Blended families represent 12% of families with children in Canada. Many of these face financial and estate planning challenges, which can be further complicated by emotional factors. This can be both tumultuous and overwhelming, but there are ways to avoid these and streamline the transition to a blended family.
Update your wills: One common mistake is neglecting to update wills after divorcing or starting a new relationship. In Alberta, a marriage revokes any previous wills. If someone remarries and dies without drafting a new will, they may die intestate and their estate will be distributed with the provincial intestacy laws. It’s likewise important to review investments where a beneficiary is named, such as insurance policies, RRSP contracts, or work pension plans. Serious estate conflicts can surface if a spouse neglects to remove a former partner from these plans or policies.
Choosing an executor can be a difficult decision, because blended families face choosing between a spouse, children from a current or prior relationship, or a combination of. They also need to consider how well those individuals would get along or be willing to work together, so it may be prudent to designate a third party as executor such as a trust company, lawyer, or accountant.
Gifts and trusts: Trusts can be an effective way to distribute assets in a way that helps solidify a particular outcome, as they can be tailored to your preferences. Some people may wish to divide assets during their lifetimes. This is where outright gifts or inter-vivos family trusts may be effective. For division after death, testamentary trusts (possibly with an independent trustee) can be an ideal option. You should check with a lawyer and financial advisor for guidance.
Life insurance: Life insurance can be a very useful planning tool for blended families. Leaving life insurance proceeds to children provides a legacy for them and frees up the estate for the surviving spouse. Life insurance proceeds are not taxable, and naming beneficiaries on a life insurance policy means the proceeds bypass probate and are paid directly to them. This is an effective way to pass money to beneficiaries while maintaining the family’s privacy. Life insurance proceeds can also be used to pay the estate’s liabilities, such as taxes, mortgages or debts. This will help to ensure that non-liquid assets, such as a business or vacation property don’t have to be sold to pay bills.
Marriage contracts: While the idea of a marriage contract might seem uncomfortable, they can serve multiple purposes, especially in second marriages. To get past this reluctance, families need to understand the following:
- The contract wording involves thorough and open communication.
- Contracts help to assure both people in the relationship that they are protected.
- They permit each spouse to outline which assets they will leave to their respective children.
Its human nature to avoid talking about estate planning. Add to this the extra challenges that blended families face and it can quickly seem overwhelming. However, an experienced financial advisor can help get beyond these issues to help you make uncomplicated, equitable choices and develop a plan that meets the needs of each family’s individual unique situation.
Image licensed through Shutterstock