^Blog Navigating Complexity: Planning for Blended Families

What is a blended family & why is it different?

Blended families are increasingly common as people with children separate and move into new relationships. A blended family forms when two people come together, creating a new family while bringing children from previous relationships. Estate planning is particularly complex for blended families due to unique considerations. When merging families from previous relationships, there are often differing guidelines and wishes regarding how assets should be distributed, regardless of whether stepchildren are viewed equally with biological children. For instance, one partner may want to pass on assets such as land or cottages exclusively to their biological children while allowing their partner to benefit during their lifetime.

What is the risk to the surviving spouse?

The likelihood of one spouse passing away before the other is high. For example, if the partner who brought the majority of assets into the relationship passes away suddenly, their Will may stipulate that all assets go to their biological children. While the children could choose to support the surviving stepparent, there’s no legal obligation unless clearly outlined. This poses a significant risk to the surviving spouse. It is crucial to update the Will when entering a blended family situation. Although it’s common to believe that family members will resolve matters rationally, it’s wise to prepare for uncertainties. A spousal trust is one solution to ensure the surviving spouse isn’t left without support.

What is a Spousal Trust

A spousal trust is a legal entity established upon one spouse’s death for the benefit of the surviving spouse. It holds the deceased spouse’s assets, providing for the surviving spouse while safeguarding these assets from creditors and potential future spouses. The trust remains active for the survivor’s lifetime, and upon their death, the assets are distributed according to the first deceased spouse’s wishes, which may include passing them on in full or in part to anyone of their choosing such as biological children. Depending on the asset type, utilizing this structure can offer opportunities to defer certain gains and losses. For business families, employing a spousal trust can have advantages based on the succession plan and specific family needs.

Importance of having the conversation

It’s essential to have open and flexible discussions to ensure both spouses and their respective families are properly cared for. Addressing these considerations in advance can prevent complications during estate settlement. Tax implications must also be carefully considered in all scenarios. While a spousal trust offers significant benefits, it’s not a universal solution. For instance, RRSPs and RRIFs typically offer tax-deferred rollover options to a surviving spouse, which could be lost if placed into a spousal trust, where they’d be taxed as regular income before entering the trust.

Additional costs and considerations must be carefully evaluated when making these decisions. It is advisable to seek guidance from a professional planning team to conduct a thorough review of your situation and determine the most effective plan before finalizing your decision.

Authored by: Braeden Osske, Wealth and Estate Planner at Three60 Wealth