What if you died today? Thinking about it seems odd, but we all want to have peace of mind about the answer to that question. When answering from a financial perspective, it’s natural to want to do the best you can with the finances you have.

Dean’s Estate Planning

In the last few years, it has been challenging to get people to spend their money if they are truly savers. Recently I sat down with Dean, a single senior who wanted estate planning advice. He is in his 70s and living in LaSalle. If he doesn’t spend all his money, he wants to leave it to his two children. His home, his RRIFs, and his investments are worth about $400,000. Dean has named his children as beneficiaries of his RRIF.

I encouraged him get control of the money by taking more of it out of the RRIF, so he can spend and enjoy it and pay tax as he goes instead of losing almost half when he dies. The money outside his RRSPs is invested in segregated funds. The estate advantage is that he can invest in dividend income funds and generate dividends and capital gains. These funds might pay him more but will not tax him more, and 100% of his capital will be guaranteed to his children if he dies regardless of market conditions. This strategy also bypasses probate, so the payout is immediate.

Dean asked if he should add his children’s names as joint owners of his home. I mentioned that they would be responsible for capital gains when the house is sold, since it is not their principal residence. We switched back to his name a GIC that had been jointly held with his boys and invested it into an insurance-company GIC with the boys as beneficiaries.

Finally, a will and power of attorney needed to be set up outlining his wishes if becomes ill or incapable of making financial decisions. We referred him to a lawyer or notary public to get the proper legal advice. Dean left that day with the peace of mind knowing the answer to the question, “What happens when I die?”

Second Marriage Mistakes

Let me tell you a secret about estate planning. One day last month, Mike and Tracy walked into my office to discuss estate planning. Mike introduced me to his second wife and joked about the challenges in joining two different families. He said, “When I die, I want to leave enough for my children and everything else to my wife.”

Sounds simple. He has a will, so everything is set out in the will, right? Most of Mike’s assets are jointly owned with Tracy. The home, as well as investments yielding approximately $300,000, will pass outside the will to Tracy. His RRIF, worth about $200,000, names Tracy as beneficiary since it will pass to her tax-free. Even Mike’s vehicle is jointly owned with Tracy.

“So, what’s left for your children?” I said.

After the dead silence, Mike looked at me and said, “Wow, I never thought of it that way. How do I make sure Tracy will give anything to my children when I die?”

“Tracy’s will say everything goes to her children. So, if you both die in an accident tomorrow, most of your estate will go to Tracy’s children.”

Estate planning gets very tricky with second marriages, especially amongst seniors who may have children and grandchildren on both sides. While the will may give you guidance, joint accounts or accounts set up with beneficiary designations will not pass through the will. Mike has to be more specific in his intentions

and do some careful planning with his lawyer and accountant or financial advisor; not only about the tax implications but also about the best way to distribute his investments when he dies (as well as when Tracy dies).

The secret of estate planning is to figure out not only how to distribute the funds, but also how to prepare for the challenges faced by those left behind.

Financial Tips for Second Marriages

According to Statistics Canada, remarriage is very common but becoming less so because of the trend towards living together without marriage. About 75% and 65%, respectively, of divorced men and women remarry. In today’s world, the same joint-ownership rules may apply both to marriages and to common-law relationships.

Let’s look at Fred and Wilma, who were both married previously. Fred was revising his will and wanted to make sure that some money went to his two adult children. In his will, he stipulated that Wilma would get 50% of the estate and his two kids would get 25% each. The problem was that he and Wilma owned the home as “joint tenants.” In addition, they had joint bank accounts and joint investment accounts. The way his assets were titled–jointly, with rights of survivorship–the house, the bank account, and the investments would all go to Wilma. The kids would get a percentage of whatever was outside of these investments; in this case, next to nothing.

There are two ways of owning property. The more common is “joint tenancy” with rights of survivorship. Essentially, when property is held jointly the surviving joint owner becomes the owner of the entire property. The property bypasses probate bypasses the will and is not part of the estate. Less common is “tenants in common” where each only owns a portion of the property. Upon death, their portion forms part of their estate. In the case of Fred, he may have been better off owning the house as tenants in common with Wilma, to ensure that his kids would get a portion of his property.  

RRSP/ RRIF Beneficiary Designation

If you name a beneficiary other than your spouse, you must understand the tax consequences. Not only will the RRSP/RRIF be taxable, but it will also be taxable to the estate. The estate is responsible for filing the final return.

Betty was widowed and living common-law with her new partner, Barney. Betty wanted to make sure that her daughter Christine got something, so she designated her as the beneficiary for her RRSPs. When Betty passed away, Christine got the RRSPs, but the estate was responsible for the tax on the RRSPs. Barney and Christine wound up getting into a battle over who would have to pay the tax on the RRSPs. Be careful when listing someone other than a spouse as the beneficiary for an RRSP. As you can see, estate planning for second marriages requires some detailed thought and planning. Don’t assume everything will work out. Take the time to plan ahead and seek advice. Rules may also vary from province to province.