Navigating delicate family dynamics

The first step in untangling that web is helping the client clarify exactly what his or her wishes and responsibilities are towards stepchildren. For example, if a client’s stepchildren are adults then he or she may not have any responsibility to provide for them in an estate plan unless the client specifically wants to, according to Sébastian Desmarais, an associate with Tierney Stauffer LLP in Ottawa.

On the other hand, if a client’s stepchildren are minors and dependents then the client should probably take their needs and interests into consideration, says Desmarais. Clients can do this in a number of ways, such as through a trust or a registered education savings plan (RESP).

Regardless of how a client intends to provide for stepchildren in an estate plan, it’s imperative that he or she pays attention to the wording.

“If you’ve not legally adopted stepchildren, they actually don’t have a legal relationship to you,” says Tom Junkin, a Calgary-based senior vice president, personal trust services and operations, Fiduciary Trust Co. of Canada, a division of Franklin Templeton Investments Inc. “And so if your will says leave everything to my children and you don’t specifically name your stepchildren, they won’t receive anything.”

As such, it’s important to name those individuals in the will and to identify their relationship to the client. The same applies to the grandparents: If a client’s parents consider his or her stepchildren as their grandchildren, then the same detailed wording needs to be included in the parents’ wills, says Junkin, so as to not inadvertently disinherit a non-blood relative.

Further complicating matters is the potential for tension to arise between a new spouse and children who are close in age. If a new spouse is only a few years older than a client’s children, for instance, those children may never receive an inheritance since their stepparent could live as long or longer than them.

Clients don’t often talk about these situations, but Junkin says it’s a good idea to raise the topic to determine the client’s estate planning priorities.

Advisors can help clients ensure everyone is accounted for through the use of trusts for the children or the spouse, or through insurance. For example, the client could take out an insurance policy that would be paid out to the children at his or her death, thereby giving them an inheritance while the new spouse continues to benefit from the remaining estate.

Some clients may want to skip the difficult planning associated with drafting a will for a blended family altogether, and simply gift money to children. Unlike in the U.S., there is no gift tax in Canada, says Ian Lebane, will and estate planner, wealth advisory services, TD Wealth, in Toronto.

In fact, gifting money before a second marriage or death not only smoothens out the estate planning process, but it can also help with the taxes — particularly if the children are young.

“It can result in some better tax results with income splitting,” says Lebane.

At the end of the day, it’s best for clients to make their estate plans as simple and fair as possible if they want to avoid having their estates tied up in litigation for years.

“When there’s an unequal piece of the pie going to one beneficiary then there’s risk of that will being challenged in a court of law,” says Willis, “and if that were to happen then it’s kind of a long drawn out affair.”

To avoid court, Lebane suggests clients “try and be magnanimous or have a generous spirit in the will.” Even if the client has misgivings about a potential beneficiary or there is some kind of tension, it’s best to be as fair as possible and discuss the reasoning for his or her decisions in the will with family members.

This is the second article in a three-part series on estate planning.

Next: Help clients choose an executor.