What happens to my child's inheritance if he or she dies before me?

I was asked this question at last week's seminar, and in fact I hear this question regularly. The real or underlying question is whether the child's inheritance will go to the child's spouse. Very few parents want a deceased child's inheritance to go to that child's spouse.

The answer is simple. What happens to the inheritance is what the parent says in the will. If a parent is concerned about the issue, then he or she had better put together a will that addresses it.

The arrangement favoured most often is that a deceased child's inheritance is split equally among his or her children, with the share of any minors being held in trust to a pre-determined age. For example, if William makes a will leaving his estate to his sons Tom and Joe, but Tom dies before his father does, William's will directs what happens with Tom's share. If William likes the most common arrangement, his will will say that Tom's share is to be divided among Tom's children.

From there, a parent such as William needs to clarify a few points. For example, does he want Tom's step-children to be included? What about the illegitimate child that Tom had in high school and currently has only a superficial relationship with?

William may leave some of Tom's share to Tom's wife if he wants to, though as mentioned above, this is fairly unusual. William must consider whether Tom's wife still gets a share if she and Tom were separated at the time Tom died. William also needs to think about whether Tom's wife should be the trustee of the money held in trust for Tom's children, and if not, who would be a good choice for that job.

Some parents choose that if one of their children has passed away before them, grandchildren don't get anything, nor does the spouse of the deceased child. The share of the estate would be given to the parent's other children. Using the family already described in this post as an example, Tom's share would be given to Joe instead. There could also be an arrangement whereby half (or some other portion) is given to Joe with the rest being given to Tom's children.

Another alternative is that a deceased child's share could be given to a charity.

All jurisdictions have laws in place that describe what will happen if a parent dies leaving a share to a child who has already passed away. These laws kick in if the person hasn't left a valid will. There is no guarantee that the legislated arrangement will be the same as what the parent would have chosen.  If the issue is important to the parent, he or she needs to make a will.

Top ten posts about parents and children

The following are the top ten posts on my blog about parents and children. Loans, wills, treating them equally, protecting them - it's all here. These tend to be the topics that take the longest time to figure out when doing estate planning. Click on the titles below to go to the articles.

1. Do I have to leave anything to an illegitimate child I haven't seen in years?

2. Using trusts to protect your children.

3. Should my parents be my executors?

4. Is "fair" the same as "equal"?

5. Putting one child in charge of a trust for another child.

6. Can I leave my child out of my Will?

7. At what age should children inherit money?

8. If my parents lend me money do I have to repay it after they pass away?

9. What do the in-laws get?

10. Can I have my parents' house as part of my share of the estate?

What do people in a second marriage have to consider when making a Will?

Because I get so many questions about second marriages, and because it's so tricky to get estate planning right for individuals in this situation, I thought I'd talk a bit about some of the issues that specifically apply to people in second marriages. I'm not going to cover issues that apply to ALL married individuals, but only those that crop up with second or subsequent marriages.

Firstly, in some provinces, getting married automatically revokes an existing Will. If you made a Will after your divorce to look after your children, that Will was revoked when you re-married.

You'll realize when you start discussing your estate planning that you're going to have to carry out a balancing act between the various people in your life. You owe an obligation of financial support to certain people, including your spouse (married spouses in all provinces, common law spouses only in certain provinces), your minor children, and your children who are adults but who cannot earn a living due to a disability. This gets tricky for people in subsequent marriages because they often have two sets of children - one from each marriage.

I talked a bit more about that balancing act in a post here.

There are some other issues as well. For example, have you adopted your step-children? Typically people going into a second marriage only adopt their step-children if the children are quite young, but that varies. Understand that for the purposes of estate planning, non-adopted step-children have quite a different legal status than adopted step-children. If you don't make a Will at all, or the Will you have made is found to be invalid, this will make a huge difference to their rights.

If you do not make a valid Will, and your estate is to be divided among your spouse and your children, the word "children" here only includes blood or adopted children, and not step-children.

Also consider the beneficiary designations you've made on your life insurance policies and RRSPs. If you bought those items during your previous marriage, they probably designate your ex-spouse as the beneficiary. Perhaps that's what you still want, or what you are obligated to do as a result of your divorce settlement. In that case you don't have to change anything.

Most people, however, want to update their beneficiary designations to name their current spouse or perhaps the children. Do not assume that your divorce decree or your separation agreement changes those designations, because they do not. In some cases (a minority) the divorce or separation paperwork will specifically refer to a certain policy or account and talk about how it's to be dealt with; most do not. The generic wording of releasing all claims against the other's estate does NOT change beneficiary designations. You'll have to do that yourself if you want to change it.

Guardianship of minor children can also be an issue. You may have two sets of minor children who will likely have two different guardians. When you pass away, the children's other biological parent automatically has a right to custody, so you have to word any guardianship appointments for the children of your first marriage properly. I talked more about this in a post here.

For some people, leaving money in trust for the children of a previous marriage is an issue because they don't want their ex-spouse to have access to that money.

Finally, think about how the Dower Act might affect you. Most provinces in Canada have abolished the Dower Act but it's still in effect (for now, at least) in Alberta. This law gives a married (but not common law) spouse a right to live in the matrimonial home until he or she dies, moves out permanently or signs away that right. This can cause complications for someone with a current spouse who is trying to pass on property to children of a previous marriage.

If you are in, or soon to be in, a second (or subsequent) marriage, I strongly urge you to talk to an experienced estate planning lawyer to have an appropriate Will made. It's not a simple document but if properly done it will definitely save money and headaches for the people left behind after you pass away.

Do I have to leave anything to an illegitimate child I haven't seen in years?

When it comes to estate planning, people often take an "out of sight, out of mind" approach to illegitimate children who aren't part of their lives. They assume that because they don't have a current relationship with the child, and perhaps haven't had one in many years, that the child is simply not a factor in deciding where their assets go after they pass away.

Take for example a man in his late forties who fathered a child while in high school. He didn't marry the mother and has never been a part of the child's life. Later he married someone else and is raising a family with his wife. Most men in a similar position are so sure that the child has nothing to do with them that they don't even mention the child's existence unless I specifically ask. So let's look at what this means for everyone involved.

If the father dies without a Will, his wife will get what is often referred to as a spousal preferred share of the estate. The value of the share varies from province to province but in Alberta, the share is $40,000. After that, the estate is divided among the man's spouse and children. This means biological and adopted children. So, the illegitimate child, who is a biological child after all, is entitled to an equal share of the estate with the children of the man's marriage. That is usually not what the father wants, and it is pretty much guaranteed not to be what his wife wants.

So, we should assume that a man in this situation is going to make a Will expressing his wishes. This raises the question of whether the father must, by law, leave something to the illegitimate child.

The same rules apply to the illegitimate child as apply to everyone else. If the child qualifies as being a person entitled to claim financial support under a Will (i.e. a financial dependent), he or she must be included. If you leave out someone who is entitled to be included, you run the risk that the person will contest the Will. If the child does not qualify, then the father need not leave anything to the child.

In order for a child to qualify as a dependent, the child must either be under the age of majority or must be handicapped to the extent that he or she cannot earn a living. So if the child is under 18, the father must either leave a share to the child, or risk the child contesting his estate to get a share. One of the urban legends going around is that if you leave someone $1 in your Will, that person can't contest your Will. Not true.

Not all fathers want to leave the illegitimate child out of the Will completely. Some want to leave a financial gift simply to acknowledge that they are the father. While the father might not want to leave an equal share of the estate that he and his wife built up together, he might want to leave something from his own assets.

As I've said many times, don't assume you know how the law applies to you. It's always worth it to sit down with an estate planning lawyer and talk things over.