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Incapacity and Estate Planning for Blended Families

Incapacity and Estate Planning for Blended FamiliesImage: ABC Archives

This is a blog post  by Victoria lawyer John Jordan. John joined Dinning Hunter Lambert & Jackson with a history of successful practice in Estate and Trust Law in Victoria

Incapacity and Estate Planning for Blended Families

As Canada’s population ages, the number of Canadians over the age of 65 is projected to rise to nearly 25% of the population by 2036 nearly double that of 2005, when seniors comprised 13.2%

Blended Families Are the Norm

As they live longer, more seniors will develop physical and mental impairments that not only make them vulnerable to abuse, but also make it more difficult for them to set up procedures to safeguard their own health and financial wellbeing. There is also the need to balance the competing financial interests of those persons (spouses and children) who have a claim against their estate, once they die.

Accordingly, a blended family cries out for pro-active estate planning. Failure to engage in such planning increases the likelihood that someone will seek compensation in the event of incapacity, splitting up or on the death of one or both of the spouses. So a plan should be put in place to guard against worst case scenarios.

Estate Planning Documents for Blended Families

Planning should be centred on the areas of disability, divorce (or ceasing cohabitation of common law) and death.

The documents that should be considered in each of these categories are the following:

Disability

  • Powers of Attorney
  • Representation Agreement
  • Advance Care Directive
  • Nomination of Committee

Divorce/Splitting Up

  • Marriage Agreement or Cohabitation Agreement

Death

  • Wills and/or
  • Alter Ego Trust
  • Beneficiary Designation for RSPs, RIFs, or Life Insurance
  • Joint tenancies

Disability/Incapacity Planning for Blended Families

An Enduring Power of Attorney is a legal document where you appoint an agent (attorney) to manage your finances if you are mentally unable. It is a more powerful document now that the September 2011 amendments to the Power of Attorney Act are in force. In order to protect yourself, it is a good idea to involve your family and put into the document a mechanism in which the agent must report his or her accounts to at least one trusted family member periodically.

In second marriage situations, where one of more of your children are appointed attorneys, assuming you wish to ensure your second spouse is protected, you should insert provisions instructing your attorney to make payments from your estate to make ample provision for her/his case, including, say, the right to live in your home for as long as he/she needs to.

Representation Agreement

A Representation Agreement allows you to designate a trusted person or persons to make personal and health care decisions you want in the event you are mentally incapable of making those decisions yourself. The Representative must abide by your wishes. Obviously you should discuss in considerable detail with your Representative your particular health care wishes. Who you appoint in a blended family situation depends on who you think is the most responsible. Ideally all family members should be involved.

Nomination of Committee

A Nomination of Committee designates the person you choose to be your legal representative if you are no longer capable of looking after your person or your financial affairs. The Court must appoint this person unless there is some good reason why that person should not be appointed. The same defensive provisions for the administration of your assets to protect your spouse should be written into the nomination. This is a backup document for a Power of Attorney and Representation Agreement.

Advance Directive

An Advance Directive is a document completed while capable, giving specific directions about his or her proposed health care. It is usually very specific to a very specific health issue and must be complied with by a Representative named in a Representation Agreement. It can give instructions to give or refuse consent to any health care described in the advance directive. It is usually for emergency situations.

Divorce/Splitting Up

Marriage Agreements- (for married spouses)

It is possible for spouses to contract out of the equal division of family property assets upon a marriage breakdown as set out in the Family Relations Act. This is essential for second marriages for it protects the assets of each spouse so that they can pass their respective estates on to those they wish to on their death.

There is less certainty as to Cohabitation Agreement for common law marriages if the Agreement is meant to protect property. Recent case law suggests the Court will enforce a Cohabitation Agreement if it attempts to preclude a property claim.

Death

A Will sets out who you would like to administer your estate, who is to receive your assets, and upon what terms. A Will with a testamentary trust provides that all or a part of your estate assets will be placed in this trust when you die with instructions on what terms the money is to be paid out. A testamentary trust can significantly reduce the taxes payable by your beneficiaries on income received from your estate assets.

Because of all the competing interests, (current spouse, children from previous marriages), estate planning for blended families can be difficult. If the estate plan is not correctly structured, there is considerable risk of litigation and/or an unequal distribution of wealth between branches of a family.

Risks with Mutual Wills

As an example, many second marriage couples execute mutual Wills where on the death of the first spouse, all assets transfer to the surviving spouse. On the death of the surviving spouse, his/her Will provides that the assets of the first-to-die spouse go to his or her children.

This planning is risky because the second spouse may remarry rendering their Will void. If the second spouse dies without making a new Will, the intestacy rules in BC specify that the estate is divided amongst the second spouse’s new spouse and her/his children, not the children of his/her former spouse.

Even if the surviving, second spouse does not remarry, he/she may change his/her Will after the first spouse dies and leaves nothing to the children of her/his deceased second spouse.

One Possible Solution: Spousal Will Trust

One solution which can be effective, especially with a marriage agreement in place, is to create a Spousal Will Trust where the surviving spouse has all of a portion of the first-to-die spouse’s estate held in trust for him/her, and he/she is entitled to all the income of the Trust and possibly some of the capital. On the death of the surviving second spouse, the capital is distributed to the children or other family members of the first-to-die spouse.

An additional advantage is that any capital gains taxes on the assets comprising the Trust are deferred until the death of the second spouse.

Living Trust (including Alter Ego Trusts)

Trusts are an extremely flexible legal concept. In it, the Settlor transfers legal ownership (but not beneficial ownership) to the Trustee of the Trust who administers the income and assets as directed by the Trust document.

An Alter Ego Trust brings with it extra advantages. To be eligible to set up an Alter Ego Trust two of the requirements are that the Settlor must be 65 years of age or older when the Trust is established and that during her or her lifetime he or she is entitled to receive the income.

In addition to some favourable income tax treatment, the trust assets are immune from attack by those who have a claim under the Wills Variation Act (children, legal and common law spouses).

“Trusts are an extremely flexible legal concept”

As a result, you can plan ahead of time for an orderly distribution of your estate as you wish without the worry that your wishes will be distributed through litigation. The Trust is alterable in certain aspects so that the Settlor can make what he or she feels are adequate provisions not only for his/her children but also for any spouse, whether it be the first, second or otherwise without any chance of litigation.

Another significant advantage is that it can serve as part of your incapacity planning.

If, after settling the Trust, the Settlor becomes physically or mentally disabled, the Trust serves as a vehicle to provide for his/her financial well-being, in much the same fashion as a Power of Attorney or Committeeship. On the Settlor’s death, the Trust distributes the Trust assets to the persons and in the way the Settlor wishes. The Trust, in addition, as a private document, is not subject to the expense in time or money of probating a Will. However, before instituting an Alter Ego Trust, the person should get qualified income tax and legal advisors.

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