How can I ensure my estate goes to my son from my first marriage?

I received a short but interesting question from a reader recently that I thought would be of interest to many of you. The reader is thinking about how to ensure that a child from a first marriage eventually inherits from the reader's estate. This is a topic that is on the minds of many people these days, since marriages and families come in all shapes and sizes. Read on to see the question and my response:

"How can I ensure my estate goes to my son from first marriage? The second marriage has not produced any child and I do not want to leave my son in jeopardy."

I'm glad you asked this question. The worst will I have ever seen in 30 years in this business was a brief one made by a woman in a second marriage. Regarding her son from her first marriage, she said in the will "I make no provision for my son because I trust my husband to look after him". Guess what? The husband didn't look after him.

If you leave your entire estate to your second spouse, there is absolutely nothing stopping that person from leaving the estate to whoever he or she wants. This could be another spouse after you, or the children of another spouse (in other words, someone you've never even met or heard of) while your children get nothing. That's completely legal unless your children who are left out are either minors or disabled adults.

This can be a tough topic to bring up. I find that many clients stubbornly insist that their new spouse simply would not ever leave the kids without an inheritance. I think this is because they absolutely don't want to consider that they are making any kind of mistake in choosing that second spouse. I do understand that, but I urge parents in second marriages to put the kids first. What's worse - risking a small offence to a new spouse, or risking that your children will never inherit anything from you?

The reader who sent me this question is obviously sold on the idea of protecting the children and wants to know about how that can be done. I have a couple of ideas.

Option 1 - The simplest idea is that you portion your estate in your will so that your children receive a share of it on your death, as opposed to leaving it to your spouse and hoping that he or she will pass it on to them. This is easier when there is plenty of money, but a little bit tougher for us ordinary folks who don't have millions to divide up.

When thinking about dividing up your assets, think about  how you can make the most of them. For example, if you  have an RRSP or RRIF, you can roll that over on your death to your spouse without incurring tax at the time. If  you give the same RRSP or RRIF to your children on your death, there would be tax on it. If you have life insurance, think about whether it's beneficial to leave it to your spouse or your children or your estate. Make sure you take your pension into account because most likely that is going to be payable to your spouse. If you own a business, take the time to think about who is getting the shares of it and who is going to run it. I have this kind of discussion with parents in second marriages quite often. It's a bit like putting together a puzzle so that all the pieces fit nicely together.

If your children from the first marriage are minors, their shares will be held in trust until they reach the age of majority or later. Choose your trustee carefully.

Option 2 - Another idea is to use your will to set up a trust that will contain some or all of your assets. You could set it up so that your spouse would have the use of those assets during his or her lifetime, and then when the spouse passes away, the asset would go to the children. This is often done with a house, and sometimes with a cabin. The idea is to ensure that the spouse continues to live in the marital home but also to ensure that one day the kids will have the house.

Trusts are not difficult to set up in your will as long as they are written with care and forethought. There are some things to consider, though. First of all, your children might have to wait for many years to receive their inheritance. Secondly, if the trust is not well-drafted, there could be disputes about who pays for things like property tax while the spouse lives there. Thirdly, you risk the value of the asset being reduced over time. Fourthly, your executor and trustee would have to continue to manage the trust for many years to come, which would involve expenses.

Having said all of those negative things, I do have to reiterate that a trust can be a really good solution for certain situations.

When considering setting up a trust like this, look carefully at what would actually be in the trust. If you own your home jointly with your spouse, you cannot put it in a trust. Same goes for any money that you hold jointly. Only assets in your own name could be put into the trust. Talk this over with your estate planning lawyer or accountant.

Option 3 - You can choose to give some of your assets to your children of the first marriage while you are still alive. This of course can only be done if you can afford to give those assets away. Also, there are certain assets that won't be available while you're alive, such as  your life insurance policy.

The upside to doing this is that you get to see your children enjoy the assets. In addition, planning to give away some assets while you're alive tends to lead to some very useful conversations about what will work for the children. For example, one of the children might want a piece of land or cabin that you were thinking about selling, while another might prefer to have cash. If you put together what they want with what you wish to do for them, you might just come up with a plan to advance something to them in a way that pleases everyone.

You might want to involve an accountant in these discussions to ensure that you do not accidentally trigger a tax hit for yourself.

Option 4 - This is something that can be combined with any of the three previous options. Consider signing a prenuptial agreement in which both you and your new spouse can set out your expectations of what will happen when one of you passes away. Doing this kind of planning may include you or your new spouse waiving certain rights that a spouse might otherwise receive, such as the right to keep the matrimonial home.

As you can see, there are ways of ensuring that your son from your first marriage is protected. Of course it depends on the child's age and the assets you own, but I encourage you to sit down with an estate lawyer and talk out the possibilities.