Divorce doesn't change your beneficiary designations

Today I had a phone call from one of the Scotiabank branches I work with. A customer was dealing with her father's estate. The father's will said that everything he owns should be divided between his two kids. Now here's the problem: when the father got divorced years ago, he didn't change the beneficiary designation on his RRSP. He left the designation as his ex-wife.

The RRSP contained $100,000 and was by far the largest asset of the estate, which was otherwise modest. The customer found out from our branch that not only was the ex-wife going to receive the RRSP, but the rest of the estate was going to be used to pay the tax on it. The kids weren't going to see a dime.

It was at this point that our staffer called me to see if this could possibly be right, since it seemed so unfair. Unfair or not, it is the law. The will didn't change the beneficiary designation on the RRSP. Neither did the divorce judgment. If the father didn't want his ex-wife to receive the money, he should have changed it some time over the years since they divorced. Otherwise the law will presume that he intended to leave her on as beneficiary.

This is not an uncommon situation by any means. I see several estates like this every year. Unfortunately, if this client's father, who made his own handwritten will, had spent even ten minutes talking to an estate planning lawyer, he would have found out that his money would go to his ex and not his kids. He probably didn't realize the importance of changing what must have seemed like a paperwork detail.

All divorced or separated people should realize that nothing automatically changes your beneficiary designations. They don't change unless you take steps to change them. A divorce settlement, separation agreement or Minutes of Settlement that contain standard boilerplate words to the effect that you and your ex won't make claims against each other's estates won't change anything. Receiving money when you're the designated beneficiary is not "making a claim" so this clause doesn't apply.

It's bad enough to lose a parent. Having them leave an estate mess behind is a nightmare. Do your children a favour and find out how the law affects you before you sign a legal document, even if it's one you wrote yourself.

Was Pat Robertson right? Divorcing a spouse with dementia

Is it alright to divorce a spouse who has dementia when the dementia has caused the spouse to forget who you are? What do you owe them? What about your own emotional needs? This heart-wrenching argument has two very emotional sides to it, and has recently flared up in the US. Click here to read a blog post by Paula Span, which will also link you to a recent story in the New York Times.

Many of us have a parent, spouse or close friend with dementia, and many of us are their caregivers. This issue won't leave you untouched if you have someone with dementia in your life.

When I inherit, how do I keep that money out of the hands of my spouse?

For the purposes of this discussion, let's assume that there was nothing in your parent's Will that either requires you to share your inheritance with your spouse, nor specifically prevents that from happening. In other words, this discussion is about YOUR actions and what effects they will have on money you inherit from your parents.

If you share your inheritance with your spouse, for example by using your inheritance to pay down a mortgage on a home that you and your spouse both own, then you cannot later decide to take it back. You've already turned your inheritance into joint property and given your spouse a gift of the money. Should you and your spouse later become divorced, the accounting and legal arguments involved in sorting out who owns what part of the home will become expensive and time-consuming.

Keeping a family inheritance separate sometimes becomes very important to individuals who are in second marriages. The individual's goal is often to ensure that the money inherited from his or her parents is passed on to his or her children. They feel that this is more in line with what the parents wanted, rather than have the money passed down through a son-in-law or daughter-in-law to step-grandchildren.

It is possible to keep the money separate. The person who inherits should open a separate account in his or her name only, and put the inheritance in there. Interest earned can accumulate in the account. Nothing else should be added. This way it remains easy to trace the origin of the money and it's clear that no joint money was ever added to it.

This matters if there is a divorce, because in most jurisdictions in Canada, money that was inherited by one of the people divorcing is exempt from being divided with the spouse. As described above, if you don't make sure that it's clearly inherited money and nothing else in the account, that account could be attacked and you could lose some of it.

When you make your Will, you can specifically leave that account to your children. I have always added a few words to my clients' Wills to identify the account as being one that was inherited from a parent. An alternative, of course, is to give some or all of your family inheritance to your children while you are alive, either by a direct transfer or by buying assets in joint names with them.

What if I don't want my ex to be my children's guardian?

One of the main elements of a Will is the appointment of a guardian for any of your children who are minors at the time you die. This is an area in which I am always asked a lot of questions about the competing rights of the parents and the child. Divorced people frequently want to know whether they can appoint someone other than their ex-husband or ex-wife to be the children's guardian.

The basic rule is that when a parent dies, the child's other biological parent has the right to custody (guardianship) of that child. You cannot overcome that parent's right by simply naming someone else in your Will.

This may be cause for concern for some parents. I know of cases where one parent has custody and the other parent has had no contact with the child for many years. There is no relationship between the child and the non-custodial parent. This is obviously cause for alarm, as no parent wants a child to live with virtual strangers.

Sometimes parents in the situation I've just described will tell me that they are pretty sure the non-custodial parent has shown no interest in the child but might do so if the estate was given to the child. In other words, that non-custodial parent might simply want the money.

There is no question that I only hear one side of the story in cases like this. I don't know whose "fault" it is that there is no contact between the child and the non-custodial parent. But it's not my job to decide custody issues. My concern is to build a Will that is likely to achieve the results my client wants.

Having already said that you can't override the other parent's right to custody, I can tell you that there are some things you can do in your Will. They are:

1. Name the person you want as guardian. Though the clause on its own won't achieve custodial rights, it does give the named person legal standing to begin a guardianship application in the court, if need be. In other words, the person you've named is no longer just any person off the street butting in; he or she has been given a higher status just by the fact that you have put their name in the document.

2. Make a brief statement in your Will explaining your choice. This is not meant to be a detailed litany of everything you think the other parent did wrong. This is simply a statement that the child hasn't seen the parent in years and there is no relationship. Remember that if a judge decides where the child is going to live, he or she will be looking at what is best for the child. If you are not going to be around to explain the situation, you need to have something in your Will that states that you had a good reason for naming someone other than the child's other parent.

3. Set up the trust clauses in your Will so that the other parent will never be in charge of the child's money, even if he or she becomes the guardian of the child. This should help to eliminate any parent who is, as described above, really only interested in the child's money.

4. Include a statement that you allow your executor and trustee to use your estate funds for the purpose of fighting a custody battle, should it come to that.

None of these things will guarantee the results you want, as you will be asking a court to take away a person's right to look after his or her own child. That's not going to be easy. But these steps will certainly improve your chances. Please remember to consult an experienced Wills lawyer when you have something as vital as child guardianship to worry about.