or alter his or her Will at any time, so there is nothing preventing a surviving spouse from making a new will that differs from a mirror will after the first spouse dies. In contrast, a “mutual will” creates an obligation on the surviving spouse to not change his or her will. 

“Mutual wills” and “mutual will agreements” are commonly used by spouses and are especially valuable where each spouse has children from a previous marriage. In a blended family situation, the purpose of a mutual will agreement is to bind the surviving spouse to provide for the children of the spouse who dies first.

If the surviving spouse later revokes or alters his or her will, those who were intended to benefit under the mutual will have a remedy in the form of a constructive trust on the survivor’s estate. In other words, the intended beneficiaries under the mutual will can sue to enforce the obligation. 

Provisions can be added to a mutual wills agreement limiting or prohibiting gifting of assets before death. This is to prevent the surviving spouse from skirting their obligations by giving away assets or wealth during their lifetime to their own children, etc. so that there is little to nothing left for the surviving spouse’s step children when the surviving spouse dies.  

 Update Your Beneficiary Designations

If you have assets such as life insurance, RRSPs, TFSAs, or a workplace pension, you can use beneficiary designations to achieve estate planning goals given your new family status. For example, you can name your natural children as beneficiaries of your life insurance, so the proceeds will pass to them outside of your estate. For those who have minor children, a trust can be set up to hold insurance money until the children reach the age you specify. 

Bear in mind that there are tax implications when certain types of assets are left to certain people. For example, an RRSP or RRIF rolls over tax free to your spouse, and won’t be taxed until your spouse’s death, which is not true if you designate your adult child as beneficiary of your RRSP or RRIF. Understanding which assets are taxable and when taxes can be deferred is the best place to start developing a tax-efficient strategy for your blended family. If you are concerned about the amount of income tax your estate might face, contact our estate planning team today.

Trusts

Types of trusts

A trust can be a very effective way to protect assets and wealth while also providing for the financial needs of your loved ones. There are many types of trusts to consider:

A spousal trust or common law partner trust can be created that allows your spouse to receive income from the trust during their lifetime; on the death of your spouse, the remaining capital of the trust passes to the beneficiaries you selected (e.g., your natural children, your children and your stepchildren). 

An alter ego trust or joint partner trust can be used if you are over 65 and a Canadian resident. These types of trust offer tax advantages and can be an excellent option to provide for your spouse during their lifetime, to ensure a “gift over” to your children after the death of your second spouse, and to address incapacity planning. By naming an alternate trustee other than yourself, it serves a similar function to a Power of Attorney. That person will step in to manage the trust if you become incapable.

A trust can be established to provide for children and/or stepchildren while they are in college or university.

A trust can be set up to provide for disabled children and/or stepchildren. 

What type of trust is best for blended family?

That depends primarily on your family’s needs and the types of assets you own. But there are other considerations to factor in. For example, a spousal trust can be created during your lifetime or in your will. If you create a spousal trust in your will, probate fees will be payable on the assets put into the trust, and the assets passing in the trust are open to a wills variation challenge. A spousal trust created during your lifetime avoids probate fees and are not subject to a wills variation challenge. 

Our estate planning lawyers can help you determine what type of trust(s) would be most advantageous and recommended as part of your estate plan.

Joint Tenancy (or Severing a Joint Tenancy)

Married and common law spouses often hold their assets and property jointly. One of the major benefits of joint ownership is the right of survivorship, which means the asset or property passes automatically to the surviving joint owner on the death of the first. 

This is an effective way to avoid probate fees but may not be the best choice in a blended family. The surviving spouse who receives the asset or property can do what they choose with it. They may re-marry and leave it to that new spouse, sell it, spend it, etc.—all of which serves to exclude the children of the spouse who died first. There are ways to avoid that problem. For example, you can hold title to your home jointly with your new spouse so they receive it after you die, while at the same time providing for your children in your will, by naming them as beneficiary of your life insurance, etc.

If you already own property or a bank account, for example, in joint names but that does not fit within your overall estate plan, you can sever the joint tenancy. As “tenants in common” each spouse owns only their share of the asset or property. When a spouse dies, the property does not pass to the other spouse by right of survivorship. Instead, their share of the asset falls into his or her estate to be distributed in accordance with the terms of their will. 

Life Estates

A life estate is an interest in real property that allows the beneficiary (the “life tenant”) to reside in the property for the duration of their life. On their death, the life tenant loses their interest in the property. A life estate can be used for a family home, cottage, etc. After the death of the life tenant, ownership of the property passes to the person or people you designated (also called the “remaindermen” or “capital beneficiaries”).

A life interest in assets can also be created. For example, a life interest in income from an investment portfolio can be established to benefit your second spouse during their lifetime. On their death, ownership of the asset passes to the capital beneficiary you selected. 

Marriage Contract or Cohabitation Agreement

It is well-known that these types of agreements can be used to protect assets on separation. They can also be used to protect assets on death. The agreement can specify what happens to property owned prior to the new relationship and what happens to property acquired during the relationship. All of this is extremely beneficial for people who are remarrying and want to protect the assets they are bringing into the relationship. These agreements can also be drafted to protect the interests of your children from a previous relationship.

While these agreements are often referred to as “prenups,” they can be entered into before or during your marriage or common law relationship. The agreement must be in writing, signed, and properly witnessed to be legally enforceable. Full financial disclosure is also essential. 

Estate planning advice for blended families 

Estate planning is essential to prevent family conflicts in blended families/second marriages. Determining what is fair in a blended family context requires a careful consideration of the circumstances and may be complicated by the family dynamics. 

If you die without a will or become incapacitated without an Enduring Power of Attorney or Representation Agreement in place, your loved ones may argue over who should control your estate, your finances, or your health care decisions. If their dispute is particularly contentious, they may end up pitted against each other in court. The same is true if you neglect to update your will to remove your first spouse or forget to update beneficiary designations in your life insurance, RRSP, TFSA, or workplace pension. 

The passionate and knowledgeable estate planning lawyers at Onyx Law Group pride ourselves on providing clear legal advice and personalized estate plans to suit your needs. When you put an estate plan in place, it provides you peace of mind and reduces or eliminates the potential for disputes among your family members.