effective blended family planning

Effective Blended Family Planning

Presentation to:

Academy of Financial Divorce Specialists

Nicole Garton, B.A., LL.B., TEP

Heritage Law

220 – 545 Clyde Avenue

West Vancouver, B.C.

778-786-0615 Ext.111

[email protected]

The Blended Family

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Estate Planning for Blended Families

A blended family is where one or both members of a couple have children which are not mutual (and possibly also children together);

Increasingly common and give rise to conflicts and complexities greater than when advising a traditional family (all children are the children of both spouses);

Added complexity, plus added emotional and psychological issues that can arise in a blended family context, means there is a higher risk that issues and conflicts may arise;

The professional advisor must exercise a heightened degree of diligence and caution when advising blended families.

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Conflicts and Ethics

Lawyers are in a fiduciary relationship with their clients and as such owe a duty of loyalty, including:

The duty of candour;

Requires full disclosure of all information known to the lawyer that may affect the interests of the client in the matter;

The duty of commitment to a client’s cause;

Nothing should conflict with a lawyer’s obligation to fully advance his or her client’s interests;

The duty to avoid conflicts of interest;

The lawyer’s loyalty to or representation of a client cannot be adversely affected by the lawyer’s own self interest of the lawyer’s duties to another client.

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Conflicts & Ethics Cont.

BC Code of Professional Conduct is the governing document

setting out professional responsibility for BC lawyers;

Key principle in Code: a lawyer must not represent one client

whose legal interests are directly adverse to the immediate

legal interests of another client without consent

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Code:

3.4-5 Before a lawyer is retained by more than one client in a matter or transaction, the lawyer must advise each of the clients that:

(a) the lawyer has been asked to act for both or all of them;

(b) no information received in connection with the matter from one client can be treated as confidential so far as any of the others are concerned; and

(c) if a conflict develops that cannot be resolved, the lawyer cannot continue to act for both or all of them and may have to withdraw completely.

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What to do when acting for a blended family where the spouses are potentially adverse in interest?

Informed consent (document terms of joint retainer in writing – see CLE BC precedents); or

Act for one spouse only and refer the other spouse out for separate representation.

Practice Points:

Where a joint retainer is accepted, the terms of the retainer should always be confirmed in a joint retainer letter

Consider in the final reporting letter to include advice given with respect to various legal issues, especially where clients have chosen to accept the risk that following death, their estate plan may be varied or frustrated by the surviving spouse or a court order.

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The Three “D” Pieces of the Puzzle

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Essentials of the Blended Family Estate Plan

The Three Ds!

Death (Wills, Mutual Will Agreements, Trusts, Jointures,

Beneficiary Designations)

Disability (Power of Attorney, Representation Agreements,

Advance Directives)

Divorce/Splitting Up (Cohabitation/Marriage Agreement)

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The Will

The foundation of a solicitor’s estate plan (unless unique situation where an intestacy is desirable);

• Often used as a back up to other planning: trusts, joint tenancies, designated beneficiaries;

• Sometimes primary planning tool because other options not available, too expensive or clients don’t want complexity;

Alter ego and joint partner trusts only available to those 65 or older;

Trusts can be fairly expensive to draft;

Older clients especially often don’t want administrative complexity or ongoing management duties;

Note: wills often required for disabled beneficiaries to retain disability benefits and to create a qualified disability trust and long term graduated rate eligibility under the Income Tax Act

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The Will, cont.

Drafting Considerations in a Blended Family Context:

Balancing spousal provisions and children’s expectations

• Gift to spouse and children on the first to die?

• Spousal trust?

• Choice of Executor – Spouse, plus adult child? Adult child from each

spouse to act together? Neutral party such as trust company?

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The Will, cont.

Drafting Considerations in a Blended Family Context, cont.:

Under Family Law Act, S.B.C. 2011, c. 25, now possible to

appoint a successor guardian to stand in the deceased’s shoes

(vs. prior where there was one sole guardian of the children)

Can appoint new spouse to be co-guardian with the surviving

parent of the children

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The Will, cont.

Drafting Considerations in a Blended Family Context, cont.:

Careful with funeral instructions and personal effects to

prevent disputes

Trusts for personal use real estate? Short & long term – does

spouse or estate pay expenses?

Recreational real estate – draft spousal trust carefully to defer

capital gains taxes until last spouse to die (note: surviving

spouse must retain right to use property for lifetime)

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Mutual Wills Agreements

tension: how to provide for second spouse while securing the inheritance for the children of the first spouse to die?

risk: the children of the first spouse to die have no recourse against the surviving spouse under s. 60 of the Wills, Estates and Succession Act (“WESA”) if he/she decides not to provide for them

mutual will agreement: an agreement to make wills which are coordinated and meant to revoked or amended only by agreement – the surviving spouse is bound by the terms of the agreement and cannot change their will

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Mutual Wills Agreements, cont.

Often terms will be that the survivor must leave a will in the same form as the first to die or must not revoke his/her existing will

Agreements vary on what assets are bound by the agreement and the use the survivor may make of assets during his/her lifetime

Pros: useful when trust planning not available due to age, cost or the nature of assets

Cons: inflexible; assets still vulnerable to claims of creditors and subsequent spouse of last to die

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Mutual Wills Agreements, cont.

Drafting considerations:

may be included in will itself or separate document;

Specify what property it applies to;

Specify survivor’s rights to use property during his/her lifetime;

and

Address how the agreement may be amended, if possible.

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Inter Vivos Trusts

Potential trusts available: residence trusts, insurance trusts, spousal trusts, alter ego and joint partner trusts;

Since 2000, if 65 or older, can establish alter ego and joint partner inter vivos trusts on a tax deferred basis;

21 year deemed disposition rule does not begin to apply until the death of the settlor for an alter ego and the death of the surviving spouse for a joint partner trust;

Allows enjoyment and control of assets during lifetime, providing for a surviving spouse (if desired) and then assets can pass to children from first marriage;

Also avoids probate fees and potential variation claims by unhappy spouses and children.

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Inter Vivos Trusts, cont.

Alter Ego & Joint Partner Trusts:

Pros:

s. 60 WESA (wills variation) protection;

Probate fee avoidance;

Incapacity planning;

Privacy;

Orderly and faster administration;

Creditor protection.

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Inter Vivos Trusts, cont.

Alter Ego & Joint Partner Trusts:

Cons:

Cost;

Added complexity;

cannot transfer RRSPs & RRIFs in;

May trigger Property Transfer Tax;

Note availability of related individual/primary residence exemption code 5, then exemption code 26 transfer from one trustee to another)

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Jointures, Designated Beneficiaries

Can be used to allocate assets as desired between spouse

and children from first marriage;

Risks to children of first spouse to die if assets pass to second

spouse directly;

Watch income tax consequences, document all intentions

carefully.

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Incapacity Planning

Powers of Attorney for finances;

Representation Agreements for health care (appointing

decision maker and documenting health care instructions);

Advance Directive for documenting health care instructions

only;

Consider the relationships and feelings of various parties in the

event of one or both spouses becoming incapable.

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Power of Attorney Restrictions

Generally speaking attorneys cannot do anything of a

testamentary nature (sever tenancies, alter beneficiary

designations, change wills or modify trusts);

Divorce by power of attorney? Adult must have intent to

separate prior to incapacity;

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Family Law Agreements

Cohabitation/Marriage Agreement: a property agreement

governing entitlement to support and assets if the spouses

separate or die;

Instructive but not certain to defend against a family law or

wills variation claim;

Agreements can be set aside if there wasn’t full financial

disclosure, if there was duress or if it’s patently

unfair/unconscionable;

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WESA Family Law Issues

Spouse loses succession and wills variation rights immediately upon separation under WESA (may have to sue spouse with declining capacity or their estate after death under the Family Law Act);

Possibility of post-humous births;

A step-parent can be obligated to pay support for step children;

Intestacy: if deceased children are step-children of surviving spouse, surviving spouse receives first $150,000 and the balance is split equally between spouse and children; surviving spouse has right to purchase home

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WESA Family Law Issues, cont.

Are the parties separated if one goes into long term care?

Long simmering tensions with step-children can surface when

one or both of the spouses begin to lose capacity;

Does the spouse have the capacity to form an intention to

separate?

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Help Clients Plan Now for the 3 Ds

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