Second marriages and blended families are quite common, given current trends. This presents a unique set of issues when it comes to estate planning. Usually, a will-maker in a second marriage situation must attempt a delicate balancing act, wherein he or she tries to balance the demands of a new spouse with the protection and advancement of children from a prior marriage.
The most important consideration when dealing with clients who are involved in a second marriage is to delve carefully into the dynamics within the family. This is vital in understanding the tensions at work while the will-maker is alive, and may also help predict whether, and how, they might change in the future. Clients should be reminded that although family relations seem positive now, the glue holding them together may fall away upon the death of a spouse and result in an unexpectedly contentious estate administration.
This scenario provides an excellent illustration of the importance of advance estate planning. Clients need information about what can often happen in situations such as theirs, and how trouble can be prevented. Some estate planning tools that are often used in second marriages include splitting assets between the two groups, designating life insurance to go to the children while the assets provide for the spouse, or the use of a spousal trust.
A spousal trust is a tool that can allow the surviving spouse to use trust assets during his or her lifetime, but upon death, the assets pass to the children of the predeceased spouse. The spousal trust is useful in estate planning and has historically enjoyed certain tax benefits, such as rollover treatment and graduated rates of taxation. "Rollover treatment" means that when assets are transferred from the estate to the spousal trust, they are considered to have been transferred for the same value at which the testator acquired them. The purpose of a rollover is to defer the capital gains that would result if the assets were deemed to be transferred at fair market value at the date of death, thus taking into account any increase in value over the years. Subsequently, upon the death of the second spouse, the trust is to be responsible for the taxes payable on any capital gains incurred when the assets are distributed to the children of the first spouse.
However, there are changes to Canada's Income Tax Act which will come into effect January 1, 2016. Once these new rules are in effect, instead of the trust being responsible for the payment of capital gains tax, the estate of the second spouse will take over this responsibility. This places a great deal of financial responsibility on the estate of the second spouse, as they must account for all increases in value of the assets since the time the first spouse acquired them. To illustrate the true burden of this responsibility, consider the example of a home in Toronto purchased 60 years ago by the first spouse. The capital gains on this asset could easily be in the hundreds of thousands of dollars. The second spouse’s estate alone will now be obligated to pay tax on this amount.
Another benefit of the spousal trust is being altered dramatically with the coming-into-effect of the new amendments to the Income Tax Act. Previously, as a testamentary trust, spousal trusts were taxed at the same graduated tax rates applicable to individuals (compared to inter vivos trusts, or trusts settled during the settlor’s lifetime, which are subject to the highest marginal rate of tax), making them attractive from an estate planning perspective. However, starting next year, testamentary trusts, which include spousal trusts, will only benefit from these graduated rates of taxation for the first 36 months after the Testator’s death, and subsequently will be taxed at the highest marginal rate. This may reduce their value as an estate planning tool if the trust is intended to last longer than three years.
When it comes to second marriages and estate planning, there are many issues to which a will-maker must be alert. Keep in mind that personal family dynamics play an important role in determining what estate plan will work best for you. With new developments in the taxation of one of the most useful estate planning tools in this context, consider revisiting your current estate plan to ensure that your family will not be taken by surprise later on.
Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.MORE ON HUFFPOST:
Discussing personal finances is often considered a taboo, but many barriers can be knocked down if you approach the conversation openly, lay out your goals, and check them off.
Or any other crisis -- to talk to your parents about their estate plans. If you feel disingenuous using some ice-breaking strategy then just be upfront about acknowledging how uncomfortable the topic makes you feel. That in itself is an ice breaker.
Ensure your parents feel loved and in control of the situation. Don't forget the discussion is about them and how they want you to fit in. Listen to their ideas to get a strong understanding of what they want. If you have suggestions then offer them, but don't expect that they'll immediately accept them, if at all. It's about people skills and open communication. If you know that will be a hurdle from the start, then perhaps a visit to a third party such as an estate lawyer or financial planner can help take the edge off.
Assets, wills, and how your parents want to share their legacy; be prepared with specific questions about all those topics. Beyond that, you'll need to talk to your parents about plans about their income, retirement investment plans, and health care. Some professionals suggest commonly cited questions including: should your parents have a living will? Does the Power of Attorney cover off what your parents want addressed? Does your parents' will and estate plan clearly lay out the transfer process to beneficiaries or deal with tax issues?
After figuring out exactly what your parents want in their estate plan there must be clear guidance on where those plans will be kept. Experts in the industry stress the importance of knowing where to easily find phone numbers and contact names, details, and documents including wills, investments, and personal information such as birth certificates.
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