Five ways to navigate blended-family finances

By Tony Maiorino | August 3, 2016 | Last updated on September 21, 2023
5 min read

If we think about our relatives, friends, and colleagues, chances are the majority of us know more than a few families who resemble The Brady Bunch rather than the “traditional” definition of a family. The reality is, blended families are increasingly common in Canada, with stepfamilies representing about one in eight families with children, according to the 2011 census.

Clients in this situation are facing financial- and estate-planning decisions fuelled by additional emotional factors. While blending a family can often seem tumultuous and all-encompassing, there are steps clients should take to help streamline the transition.

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Updating estate-related documents

Not updating a will is one of the most common mistakes I’ve seen people make after divorcing or starting a new relationship. What many clients don’t realize is that in some provinces, a marriage revokes any previous wills. So if a client remarries and then passes away without drafting a new will, they may die intestate and their estate will be distributed in accordance with the provincial/territorial intestacy laws.

It’s likewise important for clients to revisit any plan where a beneficiary is named, such as an RRSP, insurance, or work pension. Serious estate conflicts can surface if a spouse neglects to remove a former partner from these plans or policies. I have seen a situation where a client divorced and remarried but failed to change their beneficiary designation from their former spouse to their new spouse. The funds had to be paid to their former spouse, despite the client’s intention that their estate pass to their new spouse.

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Choosing an executor

This is a decision many find difficult, and those in blended families are faced with choosing among their spouse, children from their prior relationship, children from their current relationship, or a combination. Remind clients to consider how well those individuals will be able or willing to work together. Advise them that it may be beneficial to instead choose a third party such as a trust company, lawyer, or accountant.

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Giving gifts and establishing trusts

Advisors should tell clients that trusts can be an effective method for distributing assets in a way that helps solidify a particular outcome, they can be tailored to their preferences.

Some clients may wish to divide assets during their lifetimes, and this is where outright gifts or inter-vivos family trusts may be effective. For division after death, testamentary trusts (with possibly an independent trustee) can be an ideal option. If the intent is to have assets fund a testamentary trust that will eventually benefit children from a previous marriage, spouses in second marriages may not want to hold certain assets jointly with right of survivorship (note: Quebec doesn’t recognize joint with right of survivorship).

As an example, suppose Jack and Jill are in a second marriage. Jack has children from his first marriage and as part of Jack’s estate plan, he wants to ensure his assets ultimately pass to his own children on death. He also wants to ensure that if he predeceases Jill, he provides financial support for her during her lifetime.

Currently Jack and Jill hold title to their home in joint tenancy. Their bank accounts are also held jointly. If Jack were to pass away, his share of the house and bank accounts would pass outright to Jill. Jill would be free to dispose of the house and funds in the accounts as she wishes.

If Jack wants to ensure his share of the home and bank accounts ultimately go to his children, he may consider changing the ownership structure of these assets. He may consider holding title to the home as tenants in common. For the bank accounts, he may also want to hold them as tenants in common or in sole name. This way, on his death, Jack’s interest in the home and bank accounts could pass through his estate into a testamentary spousal trust created under his will. The terms of the trust could ensure that the assets are held in trust for Jill during her lifetime and are used for her benefit. On her death, the assets remaining in the trust could be distributed to Jack’s children from his first marriage.

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Considering life insurance

Life insurance can be an important tool for many blended families. Because proceeds of a policy will be available at death, it can be an effective way to create an inheritance for beneficiaries. Advisors can help their clients realize that leaving a life insurance payout to their children may take care of their inheritances and free up the estate to for the surviving spouse. Life insurance proceeds are not taxable in the hands of the beneficiaries. Also, if a client names their beneficiaries on their life insurance policy, the proceeds can be paid directly to them avoiding the need for probate. Since the proceeds are not subject to probate, it can be a good way to pass money to beneficiaries while maintaining the family’s privacy.

Life insurance proceeds can be used to pay the estate’s liabilities, such as taxes, mortgages or debts. This will help to ensure that non-liquid assets, such as a business or vacation property, don’t have to be sold to pay bills.

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Recognizing the value of marriage contracts

While the thought of marriage contracts may stir up clients’ discomfort, the truth is the contracts serve multiple purposes, especially in second marriages. To get past clients’ reluctance, advisors should explain that:

  • the contract-writing process involves thorough and open communication;
  • contracts are a way to assure both people in the relationship that they’re protected; and
  • contracts are an effective way for both spouses to outline which assets each will allocate to their respective children.

Regardless of the family situation, estate planning is a topic some individuals avoid or hesitate to discuss. If you add to the extra challenges blended families face, estate planning can quickly seem overwhelming. With the right understanding, however, advisors can help clients get beyond the worries to make decisions that are uncomplicated, equitable and ensure protection that meets the needs of each family’s individual situations.

Tony Maiorino is vice president and head, RBC Wealth Planning Services, RBC Wealth Management

Tony Maiorino

Tony Maiorino Vice President and Head, RBC Wealth Planning Services, RBC Wealth Management.