Many people want to distribute their estate in a manner that is perceived as fair and just. They try to avoid creating conflict between the beneficiaries of their estate. In some cases, determining what will be perceived as fair is straightforward. In the case of blended families, that is rarely, if ever, the case.
Clarifying Family Dynamics
The literature is rife with cases of beneficiaries making litigious claims against the estate because of a perceived unfair inheritance. Nobody wants their estate to end up in litigation. To avoid this result, it is important that your advisor take the time to patiently explore and discuss your own unique family dynamics. Determining what will be perceived as fair and just, while being aware of the risks of litigation, is an important component of every estate planning process.
Equity vs. Equality
What is fair? Equality means the equal distribution of resources to everyone. Equity means the fair and just distribution of resources to everyone. Taking an equitable approach might mean being partial to one beneficiary over another resulting in an uneven distribution of your estate. What in fact is just? The topic of what will be perceived as just or fair by your loved ones is highly relevant in the estate planning context. In each case, the answer is unique to your specific scenario.
How do you make sure that each person that depends on you is well looked after following your death? Who is a dependent? How can your estate planning lawyer work with you to decrease the risk of lengthy and costly litigation, often fueled by a sense of unfairness or perceived preferential treatment of one over another? How can you maximize your estate assets for your loved ones?
In the blended family context, such as where a person has a spouse from a second marriage and three children from the first marriage, should the estate be divided into quarters or divided into halves? What if the second marriage happened last month? Last year? Ten years ago? The ages of the children are relevant, too. Are the children still dependents? Minors? Disabled? Might the step-children be viewed as dependents that should also be beneficiaries of the estate? What if some of the beneficiaries are already successful in their own right, and others can't seem to find their way? The complex legal-social-emotional factors within a blended family dynamic present many challenges.
An estate planning lawyer can advise you on the various tools at your disposal to help you to balance the interests of various beneficiaries. One such tool that may be used as part of the estate plan is a spousal trust. A spousal trust can be used to provide for your spouse during your lifetime while protecting some or all of your capital for the next generation. If properly drafted, your estate can realize a tax deferral until the death of the surviving spouse, leaving a larger amount available to provide for your spouse and, ultimately, the children. The benefit of the tax deferral should be balanced against the delay in transferring assets to the children.
In addition, a spousal trust can provide some protection for your assets from any future relationships of the surviving spouse, while allowing you to maintain control of what happens to these assets after the death of your spouse. Your surviving spouse would be entitled to all the income from the spousal trust and nobody, other than your spouse, could be entitled to capital from the spousal trust during your spouse's lifetime. Some estate plans may use two spousal trusts, one that provides for unlimited capital encroachments to the spouse and a second spousal trust (possibly for specific corporate assets) that prohibits capital encroachments (or sets a maximum) and includes the use of additional trustees.
When using a spousal trust, it is important to consider the surviving spouse's wishes. If the surviving spouse is not pleased with the estate plan, they may choose to forego their entitlement under the Will and instead elect for an equalization of net family property (as is the case on divorce) under the Family Law Act (Ontario). Your spouse may be motivated to make such an election if they want to pass some assets of the marriage onto their own children (i.e., your step-children), as well. You can reduce the risk of such an election for equalization by discussing your planning with your spouse and entering into a domestic contract.
When should the Children Inherit?
If all the assets are left in a spousal trust, the children may feel it's unfair that they have to wait until the spouse's death to receive their inheritance. This is especially relevant where the surviving spouse and children are close in age. This perceived injustice may lead to claims by children (or step-children) for dependent support. Although the risk of litigation should not dictate one's estate plan, you should be aware of this possibility. Raising these issues with your advisor helps them understand and explore the true family dynamics and concerns that exist and are best dealt with, to the extent possible, at the planning stage.
The Nature of the Assets
Gifts made by a Will directly to children can trigger capital gains tax on your death, resulting in a less-than-optimal tax result. In this regard, tax implications should be considered when leaving assets to your children, as some assets may be better suited from a tax perspective than others. In cases where a business is involved, you should discuss the business succession plan with your advisor and consider whether all parties should be shareholders. Will all loved ones receive the same type of shares? Or should the spouse receive a separate or different type of interest than the children? Consideration of a Shareholders Agreement or family agreement to address corporate succession planning may be highly relevant.
Different Strokes for Different Folks
It is important to carefully consider the division of assets between spouse and children and the method by which assets are distributed. A discussion surrounding whether the children need different kinds of help can raise many complex legal issues and emotional concerns. In families with a special needs child, it might not make sense to place an equal share of the estate in a special disability trust (referred to as a Henson Trust) for such a child, where one is being established. With payouts to this child typically limited to maintain government or other disability benefits, a more modest amount might be more than sufficient. However, many people place a high value on the perception of treating all of the children the same, even when this may not maximize your assets for your loved ones.
There are many other contexts where a parent may consider whether to treat children differently to achieve equity. In families where a child is struggling and can't seem to find steady work or requires more assistance than the other children, should that child receive more than an equal share in order to be equitable and attain a just result? Would your other loved ones agree with this decision?
Family meetings and open discussion are often very useful in the blended family context. They provide a forum for all family members to express their concerns. You may not be able to please all parties, but you might at least be made aware of concerns that could be raised later and have an opportunity to address any grievances.
This article presents only a few of the many tools and considerations that should be taken into account when developing an estate plan for your blended family. Your estate plan should be as unique and customized as your own family dynamics.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.