Special to the Financial Independence Hub
It may not be the most romantic topic to discuss on Valentine’s Day but it may be the most valuable for long-term happiness in your relationship. 40% of blended families admit to not discussing finances before moving in together but when you blend families there’s a long list of items for you and your partner to figure out. Your finances should be near the top. Dealing with financial issues early can go a long way to ensuring this next chapter in your life is all you want it to be.
Holding property – together or apart?
One of the first decisions you’ll have to make as a couple is whether to own property jointly or in separate names. What you decide will affect the way you manage money now, and determine how your wealth is passed on.
Some property like an RRSP or TFSA must be registered solely. But for other assets, including investment accounts, GICs or real estate, you have the option of sharing ownership.
Arranging joint title is handy where unrestricted, convenient access for either party is important; daily bank accounts are an example. It can also make sense if you want to share your property with your partner now and leave those assets to them when you die. Holding property as joint tenants with right of survivorship ensures ownership will transition smoothly to the surviving spouse. However, tenancy if your partner makes bad financial choices it could also impact you and your creditworthiness.
Keeping title separate is an option if you’re concerned about clearly tracing who brought which assets, or debts, to the relationship. On the other hand, if you still prefer sharing ownership with your significant other there’s an alternative: holding property as tenants-in-common.
Let’s say you bring assets from a prior relationship which you plan to leave to your children from that earlier union, rather than to your new partner or stepchildren. Instead of having title transferred automatically to your spouse upon your death as would happen in a joint tenancy, as tenants-in-common your share of the property remains part of your estate, meaning title can be passed to your heirs according to your will. You won’t be relying on your new spouse to ultimately decide your children’s inheritance.
Don’t forget to update important documents
Review key documents to ensure they still reflect your intentions. Including:
- Beneficiary and related designations for RRSPs, RRIFs, TFSAs, life insurance policies and workplace pensions. At death, registered investments can generally transfer to your new spouse without immediate tax consequences.
- Your will. In BC and Alberta, a will is no longer automatically revoked by marriage. That means any directives stated in your will, including those made benefitting your ex-spouse, stay in effect unless you alter them. However, no matter where you live, it is important to review your will during life events such as divorce or marriage.
- Power of attorney and executor appointments. In blended family situations where adult children are involved, consider naming a third-party professional like a lawyer or trust company to these roles. Doing so can help head off any family conflict, while ensuring duties are carried out properly.
Options for estate planning
It can be tricky to balance the needs of a new spouse with the expectations of children from a prior relationship. A spousal trust can help. Your will can direct the trust be set up upon your death and structured to benefit all parties. One approach is to have income and capital from the trust go to supporting your partner for their lifetime, with the assets that remain eventually passed on to your kids.
A life insurance policy is another valuable tool in a blended family’s estate plan that offers several advantages. First, a tax-free benefit is paid out at death, which can help cover any taxes, debts and other obligations facing your estate. That way your heirs won’t be forced to sell property to generate cash needed to settle your bills. You can choose to have life insurance proceeds create an inheritance for your children, leaving the capital from your estate to accommodate your spouse.
An alternative approach is to distribute wealth to your children now. While there may be tax consequences to transferring assets (for example, capital gains), it may be a sensible compromise if you feel there’s a likelihood of future family disputes.
Putting a solid estate plan in place is a must, but it’s no substitute for thorough communication with your spouse and beneficiaries. It’s important to explain your decisions if you’ve chosen to distribute your estate unequally, say on the grounds of financial need or closeness of relationship. The handling of sentimental property is what can stir up emotions the most, so be sure to communicate your wishes clearly.