The challenge of estate planning with blended families

Q. My husband and I are senior citizens, have both been married before, and each has adult children from a previous marriage. We each have investments we accumulated during our working years, which we have kept strictly separate (about $200,000 each). We purchased and own a home together, which is mortgage free, worth about $250,000. Seems simple, right?

Recently we made a will together, but now I am questioning that will. Here’s what was done: My husband wants to leave his investments to me. They are all in RSP’s and a LLIF. The plan is to pass these on to his children once I pass away. They are already his beneficiaries should I go first. I wish he would just leave these to his children directly but he won’t hear of it.

My own investments of about $80,000 are in a Registered Retirement Income Fund (RRIF), a TFSA and a margin account and the three total $200,000. My RRIF goes to my husband if I die first, with my children as beneficiaries in case my husband dies first. My TFSA goes to my children immediately upon my death, and my margin account will be part of my/our estate, as I cannot designate a beneficiary. The estate is to be divided 50% to my children and 50% to his children.

I have two concerns: First, if either one of us dies, how can we make sure the other will (be able to) change the beneficiary on the sheltered accounts according to the spouse’s wishes? After all, they are not part of the estate. The survivor could be mentally incapable by then, and unable to change anything. Second, regardless who dies first, the estate tax on my husband’s investments will be almost three times that of my own RIFF. If our estate is charged with these taxes, my children will receive much less out of the estate than they should. I think the taxes on his investments should come out of my husband’s half of the estate (the estate currently being the value of the house, plus my personal margin account, which I am slowly transferring into my TFSA).

If our sheltered investments end up taxed at 50%, my children will be paying a good deal of the tax on their stepfather’s investments, and they will get considerably less than my husband’s children. Am I overthinking this? How can we fix this so both of these concerns are addressed? And, from what I have been reading on MoneySense, Revenue Canada does not always tax the estate—sometimes it taxes the beneficiaries. I would prefer to see the beneficiaries being taxed, and then the actual estate (house) to be divided equally eventually, but how do we achieve that? Thanks so much,

—Chris

A. Chris, you and your spouse have adult children from previous marriages. Now you question your estate plans contained in your recent wills. Your question raises estate planning concerns for blended families.

Did you use the same lawyer, or did you prepare do-it-yourself wills? If you used the same will lawyer, then this lawyer cannot take sides in any discussion of your estate plan. This may prevent your lawyer from commenting on changes to your proposed distribution.

Lawyers acting for two individuals must confirm that they cannot keep secrets from either client. This is a waiver of confidentiality that is confirmed in writing. The lawyer should also confirm that there is no conflict of interest in your estate plans.

If a lawyer prepared wills for both of you, that lawyer cannot change your will without your spouse’s consent. This will likely mean you will need a new lawyer.

Wills are not contracts or estate plans. Some lawyers make wills based on your instructions. This may satisfy your wishes but not be tax efficient. Making your estate plan tax efficient is a valuable goal. Your estate plan can include life insurance, registered investment plans, and pension benefits. These assets may be designated or jointly owned. They would not be controlled by your will or executor. Estate plans satisfy your legal obligations and include all your assets.

Planning for blended families is challenging. If you do not meet your spousal support obligations, expect your estate to wind up in court. Spouses may not be able to live on what you leave them. You should take advantage of tax exemptions for spousal gifts or transfers.

What if you do not leave enough of your estate to your spouse? You run the risk that your spouse is forced to sell assets for support. This can force them to live in a manner below standards of living you would have expected and what is sufficient support in 2019 may not be in 2030 or later.

You and your spouse may need to find separate lawyers. You need advice about your legal obligations to support your spouse. You may have no legal obligation whatsoever to support adult children who are financially independent.

Ed Olkovich is a Toronto lawyer and certified specialist in Estate and Trusts Law

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