Leaving an inheritance to the children of the first marriage

As people enter into second and subsequent marriages, they generally don't mix their assets with their new spouses the way they did with their first spouse. There are plenty of reasons for this, of course, but one major consideration is the fact that people often wish to ensure that one day their children will inherit something from them. Parents can feel quite strongly that they want their children to have the benefit of the estate both of their parents built up together.

It's a topic I am asked about frequently, so when this reader wrote to me with a question about it, I thought I'd share the question and my answer below:

"If someone remarries after death of a spouse, how does that person leave an inheritance to their natural children and not have everything go to their second wife?  Is that done through the will?" 

Your will is very important for ensuring that the distribution you want is going to happen.

In your will you can specify assets that are going to go to your children. In a first marriage, a person's will often says that assets are all to be given to the spouse, and only on the death of both parents are the children to inherit. In a second marriage scenario, the will might be very different and set up a split of assets between the children and the spouse.

In some cases, these might be assets that will be needed for a while by your spouse before your children can have them. For example, you might want to make sure that your second spouse will be able to live in the family home should she outlive you, but you may want your kids to own that house one day. To do this, you could set up a trust that would pass the house on to your children once your new spouse has passed away.

There are other viable trusts too, such as family trusts that name your children and yourself as beneficiaries.

Just a warning here. Do not, under any circumstances, try to write a trust like this yourself. Believe me when I say there are dozens of rules about trusts that you don't know.

Now let's talk about the limitations of using your will to give assets to your children. Your will is not the only legal paper that comes into play after you pass away.  Remember that your will doesn't change some of the other arrangements that you may already have in place. The two main areas that I refer to are jointly held property, and property with a designated beneficiary. Pre-nuptial agreements may also have an effect on your will.

As an example, if you and your second wife own your home jointly with a right of survivorship, you can't leave it to your children (or anyone else for that matter) in your will. Even if you put it into your will, it won't do anything. In a case like this, your second wife will own the property after you pass away because she is a joint owner.

Assets with a named beneficiary also pass outside of your estate and therefore are not governed by your will. As an aside, it IS possible to use your will to change a beneficiary designation but that is not the best way to do so.  Assets like RRSPs and life insurance policies have beneficiaries that you name at the time you set up your RRSP or buy your policy. This named beneficiary gets the proceeds of the plan or the policy on your death. If you have named your new spouse as the beneficiary of a plan or policy, your will doesn't affect those assets.

Keep in mind though, that you can name your children as beneficiaries of insurance policies too.

The final downside to using your will to leave assets to your children is that your spouse may decide to challenge your will to try to obtain a larger share of the estate. A lawyer can draft your will and set up your assets in a way that will help reduce the odds of that kind of challenge.

So to pull this all together, a person who wants to leave assets to his children from his first marriage should make a list of all of his assets, including his home, cottage, business, bank accounts, investments, pension, insurance policies, vehicles, and anything else he might own. This list would include things he only owns part of, for example his share of a cabin he owns with his siblings. Then he should list how each asset is held. By that I mean he should indicate whether the asset is owned by him alone, or whether he owns it together with another person. For assets that carry a beneficiary designation, he should write down who that is.

Using this list, he can now get a clear picture of what assets will be available for him to  leave to his children, and which would be covered by his will. It makes a lot of sense to take that list to an estate planning lawyer for a brain-storming session, as there are usually taxes or other surprises that people don't see coming.

Another option is to give your children assets while you're alive, assuming that there are assets you can part with, without reducing your ability to look after your own needs as you age. For example, you could pass on the family business to the children, or give sums of money. I'm not suggesting putting your kids' names on your accounts or your house, as that is one of the worst  ideas of all time, but that you give them some of your assets if you want to, and can afford to.

While a will can be an excellent tool for ensuring that the children of your first marriage receive an inheritance, your will is only part of the solution. It's a tricky and important question, so please sit down with a lawyer and talk it all through.