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What To Do When You Say, “I Do” . . . Again

One of the most common issues in financial planning at this point is what to do when entering a significant romantic relationship when you have children from a previous relationship.  Although you may be willing to take that romantic leap of faith once again, it does not have to be done with your eyes closed to the problems that can arise if the relationship does not work out or if there is a dispute over who gets when one of you dies.
Unfortunately, there is no ‘cookie cutter’ solution, as each situation is different and your wishes may differ from someone else’s in the same situation.  All the same, there are several steps you can take once you have decided what you would like to decrease the chances of nasty surprises or acrimonious battles.

An Ounce of Prevention . . .

In order to make life easier for you and your loved ones later, it may be necessary to have some awkward conversations and pay some money now to get your financial affairs in order.  In order to get the ball rolling, I suggest taking these steps, although not necessarily in the order stated:

  • Talk to somebody who knows what they’re talking about.  More specifically, find somebody that can explain the relevant legal, tax and financial planning issues in languages other than legalese or accountant-speak.   In order to make an informed choice on what you’d like to happen down the road, it is important to understand your rights, choices, and what will happen if you do not take any further steps.  I believe that it is only after you know the rules of the game that you can decide how you would like to proceed.  Moreover, I have seen many people surprised at what could happen if they didn’t take further steps.  Accordingly, I recommend paying to talk to someone who can give you good advice, rather than relying on the power of the internet or wishful thinking.
  • Have an awkward financial conversation with your new paramour.  In an ideal situation, this conversation should take place before any marriage or sharing of addresses.  In my experience, people entering second significant relationships, especially later in life when children and significant assets are involved, are generally willing to frankly discuss financial matters.  Having this conversation up front helps manage expectations going forward and helps you identify any red flags that might cause you to think long and hard about about entering into a more serious commitment.  In addition to discussing death and divorce, consider also discussing issues like:
  1.  how expenses are to be shared and whether you wish to combine assets or keep your financial affairs separate;
  2.   full financial disclosure so you can get a better idea of your partner’s financial needs in different situations, whether they can pay their share of the expenses and whether you may end up supporting him or her at one point if they run out of money;
  3. whether they have or are willing and able to get health insurance products like long term care insurance, critical illness, disability insurance or extended health so that there will not be pressure on you to pay for your partner’s future health care expenses out of funds that you wished to leave to your children; and
  4. whether they are willing to sign documents like Prenuptial or Cohabitation Agreements and whether their financial expectations under the different scenarios mesh with your own;
  5. Decide how you would like to proceed and take whatever steps are necessary.  It is likely that this will involve working with a lawyer and perhaps a financial planner or accountant to structure your affairs.  This may (or may not) also involve a conversation with other family members, like your children.  Such a conversation may help clarify their needs and wishes, help them understand what you are trying to accomplish or, if nothing else, warn you of potential problems that could arise later.  As a result, you may decide to change your plans or take additional steps to limit the chances of these problems coming about.  In addition, this conversation may prevent later misunderstandings that can often result in lawsuits by disgruntled heirs and may also help improve the relationship between your new partner and your old children; and
  6. Revisit your plan from time to time and upon significant changes in circumstances.  In some cases, your wishes may change towards your partner and his or her family as your relationship deepens.  It is also important to realize that legal documents like cohabitation and prenuptial agreements (which can also cover claims against your estate) become less effective over time.  Accordingly, if you and your partner are willing to update the agreement from time to time or merely to confirm the original agreement at a later date, there is a better chance of it being enforced by the courts.

Understanding What Can Go Wrong

Lawyers are trained pessimists, able to see the dark cloud encased by most silver linings.  I will not attempt to provide a complete list of some of the issues that can arise when entering into a new relationship, but here are some of the problems that I have seen in the past:

  • Will Challenges. In B.C., the Wills Variation Act and its impending successor allow spouses and children of any age or financial circumstances to challenge your Will if they feel shortchanged.  Although relations between your new partner and old family may be cordial during your lifetime, things may change at death when money becomes involved.  In particular, children may feel resentful if the bulk of your estate passes to the new spouse.  Moreover, even if the ultimate plan is for your new spouse to provide for your children on his or her death, your children may:
  1. Not be willing to wait that long;
  2. Be concerned about your new spouse frittering away ‘their’ money or disinheriting them later in favour of his or her own family or upon remarrying yet again; or
  3. Get legal advice that they have limited rights if they choose to wait and see what happens on your spouse’s death, so they should challenge your Will instead;
  • Joint Tenancy Jitters.  There are 2 basic ways of owning real estate – as a ‘joint tenancy’ or as a ‘tenancy in common.’  The first choice results in the surviving joint tenant(s) automatically inheriting the deceased joint tenant’s share equally no matter what the Will says.  The second option leaves the decision of who inherits to the deceased.  Either option can either be a great idea or a total disaster, depending on the circumstances.  Moreover, sometimes the best solution is keeping an asset solely in your name rather than ‘putting your spouse on title.’  Potential problems are as follows:
  • Owning real estate with your spouse in a joint tenancy in order to save money and time on your death, with the understanding that s/he will leave all or some of the property to your children at his or her death.  Unfortunately, there is no guarantee that this will ever happen; and
  • Owning a property as a tenancy in common so that you can specify what happens in your Will, only to run into a Will challenge by your children or expose the land to your creditors.

One solution that works in some situations is owning the property as a tenancy in common or in your name only and to then set up a trust in your Will.  Without going into too many details, this option could allow your spouse to live in the place for life or until a change of circumstance but can also stipulate that your children inherit it on his or her death.  The same considerations can apply to other assets, like non-registered investments or bank accounts.

  • Beneficiary Designation Blunders.  People often forget to update their beneficiary designations for life insurance products or registered investments, like RRSPs.  No matter what your Will says, the institutions holding these assets will pay out the proceeds to the person(s) named on the most recent beneficiary designation on file.  As a result, failing to update your beneficiary designations can mean that the wrong person will inherit.    In some cases, this may even be an ex-spouse!  Tax-wise, it makes sense for the new spouse to inherit registered assets, as this avoids an immediate tax bill.  If the children are named instead, this can cause an unintended result, as adult children would receive the entire proceeds (unless your estate can’t pay the taxes) and your estate would get the tax bill.  This could eat away at the money that you were hoping to leave to your new partner.
  • Forgetting to Update Your Will.  As of September 2012, your Will is automatically revoked when you get married.  This is set to change at some point in 2013 but it is still usually essential to update your Will when you get married.  If you don’t, this could easily result in a Wills Variation Act challenge. Moreover, if neither of you have a Will, then failing to get one will result in your estate being distributed according to a government formula that may not match your wishes.

Tools to Increase Your Chances of Success

There are many steps you can take to increase the chances of things working out the way you would like while minimizing the chances of discord or later problems.  This is not a complete list and you’ll need to get more information from your own expert before deciding what makes sense for you:

  • Prenuptial and Cohabitation Agreements That Also Cover Will Challenges.  This is not an iron-clad solution but the courts do give considerable weight to these things, especially if both of you get independent legal advice, the agreement isn’t too dusty and there hasn’t been a significant change in circumstances between now and then;
  • Alter Ego or Joint Partner Trusts.  I will not try to explain these in too much detail.  Quite simply, they are a tool for people over 65 to maintain control over their assets during their life and to control what happens to them at death rather than relying on your Will.  These documents can provide protection in the event of divorce (especially when linked to a Prenuptial Agreement) and can avoid Will challenges at death, since the Will doesn’t apply to these trusts;
  • Insurance.  There are a lot of life and health insurance products that can be part of your financial solution.  Life insurance can be used to provide additional money for children (such as if most of your assets are in RRSPs or real estate) so that you can provide for both your children and new spouse immediately at death.  As mentioned earlier, the various health insurance products can help insure that you do not have to spend assets earmarked for your own retirement or your children caring for your new spouse if their health takes a turn for the worse.  It can also be used to bring in quality private care so that you don’t have to do so much yourself;
  • Powers of Attorney.  New legislation covering these documents allows you more flexibility regarding what happens to your finances if you are incapacitated.  These documents can do a number of things to safeguard your finances and protect your family.  Some issues to consider when drafting this document include:
  1.  Who should make your financial decisions?  It may be one person or multiple people.  You can also state whether they must all agree, whether the majority can decide or even if they can act individually.  As well, you might have different people in charge of different assets, such as if you wish your new partner to inherit your RRSP or perhaps a home but want your children to inherit a business or other assets.  In those situations, you might want the people to ultimately inherit to manage those assets on your behalf during your life;
  2. Whether your assets can be spend on other people and, if so, who?  Unless you state otherwise, your assets must be spent only on you.  If you want assets to be used for your new spouse or children under some circumstances, this should be stated as well.  Again, in some cases, you might want to stipulate what assets get used for which people; and
  3. Whether any assets can be transferred during your lifetime or not.  Specifying your intentions can help prevent abuse, give peace of mind for your family or provide flexibility to your financial planning;
  • Representation Agreements.  These documents allow you to name one or more person to make your healthcare decisions if you cannot.  You may also name a monitor to keep an eye on your chosen representative. You also get to spell out your general wishes regarding what you’d like to happen in different situations, which can hopefully prevent future family squabbles and reduce family guilt.  Representation Agreements may also be a tool to ensure that you get the quality of care you can afford and desire.  Unfortunately, sometimes new spouses refuse to fund quality care for their partners even if their partners have the resources to do so.  These agreements make it significantly harder for this to occur and far easier for other family members to intervene.
  • Wills.  A good Will can balance competing interests, save taxes and fees and provide safeguards to protect your heirs from themselves and each other.  Do discuss setting up trusts in your Will, especially if you have younger heirs, wish to provide for a spouse during his or her lifetime but want to control who gets what is left at that time, want to provide tax savings for your heirs to make your estate go further or if heirs have creditor or addiction issues
  • Beneficiary Designations.  If you are concerned about Will challenges, using beneficiary designations to gift assets at death can get them to your chosen heirs quickly and avoids Wills challenges in many circumstances.  Besides registered money and life insurance, there are other products with beneficiary designations, such as segregated funds (which are like mutual funds) and accumulation annuities (which are like GIC’s).   These last 2 products allow you to leave assets via beneficiary designations that would have otherwise likely need to pass through the Will; and
  • Joint Ownership.  This tool must be used carefully and only in the correct circumstances.  As well, working with a lawyer to document what you are trying to accomplish with the joint ownership can be really important.  It is vital to clarify both whether you intend to gift that share of the asset immediately or if the other person is only really listed as  a joint owner for administrative purposes.  As well, it is equally important to state what is to happen to the asset on death – are the joint owners entitled to it or are they merely holding it on behalf of your estate?  Joint tenancies can be used to avoid Will Challenges in some cases, provide some protection if you divorce potentially (again, not ironclad) and simplify your estate.  Without the right documentation, however, the wrong people might end up with the assets and the chances of legal challenges increases exponentially;

 Conclusion

If you have found love the second, (or third or fourth . . .) time around, I wish you nothing but happy days and blissful night.  All the same, the divorced lawyer in me suggests going in with your eyes open and taking the necessary steps to protect your and your family in a variety of circumstances.  Although this may be awkward at times and tedious, the result can be greater peace of mind for all concerned and a smaller chance of fighting and nasty surprises down the road.

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