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March 2018

Financial Planning for Blended Families

Taking control of money matters a key step in preserving harmony, achieving goals.

RRSPs making the right choices When you blend families there’s a long list of things for you and your partner to figure out. Your finances should be near the top.

What’s different this time around? To start, there’s likely to be more on the line, especially if either of you has brought significant wealth to your relationship. With a new partner can come fresh goals and retirement plans. Often there’s the challenge of reconciling the financial needs of your spouse and the expectations of adult children.

Dealing with financial issues early, and carefully, can go a long way to ensuring this next chapter in your life is all you want it to be.

Holding assets – together or apart?

One of the first decisions you’ll have to make as a couple is whether to own assets jointly or in separate names. What you decide will not only affect the way you manage money now, but could determine how your wealth is passed on.

Some assets like an RRSP or TFSA must be registered solely. But for other assets, including investment accounts, term deposits (GICs) or real estate, you have the option of sharing ownership.

Arranging joint title is handy where unrestricted, convenient access for either party is important; daily bank accounts are an example. It can also make sense if you want to share your property with your partner now and leave those assets to them when you die. Holding property as joint tenants with right of survivorship ensures ownership will transition smoothly to the surviving spouse. That said, joint tenancy has its drawbacks. If your partner makes bad financial choices it could impact you and your creditworthiness. It also exposes joint assets to potential creditors.

Keeping title separate is always an option if you’re concerned about clearly tracing who brought which assets, or debts, to the relationship. On the other hand, if you still prefer sharing ownership with your significant other there’s an alternative: holding assets as tenants-in-common.

Let’s say you bring assets from a prior relationship which you plan to leave to your children from that earlier union, rather than to your new partner or stepchildren. Instead of having title transferred automatically to your spouse upon your death as would happen in a joint tenancy, as tenants-in-common your share of the assets remains part of your estate, meaning title can be passed to your heirs according to your will. You won’t be relying on your new spouse to ultimately decide your children’s inheritance.

While this strategy could subject more of your wealth to probate, and its costs, it might be a small price for the peace of mind of knowing your children will receive your assets as you intended.

Take advantage of tax breaks

Getting married or establishing a common-law relationship lets you capitalize on numerous tax saving strategies as a couple. Here are just a few.

Share pension income. Up to half of eligible pension income may be transferred annually to a lower-income spouse for tax purposes. That typically means payments from an employer pension plan if you’re under age 65, with RRIF or annuity income included once you’re 65 and over. Canada Pension Plan benefits may be split with your spouse, or you can share your payment if you alone are receiving CPP.

Contribute to a spousal RRSP. A spousal RRSP contribution is deductible against your income the same as if you made the contribution to your own plan. A spousal RRSP can be valuable in building your partner’s nest egg and equalizing your future incomes, potentially lowering your total tax bill as a couple in retirement.

Grow your partner’s TFSA. The tax rules say you can’t make direct contributions to your partner’s TFSA. What you can do is give them funds to contribute to their own plan.

Make better use of tax credits. Unused, non-refundable tax credits which you or your partner don’t need to reduce your federal tax to zero can be transferred to the other to claim, including the age amount, the pension income amount and family caregiver amount. Plus, you can pool charitable donations and medical expenses to boost tax savings.

Few expenses drain wealth like income tax. Ask your advisor to review your circumstances and work with you to minimize how much you pay year-in and year-out.

More options for estate planning

As discussed, how you and your partner decide to hold assets has implications for your estate, as do your beneficiary designations, will and other vital instruments. Estate matters can easily strain relationships if not managed thoughtfully, perhaps more so in the case of a blended family. That’s why it’s worthwhile to go further when evaluating your options.

It can be tricky to balance the needs of a new spouse with the expectations of children from a prior relationship. A spousal trust can help. Your will can direct the trust be set up upon your death and structured to benefit all parties. One approach is to have income and capital from the trust go to supporting your partner for their lifetime, with the assets that remain eventually passed on to your kids.

Another valuable tool is life insurance. Making a life insurance policy a cornerstone in a blended family’s estate plan offers several advantages.

First, a tax-free benefit is paid out at death, which can help cover any taxes, debts and other obligations facing your estate. That way your heirs won’t be forced to sell property to generate cash needed to settle your bills. You can choose to have life insurance proceeds create an inheritance for your children, leaving the capital from your estate to accommodate your spouse. Another advantage? Insurance benefits can go directly to named beneficiaries of your policy, passing outside the estate and your will, preserving your privacy and simplifying estate settlement.

An alternative approach is to distribute wealth to your children now. While there may be tax consequences to transferring assets (for example, capital gains), it may be a sensible compromise if you feel there’s a likelihood that disputes between family members will emerge when they ultimately deal with your estate.

Putting a solid estate plan in place is a must, but it’s no substitute for thorough and ongoing communication with your spouse and beneficiaries.

It’s particularly important to explain your decisions if you’ve chosen to distribute your estate unequally, say on the grounds of financial need or closeness of relationship. Remember, the handling of family mementos and sentimental property is what can stir up emotions the most. Be sure to communicate your wishes clearly.

The Marriage Contract. Should You Have One?

Not just for the rich and famous, a marriage contract (or cohabitation agreement for couples who live or plan to live together) is designed to safeguard the interests of each party in a union.

Like a will or power of attorney, a marriage contract can be a valuable financial planning tool for any couple. That’s particularly true for those who are remarrying and want to protect wealth they’re bringing to the relationship. For partners with children from previous unions, the contract can spell out which assets they wish to leave to those children and which to stepchildren. It can also detail the planned division of property between spouses should the relationship break down, rather than putting it in the hands of provincial statute to determine the outcome.

Don’t forget to update important documents

A new union should prompt you to review key documents and directives to ensure they still reflect your intentions. That list should include:

  • Beneficiary and related designations for RRSPs, RRIFs, TFSAs, life insurance policies and workplace pensions. At death, registered investments can generally transfer to your new spouse without immediate tax consequences.
  • Your will. Since the adoption of the Wills, Estates and Succession Act, a will is no longer automatically revoked by marriage in BC. That means any directives stated in your will, including those made benefitting your ex-spouse, stay in effect unless you alter them.
  • Power of attorney and executor appointments. In blended family situations where adult children are involved, consider naming a third-party professional like a lawyer or trust company to these roles. Doing so can help head off any conflict among family members, while ensuring duties are carried out properly.

It’s good practice to periodically review your key planning documents to make sure they conform to your wishes, especially after significant life events like marriage, the birth of a child or retirement.

Look to us for the right advice

An effective financial plan can open the door to a brighter future – for any family. That’s where having the right financial partner makes all the difference.

At BlueShore Financial, we simplify what’s complicated, letting you make the best choices for you and those you care about. Contact your financial advisor today and get the conversation started.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters.
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