What can I do if I can't leave my spouse in charge of the kids' inheritance?

What can you do when you're worried that your spouse won't be able to properly look after assets you want to leave to your children? Recently a reader asked me that very question, and I'm sharing the answer here. Here's the question:

"I can not trust my husband with money as he always ends up losing everything in stocks. so is it possible to appoint my 2 minor children as beneficiaries to my life insurance plans, property and other assets? if so, then how do i insure my husband does not get access to the money while my kids schooling and daily expenses are financed through their inheritance?"

Yes, it's possible to name minor children as beneficiaries of insurance policies, but before you do that, there are other options to consider.

If you name a minor on an insurance policy, the child will receive his or her share of the policy on his/her 18th (or 19th, depending on where you live) birthday. The children have no access to any of the money before that. And once they receive it, there are no controls on it. Many parents feel that this is not a good way to deliver funds to the children, as the kids won't have any guidance, help or protection in dealing with the money.

Let's look at what happens when you name your estate as the beneficiary of the life insurance policy. If you do this, it is absolutely critical that your will be set up properly to bring about the outcome that you want. This is too important for you to do a home-made will, so you would need to see a lawyer to ensure that your will is solid.

If you name your estate as beneficiary, and then use your will to leave the funds to your children, your first concern appears to be ensuring that your husband is not in control of the money. The person you name as executor is the one who is in control of the money in the estate, unless you say otherwise. You would have a couple of options here. One is to name someone other than your husband as the executor. The other is to allow him to be the executor but to specifically name someone else to handle the trusts for the children, if you are comfortable with him having even that much control. You could name a sibling, a trusted friend, or a trust company.

If you pass away while your children are minors, your insurance proceeds would flow into the trusts you've set up in your will. If the will is properly drafted, the trustee of the children's funds would be able to pay for things for the children before the age of majority, for example, a school trip when the child is 16, or hockey equipment at age 14.  You would make the decisions about how money can be used at the time you make your will because that's when the trust is written into your will. The wording is very important.

Using your will, you can also decide that your children might not get the full insurance proceeds at the age of majority. Depending on the amount of the proceeds, you might think it a good idea to give them some of the money at 18, and the rest at 21, for example. These is another decision that you make at the time  your will is set up.

Some wills contain specific instructions that the surviving parent is not to be put in control of the money.

There is another side to your question. As I answer this, keep in mind that as far as I know from your question, this is not a second marriage situation. You appear to be asking whether you can leave everything you own to your children. This is probably not a good idea. Simply stated, you can't simply leave your spouse entirely out of your will.

Your spouse is entitled to a share of your estate, simply by being your spouse. If you leave your spouse out entirely, you run a very strong risk that your spouse will make a claim against your estate to be given some or all of the estate. And his chances of winning are pretty good. It's a better idea to figure out a way to benefit both him and the children.

One option is a spousal trust, which would mean putting your assets into a trust for your husband's whole lifetime. He could then use the assets (for example he could live in the house) but he couldn't sell them or mortgage them. Now, there are plenty of downsides to this plan. For one, nothing that is jointly owned can be put into the spousal trust because your husband will already own them by right of survivorship. Second, your children wouldn't get anything until your husband passes away.

Another option is finding a way to divide the estate between them. For example, if your husband receives the home, personal belongings and bank assets by right of survivorship, your children could receive the life insurance policy. And then you'll have to trust him to leave the kids whatever he owns in his own will when the time comes.

You have options, but every decision has pros and cons. I'm really glad that you're doing your research and finding out how to protect your kids. Why not take this information that I've given you and talk it over with a lawyer in your area?

RRSP/RRIF spousal transfers on death - not so automatic

Warning! This post talks about tax. I realize that not everyone finds tax information as interesting as I do, but it's important stuff for all of us.

I'm attaching a link to a blog post by accountant Mark Goodfield, better known as The Blunt Bean Counter. In this post he talks about the transfer of an RRSP or a RRIF from a deceased spouse to a surviving spouse. You might be surprised to find that a spouse can choose simply to take the funds outright rather than receive the funds into his or her own RRSP or RRIF. If that happens, the estate may end up paying the tax.

Click here to read the article, which is very readable and contains tons of good information.

Can a wife turn down an inheritance from her husband if he owed more than he owned?

Recently a reader told me that her husband had passed away, and asked whether she could turn down her inheritance from him if he owed more than he owned. Is it possible for a beneficiary to turn down an inheritance? Sure. But in this situation, more questions than answers come to mind for me, so I thought I'd take this opportunity to explore what a person in this situation might want to take into consideration.

A general rule of estate law and procedure is that debts are paid first and beneficiaries only inherit if there is enough left in the estate after debts are paid. Therefore it wouldn't really help if the wife turned down her inheritance, since there wouldn't even be an inheritance if there were unsatisfied debts."Inheritance" only refers to assets that pass under the will, or on the laws of intestacy if there is no will.

This made me think that perhaps the wife wasn't really talking about inheritance. Perhaps she was actually referring to assets that passed to her because of her husband's death, but not through his estate. This would be assets that passed to her because she and her husband owned them jointly (such as a bank account or their home), or because she was the named beneficiary (such as on a life insurance policy, pension, or RRSP).

This is where the wife might want to make sure that she has personalized legal advice tailored to her situation. She needs to understand how debt, titles and taxes work in her specific situation. Let's look at a few possible scenarios. One is a joint bank account between the husband and the wife. When the husband died, the account automatically belonged to the wife. It doesn't form part of his estate and is not available to creditors.If he owed money on a credit card, she would not have to use the joint account to pay it. Similarly, a life insurance policy that named the wife would be paid straight to her no matter how much debt was owed by the husband's estate, as the policy doesn't form part of the estate.

The question asked by this reader also makes me wonder whether the wife is worried that by accepting assets, she is also assuming responsibility for his debts. Unfortunately it's commonly - and wrongly - believed that a wife takes on a husband's debts when he dies, and vice versa. That simply isn't true.

This is not to say that some assets don't come with debts attached, because they do. Some debts are secured, meaning that if the debt isn't repaid, the asset can be repossessed or other legal action can be taken. If this were the case, say for the husband's car loan, the wife could allow the creditor to repossess the car and she would owe nothing herself.

Life insured debts also factor in. Many mortgages, for example, are insured so that when either the husband or wife dies, the insurance money covers the mortgage and the surviving spouse then owns the house outright.

I would strongly urge anyone who is faced with a situation like this to sit down with a lawyer for an hour and talk it all through. This is a complicated web of several laws and rules, and nobody should expect to figure it out on their own. Under absolutely no circumstances should you listen to friends who tell you what happened to them or someone they know. The facts are different. Their case doesn't apply even if you think it's similar.

Domestic violence and disinheritance

Should an abusive spouse be barred by law from inheriting from the spouse he or she abused? What an interesting question! According to http://www.allaboutestates.ca/, this issue is being discussed among estate planning lawyers in Ontario.

In particular, they are talking about cases in which the abused spouse left a will that disinherited the abuser. This contradicts the usual law of estates which in general does not allow one spouse to completely disinherit the other.

Currently Canadian law says that nobody can inherit from the estate of someone they have killed. But our law doesn't say anything about someone they have abused.

Click here to read the article. Also, please vote in a new poll that I've put up about this question on the right hand side of my blog.

Two spouses at the same time, and both get support from the estate

In a recent case from Ontario (Blair v. Cooke (Allair Estate)), a judge found that a deceased man had two spouses at the same time, and ordered that the man's estate provide support to both of them. Click here to read a discussion of the case from All About Estates. Note that legislation varies from province to province, so there could be a different result in a different part of the country.

My husband owns the house - what happens if he dies?

This is a question recently asked by a reader, that I'd like to answer here. I'm glad this question is being asked while both parties are still living and there is time to make changes, if necessary.

The facts seem simple, but there are many more facts that I would want to know in this situation. First I would check the title to see exactly who owns the house. Is the wife correct in her belief that her name is not on the title? Is the husband the only owner or is there someone else on title as well? This sometimes happens when a property is handed down through a family; the husband's siblings might well be on title too.

Assuming that the husband is the sole owner of the property, I would then want to know whether the parties were legally married or common-law partners, and I'd want to know which province or territory they live in. A couple of provinces, including Alberta, still have Dower rights which give a surviving spouse a life interest in the home when the spouse dies. Dower rights don't apply to common-law couples.

I would also want to know whether the husband has a valid Will, and if so, what he has said about the property in his Will. If he is the only owner of the house and he leaves his entire estate to his wife, then the house will simply be transferred to her. It could be, however, that if the husband is in a second marriage, he might plan to leave the house to his children of the first marriage. Or he might have created a trust for his wife, which would allow her to live in the house but not sell it.

Tied in with the issue of the Will are any beneficiary designations the husband might have made, such as RRSPs and life insurance, that might impact the wife's case if she were to bring a lawsuit claiming a larger part of the estate. Spouses are always included in the group of people with an automatic right to contest an estate if he or she is not adequately provided for. Her application would also be affected by rival claims to the estate such as those of minor or handicapped children.

Another fact that might impact the fate of the house is the husband's debt situation. Does he have a mortgage, and if so, is it life insured? Does the house secure a line of credit or a business loan? Is there enough money in the estate to pay all debts he leaves behind?

A simple question, perhaps. But a simple answer? That's not so easy.

Can my spouse be my executor?

I'm often asked whether having your spouse act as the executor of your Will as well as being the beneficiary of your Will is a conflict. Just the fact that someone is your spouse is not a conflict. In fact, it's very common that husbands and wives appoint each other as their executors.

It works because the finances of the husband and wife are already intertwined, such as when they take out life insurance policies that name each other, or open RRSPs and designate each other as beneficiaries. In most cases, they leave their estates to each other. In addition, it is usually safe to say that they have similar plans when it comes to looking after their children once both of them are gone.

This is not to say that it can't get complicated. For example, where there is a trust set up for a spouse, it might not be ideal for that spouse to be the trustee in charge of deciding whether they want to pay money to themselves. A trust for a spouse might be set up if, for example, a man and woman get married, and it's a second marriage for one of them. Let's say it's the husband who is marrying for the second time. He sets up his Will so that his second spouse can live comfortably for the rest of her life, but when she passes away, the remainder of the estate goes to the man's children from the first marriage.

Maybe it wouldn't make sense for the second wife to be in charge of her own trust. Even if she were completely honest, there is always the appearance of conflict of interest that might cause the children of the first marriage to speculate about how much she is taking for herself and how much she is leaving for them.

Even this doesn't mean that the spouse can't be the executor. A man like the one in our example can say that his spouse is to be his executor, but if there is a trust set up for his spouse, it is to be managed by another trustee. We do this a lot in the trust company where I work. We either act alone as the trustee, or we handle it together with the wife. This doesn't mean that the man doesn't trust his wife. It just means that he is aware of the optics of the situation and wants to avoid problems with the children if possible.

When it comes to choosing an executor, I often advise clients to decide first what they want to have happen with their estates. Once they know what the job is going to involve, they can think about who is best suited to do it. The spouse may or may not be the best choice.

As with all legal issues, the question is not whether you can do something; it is whether you should do it.

Re-visiting the Dower Act - or, what happens to the family house

Because I get so many questions about what happens to the family house when one spouse passes away, I thought I'd touch on this subject again.

First of all, the Dower Act has been repealed in almost every province in Canada but is still in place (for now) in Alberta, so these comments only apply in Alberta.

The Dower Act gives certain property rights to married spouses. They do not apply to common law spouses.

When a married couple lives in a home that is only in the name of one spouse, and that spouse dies, the surviving spouse has the right to live in the house for the rest of his or her life. The surviving spouse does not own the house and does not have the right to sell or mortgage the house. It is simply a right to live there.

In estate planning, this sometimes affects couples who are in second marriages, because the spouse who owns the house may wish to leave the house to his or her children from the first marriage. He or she usually makes a Will to that effect, not realizing that the children can't get title to the house until the suriviving spouse passes away. That could be years later. This tends to disappoint the children, who have been told by their parent that they will inherit the house and weren't expecting to have to wait.

The basis for the Dower right is that only one spouse owns the house. None of this applies if both spouses have their names on the title.

Rights to property when a husband or wife passes away

The laws that touch on estate planning and estate administration favour spouses over other people in many ways. For example, if someone dies without a Will, the person having first priority to apply to become the administrator of the estate is the spouse. As another example, a person can roll over his or her RRSP to his/her spouse on death on a tax-deferred basis whereas he or she can't get the same rollover tax break with other people.

But what are the limits on the rights of a spouse when his or her better half passes on? Many people decide not to make any estate plans because they somehow assume that the spouse left behind will own everything and have the right to look after everything. That isn't the case of course, so let's talk about the real situation and what you should do.

First of all you must realize that the simple fact that you got married doesn't change joint ownership of property you already own with someone else. If you own a cottage jointly with your brother, or your home is still jointly held with your first spouse, simply getting married without you taking any other steps won't change the ownership.

Getting married doesn't automatically change your life insurance policy designation or your RRSP designation. If your policy still names your mom or your children from the first marriage as the beneficiaries, the fact that you got married will have no effect unless you contact the insurance company or bank and request the change.

If you haven't made a Will, your spouse is probably only entitled to a portion of your assets (depending on where you live and whether you have children). So if you want your spouse to "own everything" after your death, you have to take some steps to make that happen.

A number of things have to work together. You need to make a Will that deals with all of the assets that are in your name alone. If you want your spouse to own real estate that you currently own jointly with someone else, you are out of luck unless you take steps to change the title while you are alive. Saying in your Will that you want him or her to own your joint property will do nothing as the joint owner has a right of survivorship that a Will can't touch.

You also need to look at beneficiary designations on your life insurance, RRSPs or RRIFs, and pension plan. If your spouse is not the beneficiary designated then your spouse is not going to inherit it after you pass away. An exception may be pension plans, as many are payable to your spouse even if you have not updated your records with them. Unlike joint property, you can change a beneficiary designation on many financial plans using your Will.

The other part of spousal rights after a partner's death is the right to deal with your assets. I often hear a person make a statement like "my wife can sell my stuff after I'm gone" when that person hasn't made a Will naming his wife as his executor. If she is going to sell anything that isn't hers, she is going to have to apply to the court to become the administrator of your estate first.

The bottom line is that although there are special allowances made between a married couple in tax laws and other relevant laws, a husband and wife are still two people, not one. If you want to bring about a certain set of circumstances, you have to actively take steps to set things up that way.

Can a lawyer act for an executor and for the beneficiaries?

When there is a lawyer acting on an estate, he or she has usually been hired by the executor to handle the probate of the Will and sometimes the administration of the estate as well. In a case like this, the lawyer is acting for the executor. The lawyer's loyalty is to the executor, who in turn represents the estate.

A lawyer can act for the executor and the beneficiaries at the same time, but has to be careful about conflicts of interest. For example, a very common situation is one in which a man dies, leaving his wife as the executor of his estate, but he doesn't leave her the entire estate. The wife hires a lawyer to probate the Will. The lawyer knows that the wife can apply to the court to get more of the estate. The lawyer could not act for the wife with respect to the application for more of the estate, but he or she could act for the wife on the probate. Any executor who is making a personal claim against an estate like this is wearing two hats - one executor hat and one personal (beneficiary) hat - and will likely have two lawyers.

The estate lawyer cannot represent anyone whose interest is, or could be, adverse to the well-being of the estate (for those of you who are into research, this is set out in the Alberta Lawyer's Code of Professional Conduct, Chapter 6, Rule 2, Commentary 2.4).

Most of the time, the beneficiaries don't want or need their own lawyers because things go along smoothly. They would probably hire a lawyer if they wanted to dispute what they were getting under the Will, if they needed an answer to a legal question (such as, was the joint property really joint property), or if they need to do something about an executor who is fraudulent, negligent or otherwise acting suspiciously. Other than that, beneficiaries usually have no need for their own legal representation.

But beneficiaries need to realize that the estate lawyer will do, on the instruction of the executor, what he or she thinks is best for the estate, even if that is not necessarily what any individual beneficiary wants. An individual beneficiary cannot instruct the estate lawyer to do what that one beneficiary wants. That would be chaos.

In most estates, there is a lawyer who represents the estate and is frequently the only lawyer involved in it. When beneficiaries receive the final accounting at the end of the estate and are being asked to sign off on it, they sometimes consult an estate lawyer for a couple of hours just to review/interpret the accounting and to ensure that all is in order.

How does getting married later in life affect estate planning?

Now that people are living longer, it's becoming more and more common for widowed or divorced seniors to find love a second time. In terms of estate planning, marriage in your golden years is quite different from the marriage of two young people just starting out.

Marrying someone creates a legal obligation to that person. All of a sudden, that person you've been dating has a right to some portion of your estate. This is why marriage automatically revokes whatever Will you had in place before you were married. Now you can't leave that person out of your Will without a risk of it being contested.

Most seniors in this position have adult children from a first marriage. If the senior did not remarry, the children would normally expect that the estate that their parents built up together over the years would one day be passed down to them. Now they will worry that when the senior remarries, the estate will pass to the new spouse rather than to the children.

This is not just the children's concern. Most seniors that I meet who are considering remarrying are quite aware of this issue. They ask me how they can ensure that their estates pass to their children and not their new spouse.

As you can see, now the senior is stuck in the middle between the need to include the new spouse in the Will and the desire to include the children in the Will. More than anything, they want to prevent disputes. It's a balancing act.

Remember that for married people, estate planning means more than just the Will. For example, in some provinces (including Alberta), married people have Dower rights, which includes the right to live in the house they lived in with their spouse for the rest of their lives. Also, most pension laws automatically name a spouse as the recipient of any benefit payable.

In addition, most spouses will name each other as the beneficiary on their RRIF or RRSP to take advantage of tax rollover provisions that are not usually available otherwise.

Unlike people who marry very young, seniors of both genders often already have some wealth. They have often received property through a divorce, or when they were widowed. They come into a marriage already owning a home and sometimes significant investments. This means that they are sometimes not as dependent on the other spouse for financial support as they might have been years ago.

You also have to consider mental incapacity. Who do you name as the decision-maker on your medical directive when you are newly married but have adult children? What are the chances that if you name one person, someone else will resent it or try to intefere?

There is certainly a lot to think about. There are a couple of approaches you can take, depending on the circumstances.

Where both of the seniors who are getting married have some wealth of their own, the decisions are somewhat easier. The new Will that will be made after the wedding can leave the estate to the person's own children from an earlier marriage, so long as it can be established that the spouse is adequately provided for. The Wills should contain a statement to the effect that the spouse is independently adequately wealthy and therefore does not need support from the estate. If the spouse will be getting anything not covered by the Will (such as RRIF, pension, joint property, etc) then that should be mentioned as well.

This doesn't mean that every spouse with his or her own money should automatically be left out of the Will, as that can be very risky, but it does mean that you are more likely to be able to make the case that the spouse is not in financial need.

It's not always the case that both spouses have their own money. Sometimes one senior can be in a much better financial position than the other. It's pretty hard for the one with money to leave the other out of the Will and claim that no support should be given.

A solution that can work well here is a spousal trust. This involves the spouse with money giving all of the estate - or a significant portion of it - to a trustee to look after for the lifetime of the other spouse. When the spouse with money passes away, the surviving spouse will have something to live on for the rest of his or her life, but will never own the assets in the estate. Usually this is set up so that when the surviving spouse dies too, the assets held in trust pass to the children of the spouse with money. That way, all obligations are met because the children of the first marriage still receive all of the assets eventually.

The unfortunate side of all of this is that seniors often think that if they don't marry and simply live together, they by-pass the obligation to the other person. That is simply not the case. In Alberta, if you live with someone for three years, they automatically have the same rights as a legal spouse for the purpose of inheriting. And because people in this situation don't realize they have the obligation to support the common law spouse, they probably never did make a new Will. Therefore they end up passing away with no Will, a common law spouse, and a group of adult children who are furious that Mom or Dad didn't take care of making a Will that would protect them.

Pre-nuptial agreements are also a very good idea for second marriages. This is not so much to exclude a spouse from getting anything, but to state your goals for your children , define the property that each spouse brought into the marriage, and clarify your understanding of what will happen when one spouse passes away.

If you are a senior contemplating marriage, please talk to an estate planning lawyer about how it will affect your future finances.

When my spouse dies, is my Will still valid?

Twice in the last week, at different seminars, people in my audience said they knew their Will became invalid as soon as their spouse died. What was interesting to me was that each of these people stated this as fact, rather than asking me a question. This leads me to believe that the idea is pretty widespread.

To be more clear, each of these individuals said that if a husband and wife both make Wills, and the husband dies, the wife no longer has a valid Will.

This is completely untrue.

If a Will is properly made, it will anticipate three scenarios, those being:
- the husband dies before the wife
- the wife dies before the husband, and
- they die in a common accident

Quite often when someone is widowed, he or she is advised by their lawyers or accountants to get a new Will. This is not because the Will is invalid. It's because there has been a major change in the widowed person's life and it's a good time to re-think the estate plan. It's a good time to update the naming of an executor.

Also, when a person is widowed, his or her financial picture may change. For example, the person who died may have named the widowed person as a beneficiary in a life insurance policy, RRSP, RRIF, or pension plan, so those funds will be transferred into the widowed person's name. If they owned their home as joint tenants, that property will also transfer into the name of the widowed person by right of survivorship. In other words, it's a good time to sit down with an estate planning lawyer or financial advisor and talk about how financial arrangements might need to be updated.