Leaving estate to your kids

A young wife and mother consulted with me recently. She and her husband have children together. There are no stepchildren. This is not a blended family.

The standard estate plan is to arrange their affairs so when one of them dies, everything ends up in the hands of the other without the need for an expensive and time-consuming probate process. All assets are owned jointly, in a way that the one who dies first simply disappears from ownership, leaving the survivor as the sole owner. Registered investments that cannot be jointly owned, i.e. RRSPs and TFSAs, have each other named as beneficiaries.

The wife asked: “How can I ensure my kids eventually end up with my estate?”

She was doing what lawyers are supposed to do. She was thinking about contingencies.

If she dies first and everything ends up in the hands of her husband, she has lost complete control over the wealth she helped create.

They couple are young , still in their 30s. She didn’t come to me today to get her affairs in order in case she dies 50 years from now. She’s planning for the possibility that she drops dead now, in her 30s.

Yes, it’s unlikely but it’s precisely because of that unlikely outcome that she’s consulted me. So, we must seriously consider what would happen if that unlikely outcome were to occur.

There’s an incredibly high likelihood what she would wish for would occur — her husband will find another life partner. That new partner may, or may not, have children.

Regardless, they would be at an age where they may have more children together.

Can the wife count on her husband to ensure the wealth she helped create, and which he would bring into that new relationship, would end up going to her children?

Would he ensure there’s a prenuptial or cohabitation agreement that protects their wealth in case that new relationship fails?

Would he make an estate plan with his new spouse that ties up the wealth he brings into the relationship to eventually go to their children in case he dies before his new spouse?

Whatever he does, he can’t protect that wealth completely. He will be accruing new family law obligations that will increase the longer the new relationship progresses.

And any new children will dilute what goes to the kids from his relationship with his first wife. Keep in mind, those new children will have additional inheritance sources from her husband’s new spouse’s side of the new family.

When you work through the very likely fact pattern that would emerge if the very contingency my client is planning for occurs, the traditional estate plan becomes inadequate. So, consider an alternative.

A young family’s most significant asset is likely their home, with most of their discretionary income going to diligently paying off their mortgage.

My client and her husband could agree to own that shared asset in a way that it doesn’t end up 100% in the survivor’s hands, vulnerable to claims by the survivor’s new spouse and children.

Instead, they could agree that if one of them dies, the 50% share owned by the deceased spouse can be used by the survivor for their lifetime, but then would go directly to their children.

This outcome could be achieved while avoiding probate fees and expenses.

It’s not fun to think about our mortality. If we’re going to go there, though, we might as well think realistically and make a plan that has the likely contingencies.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.