Estate planning concerns for a blended family

• 

  Nicholas Davies,

  senior associate at MacLean Family Law, Vancouver

• 

  Janet Mason

  senior trusts and estates counsel, Private Client Solutions, Raymond James, Toronto

• 

  Jamie Nguyen

  tax partner at Davidson & Company, Vancouver

To adopt or not?

Nicholas Davies: Adoption depends on what their long-term objectives are. Consider that biological or adopted children are entitled to inherit on an intestacy — a situation where there is no will. Unadopted stepchildren do not have rights to share in the estate of the deceased step-parent.

[Adoption is a significant consideration whether the child is an adult or a minor.] I’ve seen cases where the adult [step]child wants to participate in the estate, and I have to tell them they don’t have a right to because they were never adopted.

But we need to consider whether there’s consent from their exes.

Janet Mason: Yes; if Anwar’s not willing to give up his rights, adoption isn’t an option.

ND: Orleans’s ex is incapacitated. I don’t know if she has parental rights or not, but presumably her parental rights can be waived. So if Anwar consents, then the adoption can proceed. All the children have to consent as well.

In B.C., the process of adoption includes a social worker. When people hear that, they think, “Oh god, the government has to be involved.” But any case that I’ve been involved in, it’s a pro-forma exercise. The social worker goes to the home, makes sure the kid’s safety isn’t threatened and it’s a reasonable environment. That’s the end of it.

Allow six months for the adoption process. Following the review by the social worker, you submit the paperwork, the court goes through it, and then the judge signs off on it.

Jamie Nguyen: Also, adoption expenses are eligible for a tax credit. The maximum claim for each child is $15,670.

JM: If the spouses or kids don’t consent, then to unify a blended family is to acknowledge this new family of choice. One way to do that, short of adoption, is to do a legal name change. Under law, you can call yourself whatever you want, as long as you’ve got it in all your formal documents, and you’re not using an assumed name for nefarious purposes. This is cheaper and faster [than adoption], and it’s something you can even involve the kids in. They could hyphenate and use both names.

However, there is no change to legal rights with a legal name change. Stepchildren would remain unable to inherit under B.C. legislation should a step-parent die intestate, and could not claim against the step-parent’s estate. The children would each need to be named in the wills if, for example, an equal distribution among all children was desired upon the death of the survivor of Nidha and Simon.

If Nidha and Simon split up

ND: They would be well advised to think about what would happen if this marriage is not successful. Which minor children would live where, and how would that be determined?

If nothing else, Nidha and Simon should create a parental rights agreement that includes dispute resolution provisions to keep any argument out of court. If they go to court about the children when they split up, they could burn through $100,000 in legal fees each. But if they have mandatory mediation and arbitration in an agreement, those processes are much quicker to respond to the needs of parties in a matrimonial breakup, and far cheaper.

Child support would be determined by the guidelines in B.C. The obligation to pay child support is not dependent on adoption. If the parties live together as a family and each party assumes parental roles with respect to the other’s children, then they become the step-parents of those children.

Let’s say the Rodrigues children go with Nidha. Jean-Philippe is out of the equation because he’s an adult and done post-secondary education, and Genevieve remains in university. Then, in theory, Simon would have an obligation to pay Nidha child support for Sharon and Amir based on his income regardless of who makes more, because she’s caring for the children. The obligation to Genevieve is not as clear because, once children become adults and they continue on in their education, then it’s a different section of the child support guidelines that’s triggered. It has very broad discretion, so the court would look at Nidha’s income, Simon’s income and where Genevieve lives, and then craft a solution.

JM: Because Nidha’s ex already pays her child support, the court would take that into consideration. Simon may be considered a secondary measure after he fulfills legal obligations, such as contributing to child support for one year.

ND: Yes, but it wouldn’t simply be a matter of looking at Anwar’s income and the support he pays. They would consider that, but also Simon’s income and what he’s able to pay. The court would have the discretion in that it could offset Anwar’s obligation against Simon’s obligation. I often hear a judge say, “These people can afford to pay this and the children should benefit.” One scenario is that the total child support by these two men is greater than if you just calculate Anwar’s obligation and Simon’s, and add the two together. The judge might say, “Anwar, you can pay 90% of your obligation, and Simon, you can pay 90% of your obligation, and that’s a fair solution and you can both afford it.” It comes down to what the judge thinks is fair.

Blended estate planning

JM: Simon and Nidha need to identify what their agreed-upon objective is as far as property and children go. Each partner will likely want to provide for the other when they die, but Simon and Nidha each have two biological children and will want some of their capital assets to go to their kids too.

What they also want to talk about is what will happen to the assets they bring into the marriage. There are two ways to own registered property: joint-tenancy with survivorship rights and tenancy in common. There are challenges with both. If Nidha and Simon start owning property as joint-tenancy survivorship, assets upon death of the first spouse go to the survivor. The survivor can update his or her will after the spouse dies, which means there’s no guarantee of how assets will then be distributed.

Joint-tenancy survivorship can also be laterally severed by one of the spouses. This means the other spouse doesn’t have to consent. Once there’s an intent to sever, it becomes tenancy in common. That ownership is similar to owning shares in a corporation: I can do with my shares what I want; you can do with yours what you want. So they need to look at how assets are currently registered and decide the best way to take ownership.

The matrimonial home is treated differently. Let’s say Nidha moves into Simon’s home. Then Nidha is going to gain some rights to the appreciation in value of that home.

Another consideration: legal support obligations continue when you die, and can often ground a claim against the estate. In B.C., the courts are generous about a distribution regime. For instance, Simon’s ex is in a nursing home and he’s paying for it. Support obligations may have been outlined in the separation agreement between Simon and his ex. Perhaps the obligation ends when Simon dies, or it may continue. If it wasn’t outlined in their agreement, his estate may have to continue making those payments.

Finally, with the result of the Wills, Estates and Succession Act, WESA, coming into force in B.C. in 2014, a pre-marriage will remains valid after marriage. So this makes it a priority for them to update their wills and beneficiary designations.

There are two common planning methods for blended families: mutual wills and testamentary spousal trusts. I’m not a fan of a mutual will, which is a contractual arrangement that the will not be changed. The problem with that is we cannot foretell future events. With a mutual will, say Simon dies first. Nidha is young, so chances are she’s going to remarry, and she’ll be bound to a will that can’t be changed.

But a testamentary spousal trust is a great way to provide for the surviving spouse and direct the payment of the remaining capital upon the death of the surviving spouse to the biological children.

They’ll want to include these details in a domestic agreement. For instance, if Simon dies first, the domestic agreement would state that he has a spousal trust for Nidha, and she’ll get the income. Or they agree that everything is divided equally among the four kids. To ensure the other spouse doesn’t change his or her mind, the domestic agreement can include a term that deals with what happens to the assets. It says, “You’re going to follow the same regime that’s in the will with the assets as of the date of the first spouse’s death.” So it caps the assets that are controlled through the use of the domestic agreement to ensure the spouse doesn’t change his will later on. It ties everything together and can allow the surviving spouse access to the income, while preserving capital for the biological children down the road. And the domestic agreement can generally trump the will.

Tax planning

JN: When assets are being transferred to different parties, you want to be conscious about whether that’s triggering a disposition for tax purposes. Gifts and inheritance don’t trigger income-tax implications to the recipient. But a transfer by a parent to a child could trigger a capital gain.

And there are specific provisions in the Income Tax Act that deal with non-arms-length transfers. If the father wants to sell an asset to a son for $1, the father would be deemed to have received proceeds equal to the fair market value at the time of transfer, which could trigger some adverse tax consequences [e.g., a larger-than-expected capital gain]. Not only does it bring about the immediate tax consequence to the father—the child is deemed to have a cost base equal to what he paid. If he paid $1 for real estate, now the son has a cost base of $1 even though the father was deemed to have received proceeds equal to fair market value. When the son sells it, he’ll get taxed on the entire proceeds minus $1. The father is better off gifting it to the son.

Don’t forget insurance

Though we don’t know the couple’s financial situation, there still is a place for insurance, says Janet Mason of Raymond James.

“Nidha and Simon should consider the use of insurance in a number of contexts in their estate planning. It can cover support obligations for a child, stepchild, the surviving spouse or an ex. It can be used to deal with the taxes that are triggered upon the death of the surviving spouse, or it can be used to increase the wealth transfer to all of the children.”

For instance, if the parents want all children to inherit equally, Mason suggests they could have a last-to-die policy where the beneficiaries would be the children only after the second parent dies.

Another option is to have the death benefit fund a spousal trust that provides for the survivor, and then the children after the survivor dies. Mason explains that the deceased’s biological children would be the contingent beneficiaries of the spousal trust.

Suzanne Yar Khan

Suzanne has worked with the Advisor.ca team since 2012. She was a staff editor until 2017 and has since worked as a freelance financial editor and reporter.