Divorce is unfortunately becoming more common in Canada. Divorce rates are about 1 in 3 in Canada putting us as having one of the highest divorce rates in the western world. According to Statistics Canada, re-marriage is very common but becoming less so because of the tendency to co-habit and live together without marriage. About 75 and 65%, respectively, of divorced men and women remarry.
Put this together and you have a very important need to revisit your financial and estate plans in the case of second marriages. In today's world, if you are living in a common law relationship, the same rule may apply. Let's take a look at some planning considerations and examples.
- Joint ownership. Let's look at Larry and Beth who were both married previously. Larry was revising his will and wanted to make sure that some money went to his two adult children. In his will, he stipulated that Beth would get 50% of the estate and his two kids would get 25% each. The problem was that he owned the home as “joint tenants” with Beth. In addition, he had joint bank accounts and joint investment accounts. The way his assets were titled – jointly, with rights of survivorship – if he died, the house, the bank account, and the investments would all go to Beth, and the kids would get a percentage of whatever was outside of these investments; in this case next to nothing.
According to Avideh Musgrave, a lawyer with Ritchie Mill Law Offices, “There are two ways of owning property. The more common is “joint tenancy”, with rights of survivorship. Essentially, when property is held in joint names, the surviving joint owner becomes the owner of the entire property. The property bypasses probate, bypasses the will, and is not part of the estate. Less common is “tenants in common” where each owner only owns a portion of the property. Upon death, their portion forms part of their estate.”
In the case of Larry, he may have been better off owning the house as tenants in common with Beth, to ensure that his kids would get a portion of his property.
- RRSP beneficiary designation. If you name a beneficiary other than the spouse, you must understand the tax consequences. Not only will the RRSP/RRIF be taxable but also it will be taxable to the estate. The estate is responsible to file the final return.
Audrey was widowed and living common law with her new partner Jack. Audrey wanted to make sure that her daughter Elizabeth got something so she designated her as the beneficiary for her RRSPs. When Audrey passed away, Elizabeth got the RRSPs but the estate was responsible for the tax on the RRSPs. Jack and Elizabeth wound up getting into a battle over who would have to pay the tax on the RRSPs. Be careful when listing someone other than a spouse as the beneficiary for an RRSP.
- Insurance for the kids. Musgrave suggests that “In the case where you have adult children, the spouse retains most of the legal rights in Alberta. If you have adult children and you want to ensure they get an inheritance, consider buying life insurance and have your adult children as the beneficiaries.”
Rick and Jessie are in their second marriage and have adult children from their previous marriage. When they got married, they discussed that if they died, the surviving spouse would ensure that the children of the deceased spouse would get 50% of the estate. By the time Rick passed away, he had not finalized this arrangement in a will, which created a lot of tension and conflict between his kids and his spouse. Because there was no will, it was up to Jessie to give to the kids what she thought was fair. Jessie gave Rick's kids only 50% of the non-RRSP investment, which was much less than the kids though they should get. She felt the house was in joint tenancy and she was the direct beneficiary of the RRSPs. Rick could have avoided this conflict by putting some life insurance in place and drawing up new wills at the time of re-marriage.
- Spousal trusts. The benefit of spousal trusts is to make sure your children get something after you and your spouse have passed away.
Ben was remarried to Jenny and they both made wills and made each other the sole beneficiaries. Afterwards, they had a family meeting with Ben's adult children. Basically, his wish was to pass everything to his wife for her lifetime. When she died, her will stated that 50% of her assets would go to his two adult children. When Ben died, all of the assets passed to his wife (as stated in his will). About 2 years after Ben's death, his children got into a fight with Jenny and Jenny wrote them out of her will.
Ben could have avoided this by setting up a spousal trust in his will. The trust could have given Jenny assets and/or a pre-determined income for her lifetime, to ensure that she could still carry on with her lifestyle. However, the trust would ensure that any remaining assets would go to the kids on Jenny's death.
As you can see, estate planning for second marriages requires some detailed thought and planning. Don't assume everything will work out. Take the time to plan ahead and seek advice if necessary. Rules will vary from Province to Province.