Update documents related to your estate
An important step in updating your estate plan is ensuring individual documents reflect your new familial status. This involves changing the beneficiary on your RRSPs, insurance and workplace pension, to name a few. Not updating a will is one of the most common mistakes people in blended families make when they enter into a new relationship or dissolve a previous marriage, according to Maiorino.
“A lot of people don’t realize that in most provinces, marriage revokes a will,” he says. “If I have a will that leaves everything to my two children from my previous relationship, and I get married, the minute I sign the marriage certificate, that will is no longer valid.” More than half of Canadian adults don’t have a valid will, says Maiorino, leaving a door open for potential conflicts among heirs.
Updating beneficiaries is also an area that should be tackled as potential problems can arise if a spouse neglects to remove the former spouse as a primary beneficiary on retirement accounts and insurance policies after separation. The best way to avoid that is to review these documents after every couple of years.
“If you’ve an insurance plan and your beneficiaries in it aren’t the ones that you want, and you haven’t changed it, then your executor isn’t going to know about it because it’s confidential and not posted anywhere,” cautions Maiorino.
Careful consideration should also be given to who will become executor of your will to ensure your wishes are carried out. While you can choose anyone as an executor – family member or otherwise – it’s important to find someone who is trustworthy, reliable and knowledgeable in legal, tax and administrative issues. It’s also a good idea to consider possibly appointing an executor who is not a relative, like a corporate executor,if family relationships are strained.
Don’t discount prenups
While underutilized, a prenuptial agreement or marriage contract can be a valuable tool, says Maiorino.
“A lot of people view them as love killers,” he says. “But there’s value in having that opportunity to negotiate and getting that level of certainty so you’re protected, as well as the other person who is looking for protection.”
This type of contract can be particularly valuable for entrepreneurs, especially those with children from a previous marriage.
“I think [they’re valuable] in terms of a business owner, who owns a business where the future value of the business may be far greater than the current value is at entrance of the marriage. If there are children from a previous relationship – protecting that asset and its growth for the benefit of those children is key for some families. That’s when marital contracts can really be worth their weight in gold,” Maiorino says.
It’s important to remember prenups are not iron clad. The contract may have no impact on what happens to assets if one spouse dies and there is no valid will in place.
Grubman says there are now modern approaches to prenups that are less adversarial and more collaborative.
“A modern prenup process is actually based upon mediation principles involving extensive and open communication, keeping the focus on fairness for both parties rather than protection of the wealthier party,” he says. “And facilitating important conversations between the couple to be married rather than having it be seen primarily as a legal process.”
Consider setting up a trust
Remarried couples use trust structures to aid in the distribution of assets, says Maiorino. One trust scenario for remarried couples may look like this: A spouse sets up a living trust and names themselves as the trustee during their lifetime, with the intent the surviving spouse will receive income from the assets and the remainder of the trust (capital) will go to the children after the spouse passes.
By setting up the potential for a stream of income, your spouse will be able to sustain their current lifestyle without being disadvantaged financially and the children still receive the capital at the end of the day.
The tax benefits associated with trusts are largely gone as a result of the last budget presented by the Conservative government, says Maiorino. “But the ability for trusts to solidify a particular outcome is still very much intact and a key reason why you would want to use a trust.” A trust structure can be tailored to one’s specific preferences, for example, where all of the children can be treated equally, or alternatively, bloodline children may be favored over the non-bloodline children.
Engage in meaningful dialogue
Drafting a new will and updating your beneficiaries by no means ensures a smoothly-run blended family. That’s why it’s critical to maintain meaningful and ongoing communication among all concerned parties.
Open, honest and consistent dialogue is one of the key elements that will bring all parties to common ground when making decisions regarding retirement, a vacation property or designating assets for inheritance.
“I’m a firm believer in family meetings as an ongoing process in wealthy families,” Grubman says. “A family meeting process provides a vehicle for the two activities I mentioned: communication and preparation. But also is a vehicle for making adjustments as time goes on and circumstances change. What may seem fair at the beginning of a new marriage may have to be adjusted 10 years down the road.”