Estates & Wills & Trusts

Providing for children after a second marriage

By AdvocateDaily.com Staff

In the second instalment of a two-part series, Winnipeg wills and estate lawyer Cynthia Hiebert-Simkin discusses how to provide for children when there’s a second marriage.

A couple marrying for the second time often considers leaving their estate to the surviving spouse assuming their children will inherit everything after the second one passes, but that won’t necessarily happen without a solid plan in place, warns Winnipeg wills and estate lawyer Cynthia Hiebert-Simkin.

“There’s the idea, then there’s the implementation,” says Hiebert-Simkin, a partner with Tradition Law LLP, a boutique Winnipeg estates and trusts firm.

Ensuring the kids receive their share following the death of the surviving spouse of the second marriage could be facilitated by an agreement between the spouses, she tells AdvocateDaily.com.

But the children need to be aware of that agreement for it to be effective, adds Hiebert-Simkin.

The first step, she says, is to create an estate plan agreement, which sets out a person’s wishes, including how assets will be gifted after the death of the first spouse and what will happen when both spouses are gone.

“Once that’s created, you would prepare a will that reflects the agreement. You could also take it a step further and make mutual wills, which cannot be changed without the permission of the other person,” explains Hiebert-Simkin.

One example could be of a couple in a second marriage deciding to buy a house together and owning it jointly with the right of survivorship. In the situation of a $700,000 home, they would each contribute $350,000.

“The house wouldn’t be included in the will because it passes to the surviving spouse by right of survivorship,” says Hiebert-Simkin. “The issue is how the children of the first spouse to pass away will receive their parent’s contribution to the purchase of the home.”

She says an agreement can set out how children of the first to die are to receive a portion of the proceeds if the house is sold or buy-out provisions if it's not sold.

“The agreement can determine how much is paid and under what circumstances,” says Hiebert-Simkin. “For example, what happens if the home has increased in value by the time the first spouse dies? It can also determine whether the amount is to be paid only on the death of the second spouse.”

She says all of those nuances and scenarios should be discussed and agreed upon when drafting the document.

Detailing beforehand how that plays out could help avoid conflict between the survivors later. Issues such as who will pay the cost and maintenance of the home often arise. And there is the potential that any deferral of title can add to the burden.

“If the house is not transferred in some way, then the estate stays open indefinitely and has to keep filing tax returns,” says Hiebert-Simkin.

The necessary offshoot of that arrangement is that the kids are forced to maintain a relationship with the surviving spouse whether they get along or not, she says.

Things can get even trickier for surviving spouses who don't jointly own the home because they don’t have rights of survivorship, says Hiebert-Simkin.

“In many provinces, when a deceased spouse owns the house, the surviving spouse has a homestead right to live in the home for his or her lifetime,” she says. “This is a legislated right, but the couple can opt to do something different in the estate plan agreement that suits their circumstances.”

Hiebert-Simkin says there could be a provision that says the surviving spouse and the children of the deceased spouse own the house together.

“If there is nothing in the agreement about giving an ownership interest in the house owned by the deceased, then the surviving spouse could have a ‘life estate’ or the ability to live in the home during their lifetime — or a variation of that,” she says.

“if the house is part of the residue that is going to the children of the deceased spouse, then one option is to transfer the house to the children in order to close the estate.”

The details of this would have to be worked out in terms of who pays the expenses when the surviving spouse continues to live in the home, but the children of the deceased spouse own it, says Hiebert-Simkin.

If the agreement allows the surviving spouse to continue living in the home, it cannot be sold without that person’s permission, she says.

“One of the things that may be important for this couple is to minimize the lingering financial connection between spouse number two and children from the first marriage because there’s no guarantee they’re going to continue to have a financial relationship,” Hiebert-Simkin says.

Another possible approach is to create a spousal trust, she says. That could ensure the assets of the estate will flow to the trust and only the surviving spouse can draw income and withdraw capital from it. Then, upon the death of the second, whatever remains can be left to the children.

But in that scenario, the second spouse will have the ability to drain all the proceeds of the trust if he or she is the sole trustee, says Hiebert-Simkin.

“That’s why the choice of trustees will be critical,” she says. “If the surviving spouse is the only trustee, then they would have the ability to drain the assets of the trust. But if the children of the deceased spouse are also trustees, they would have control over the assets.”

The difficulty in this situation is that the surviving spouse may feel like they have to ask permission to spend money, Hiebert-Simkin points out.

“The relationship between the second spouse and the stepchildren is an important consideration when setup up spousal trusts. Plan for the worst and hope for the best,” she says.

“This is why it’s so critical for people entering a second relationship to sit down with a lawyer who has expertise in this area. Otherwise, the spouse is not just grieving, but facing a relationship they may not want with their stepchildren," she says.

Click here to read Part 1 — estate planning for second marriages.

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