Blended families need special attention

(August 4, 2004) While everything always worked out in the end for the Brady Bunch, life is rarely so neatly wrapped up in 30-minute segments. So-called blended families — those created by the marriage of spouses with children from a previous relationship — face unique financial challenges, according to one expert.

“From a financial planning perspective, the most important thing is that both sides of the family are able to communicate and come to an understanding about what their philosophy will be regarding money,” says Christine Van Cauwenberghe, director of tax and estate planning at Investors Group.

Even if the parents in the new family have the best interests of their stepchildren at heart, there are several financial pitfalls they need to recognize. Missing these points could breed resentment among their children or worse, leave them disinherited altogether.

One of the first issues that may arise stems from differing attitudes toward money. While one parent may dote on their children from a previous marriage and give them money when asked, the other may take a stricter approach, paying a set allowance in return for household chores which the child is responsible for budgeting.

The difference could very easily lead to resentment between the stepchildren and toward the stepparent, according to Van Cauwenberghe.

“In order to avoid any conflicts, it would be best for the parents to sit down and discuss what their attitudes are toward giving money to their children, what they consider to be a reasonable amount,” she says. “There’s no right or wrong answer, the issue is simply, ‘have you treated everyone in the family fairly?'”

Another issue which could lead to resentment down the road is education planning. One side of the family may have started saving for post-secondary costs when the children were born, possibly contributing to an RESP over the years.

Van Cauwenberghe recommends advisors make sure any RESPs the blended family might have are matched on both sides to avoid such disparity.

“In terms of savings, you need to think about whether or not you’ve planned for the future of each of the families in an equal manner,” Van Cauwenberghe explains. “There could be some disputes or resentment if one side of the family has their post-secondary education paid for and the other side hasn’t got anything.”

Perhaps the worst-case scenario for the blended family, however, involves everyone’s worst case: estate planning. But blended families can face unique perils and need close scrutiny of their wills.

“Many married couples put all their assets under joint ownership, assuming that upon their death the surviving spouse may need the money and will use the money in the best interests of all their children,” says Van Cauwenberghe.

But in such a case, the deceased’s children run a real risk of being virtually disowned.

“That has nothing to do with the surviving spouse being an evil stepmother, it just could be the result of insufficient planning,” cautions Van Cauwenberghe. “If the surviving spouse’s will says everything goes to their children, that just means natural-born and adopted children, it doesn’t mean stepchildren.”

Things can become even more complicated if the surviving spouse marries again, voiding any will they already had.

“If you do want to ensure that the kids from a previous marriage inherit something, you have to either leave your estate to your spouse in trust, or have an insurance policy set up with your children designated as beneficiaries so you know the children will receive something outside the estate,” Van Cauwenberghe says. “It’s much more important to have your assets go through your estate, pay the probate and have the will governed rather than just giving everything to the surviving spouse and hoping for the best.”

Another approach may be to bequeath a set amount to the children, leaving the rest to the surviving spouse, avoiding possible confrontation over handling of a trust. But the clients must be careful to leave sufficient funds to their survivor, or else the will could be challenged under the marital property laws.

“We generally recommend that advisors do speak with an estate planning lawyer who is very familiar with the issues and do not simply take matters into their own hands without speaking to someone else,” she says. “This is an area where a lawyer will be very valuable to talk to the client, work through the issues and then determine with the advisor how title to assets should be registered, et cetera.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(08/04/04)

Steven Lamb