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Working with a full house

Estate planning groundwork needed to avoid blended family conflicts
By Karen Platten
March 03 2017 issue

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Blended families can be a real joy with the addition of interesting people into your life and the exposure to new ways of thinking.

They can also be hard, and one of the hardest things about a blended family is determining what will happen when one of the parents dies. Most parents want to provide for their children, but what about the spouse who is not the parent of those children? Sadly, in my practice I see that even the best stepparent/stepchild relationships can be torn asunder because of the division of an estate.

What is the right thing to do? Only each blended family can decide for themselves and not all members of that family will agree. Often this creates an impossible situation and one in which a lot of people do not act because they cannot come to a decision. If there is one wrong way to act in the circumstances of a blended family, it is the failure to have a workable estate plan.

If you have clients who are in a blended family, their estate planning documents should reflect that. Provision for a second spouse and children of a first marriage can be done in a number of ways.

The first consideration should be as to what assets go to the spouse and what assets go to the children. If some assets are impressed with tax, it may be best to have those assets go to the spouse to take advantage of any taxfree rollovers. However, the possible tax cost to the spouse should be considered so that the value of the gift net of taxes is appropriate. Other assets can then be given to the children. Of course, this is dependent upon there being enough assets to support the spouse and to gift to the children. There may be concerns around corporate assets going to a spouse, which would need to be addressed and certainly all aspects of possible claims by the surviving spouse against the estate must be considered in determining the amount of assets that would be left to the spouse.

Where there are not enough assets to gift to both the spouse and the children on the death of the first spouse, there needs to be planning around providing for the spouse during their lifetime and then having the remaining funds go to the children. A trust is the usual vehicle used to accomplish this as it affords certainty and a means of oversight if this is thought to be necessary.

Each second marriage/relationship is different depending on the dynamics and makeup of the family. If the marriage/relationship is long term and there are no real conflicts in the family, consideration should be given to mutual wills where all of the assets go to the surviving spouse and then to the children when the surviving spouse dies. Of course, this requires that the spouses enter into a contractual obligation to each other which binds them and their estates.

If this is not workable in a particular situation, a trust, as indicated above, is a fabulous solution given the flexibility and certainty that a trust provides. The trust can be as fulsome or as stringent as the situation requires taking into account tax realities and other assets which the surviving spouse has outside of the trust.

Additionally, insurance policies, either to provide for the children or the spouse, are good ways to augment estate assets and ensure that everyone is provided for as the client desires. This solution is dependent upon whether the ongoing premiums remain affordable for the lifetime of the client. However, it is a good solution where there are relatively young children involved. As the children mature this solution may no longer be necessary.

Further, attention should be paid to the substitute decision-making documents so that the blended family situation is addressed. For example, if one spouse owns the home, provision should be made for the other spouse to remain in the home should the owner spouse need to be placed in a care facility. Decision-making for medical issues or accommodation should also be provided for in a manner that makes sense for each blended family. Often lawyers see these documents as secondary to the will but they can have unforeseen consequences to all members of the blended family if they are not done properly.

In short, there are many ways of dealing with estate planning for blended families, limited only by your imagination and your clients’ appetite for doing something different. However, it is critically important to take all of the circumstances into account before preparing documents for clients and to address even the uncomfortable issues to afford the best possible outcome when the first spouse dies.

Karen Platten is a partner with McLennan Ross LLP. Her practice focuses on all forms of estate planning, trusts, estate administration and dependency claims.

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