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?

Ten reasons you might want a trust in your will

Whether or not a trust in your will would be useful depends only in part on how much money you have to deal with. Trusts in wills (called testamentary trusts) are not only for those with multi-million dollar estates; they can also be very useful for people like you and me. Although many people shy away from the idea of a trust because they believe it must be complicated, in reality it's more simple than you might think.

A trust is created in a will whenever your trustee (usually your executor) holds onto money or property for someone else, i.e. one or more beneficiaries of your estate. The terms of the trust such as when the beneficiaries are paid and how much they are paid are set out in your will, by you.

A trust is put into a will to serve a particular purpose, and in this post I'd like to briefly describe the top ten common purposes:

1.  A child inheriting under a parent's will can inherit the entire share on the day they reach the age of majority. A trust can be used to hold that share,or some part of it, until the child is older and more mature.

2.  A trust can protect a child who is hopeless with handling money by ensuring that a pre-determined amount is paid to the child on a monthly or yearly basis.

3.  A child with a drug addiction can be protected by a trust that pays for basic necessities such as rent, but does not make the whole share available at once.

4.  The share of a handicapped child can be managed for the child's lifetime in a way that brings the parents peace of mind, while at the same time doesn't cause the child to lose valuable provincial health benefits.

5.  A spouse who is already in a high tax bracket may not want the additional income that would be earned once a share of the estate is received. Setting up a trust for the spouse's share allows the tax to be earned (and paid) by the trust rather than the spouse.

6.  In the case of a second marriage, using a trust would allow a person to give a surviving spouse the use of assets (such as the family home) for that spouse's lifetime, after which the assets could go to the children of the first marriage.

7.  A trust can be set up to provide for emergency funds for any vulnerable family member - a child, an elderly parent - to be used when and if they are needed, with any remainder going to the family members you specify.

8.  A trust provides funds for the taxes, insurance and upkeep on an asset that is used by more than one beneficiary, such as a lake cottage.

9.  Funds that are held in a trust are safe from creditors of the beneficiary (except in the case of bankruptcy).

10.  If a beneficiary's marriage breaks down, funds held in trust are generally not held to be matrimonial property, and are therefore not lost to the beneficiary's divorce.

As you can see, these are things that affect even those of us with modest estates. If your lawyer is suggesting a trust for your will, keep an open mind to see if it would work for you.

The tax planned will

The attached article from doctorfinance is one of the best explanations I've read about  how using a trust can save tax. And it's not just about the multi-millionaires; it explains how a trust can help those who have done reasonably well financially during their lives. It's definitely worth a read so click here to check it out.

Why use a spousal trust in estate planning?

A trust exists whenever one person (the trustee) is holding money or property on behalf of another person (the beneficiary). A spousal trust generally means that some or all of an estate is being held in trust for the use of the spouse of the deceased person. A spousal trust is usually for the entire lifetime of a spouse, but the length of the trust may vary depending on what the trust is intended to achieve.

When property or funds are held in a trust, the beneficiary doesn't own the assets, but only has use of them. For example, if there is a house in the trust, the beneficiary can live in the house but cannot sell it. When money is held in trust, the beneficiary usually receives the amount that is described in the trust, but not the full capital of the fund. Trusts are very flexible instruments, and many of the details can be tailored to the situation at hand.

There are a number of reasons that spousal trusts are used in estate planning.

Spousal trust are often used in blended family situations where the individual making a will wants to pass his or her estate to their children of a previous marriage. A woman in a second marriage might leave her home in a trust for her spouse so that he can continue to reside there if he outlives her, but he can't sell the property. The terms of the trust would say that when the spouse passes away or can no longer live in the house, it will become the property of the woman's children.

I've also seen a spousal trust used where the will was made fairly late in the testator's life, at a time when the spouse was already beginning to lose capacity. The testator was worried that someone might take financial advantage of the surviving spouse if she were left to manage a large sum of money. As a result, the funds were put into a trust instead in order to protect the spouse.

Spousal trusts can also be used to protect some assets from capital gains tax. For example, if a husband and wife own shares in their privately-owned company, and the wife passes away, her shares are subject to capital gains tax. However, the shares can be rolled over to a spousal trust so that taxes aren't payable and the business can carry on without a financial hit.

And along the tax-savings line, a spousal trust can be used where the surviving spouse already has significant income and giving him or her the estate would result in extra tax being levied. A trust is a separate tax payer and can pay tax each year on the income earned on its assets. In a case like this, you might even see the spouse named as the trustee or one of the trustees for his or her own trust.

If you are considering setting up a spousal trust in your own will, make sure you talk out the pros and cons of the idea with your estate planning lawyer. If you are considering using a trust for either of the tax reasons mentioned here, talk to your accountant before you go ahead. One sentence seen here is sufficient to point out the possiblity, but you need one-on-one advice before you take any steps.

Trust services no longer just for the rich

The link below goes to a story in the Star (newspaper in Toronto) that talks about how trust companies provide estate services and how they are more affordable than people think. You probably know that I work in the trust company arm of Scotiabank so I have first-hand experience with this. I can vouch for pretty much everything that is said in this article. Click on the link below to read the story.

 

TheStar Trust services no longer just for the rich

 

I spend many hours a month doing seminars to tell people what we actually do in a trust company. Here are some examples of the services our customers want and need most often:

 

• acting as executor of a will when there is no suitable family member
• acting as a co-executor with an inexperienced or young executor
• working as an agent for the executor of a will after someone has passed away
• holding and paying out money in trust according to a bequest in a will
• holding and paying out money according to a family trust or royalty trust
• channeling assets into foundations for charitable giving
• acting as executor when family members aren't getting along
• estate planning (wills, powers of attorney, health care directives, family trusts etc)
• pulling together a team of estate planning experts including lawyers, accountants, insurance advisors, financial planners
• acting as trustee for a disabled adult under a court order
• acting as attorney appointed by a power of attorney
• completing tax returns for individuals and estates
• administering custodial accounts for seniors who need a bit of extra help with finances
• holding trust funds and making payouts (i.e. being "the office") for non-profits and charities

 

As you can see, it's a pretty diverse menu of activities, and we're pretty good at tailoring our services to fit what you need. I always tell people that we're approachable and hey, we've heard it all, so feel free to simply call up and ask whether your situation is something we can help with. You don't have to be a Scotiabank customer to call our trust office to chat.

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.

Update to "Can my spouse be my executor?"

I  had some really good feedback on a previous post from Megan Connolly, a lawyer at Connelly Law in Ontario. Megan pointed out that it's always important to consider the fact that a spouse is someone who can bring a claim for a larger share of the estate if he or she is not left the entire estate under the Will. Though Megan is dealing with Ontario law, we have similar provisions in Alberta under the Dependents Relief Act.

I agree that this is something that should be talked about between the lawyer and the client who is thinking of appointing his or her spouse. It doesn't make the estate run any more smoothly when the person who is contesting the Will provisions is the executor of that same Will. It does happen, of course, but it's preventable.

Megan adds: "As an estate planner in Ontario one thing I do when a spouse is being appointed as an executor is discuss with the client including a provision which stipulates that if the surviving spouse brings a claim against the estate, s/he is deemed to have resigned as executor."

I haven't used a clause like that, but it's certainly food for thought. I believe that it would serve a client's interests by ensuring that the spouse wasn't both attacking and defending the estate at the same time.

Thanks for your input!

If my spouse remarries after my death, will my kids inherit from me?

Much of the time, the Wills made by husbands and wives are mirrors of each other, in the sense that the spouses leave everything to each other, then follow the same distribution for when both of them are gone. The most common plan for when both parents have passed on is to leave most or all of the estate to their children.

Sometimes a spouse in this situation is shocked or dismayed to learn that should he or she pass away, there is absolutely nothing stopping the surviving spouse from re-marrying and leaving everything to the new spouse. The concern is that the new spouse will not be as interested in the children of the original couple, and the children will never inherit the money.

I can see why this thought bothers people. Nobody wants to work and save and invest for years, thinking that the efforts will benefit his/her spouse and kids, just to find out that some other person - and perhaps a completely different set of children - will reap the benefit instead.

Spouses need to understand that when they make mirror Wills as I've described here, the spouse can legally change his or her own Will if he/she wants to. There is a different Wills arrangement that does legally bind the spouses not to change the Wills if widowed; those Wills are known as mutual Wills. Unfortunately the information available is confusing because many advisors and journalists erroneously refer to mirror Wills as mutual Wills. A mutual Will contains a clause that specifically says that neither the husband nor the wife will change the Will should he or she become widowed. It creates a legal obligation on both of them not to change the Wills. Your Will won't have that clause unless you specifically direct your lawyer to include it.

Mutual Wills are rare compared to mirror Wills. I rarely prepare mutual Wills for clients because I feel that doing so doesn't allow for unforeseen but reasonable events in the future. They fit clients in certain circumstances, of course, but are not widely applicable.

There are some other ideas that could be integrated into your estate plan if you are concerned about your spouse re-marrying and not leaving the estate to the children. While many spouses say that they can't even imagine that happening, they need to realize that while it's unimaginable right now while the spouse is alive and they are a family unit, things would be very different without the spouse alive.

One idea is to leave some of all of the estate in a spousal trust that would hold the estate for the lifetime of the surviving spouse. A trust like this would allow for money for the spouse to live on, while protecting the capital intact. On the death of the surviving spouse, the capital would be divided among the children. If you want to explore using trusts, make sure you understand the tax consequences.

Another idea is to leave part of your estate directly to your children, and part to your spouse. If your children are underage, their shares would be held in trust for them until the age you specifiy for inheritance. This would mean that only part of your estate is at risk to be transferred to anyone who married your spouse in the future.

A further idea is to transfer assets to your children while you are alive. This of course depends on whether you need those assets yourself, but it is an idea that is workable for some families.

If you own a business that you want to pass to your children one day, make sure you begin your succession planning process early on to get some plans into place.

I always encourage people to be very open with me about their concerns, their fears and their goals when we are talking about estate planning. Usually there are ways of addressing your concerns, but only if you tell your lawyer what those concerns are.

Should you set up a trust in your Will?

When talking about estate planning and tax planning, there is always quite a bit of discussion of trusts. Many people assume that because their lives and their assets are pretty simple, there is no need of using a trust. However, there are plenty of every-day situations where a trust could be just the right tool to bring about the outcome they want. The following is a brief list of some of the main reasons people use trusts. You just might see yourself or a family member in one of them

Hold for minors - A child can't inherit until he or she has reached legal age, so a child's inheritance must be held in trust until then. But it's also possible to hold a child's share past the age of majority if you feel that age is too young to handle money.

Protect from children's spouses - A parent who will be leaving quite a bit of money to a young person might want to hold the money in a trust to a certain age, to avoid having the money vest in the young person and be available to an unscrupulous spouse.

Protect from spendthrifts or addicts - Sometimes individuals need help managing their money to make the most of it, due to problems that may or may not be resolved in the future. For example, a child with a drug addiction probably should not be given a large sum of money. The child's parent can help protect the child by setting up a trust that pays the child's rent but not for the habit.

Hold a particular asset - A family asset such as a lake cottage may be held in a trust for a set period of time so that all of the family members can use it. The trust should ideally also hold enough money to pay for taxes, insurance and repairs of the asset.

Control ultimate destination of funds - Putting money in trust for individuals, as opposed to simply giving the money to the same individuals, means that if not all of the funds get used up, you can control where they end up. For example, you could set up a trust leaving money for use by your elderly parents, but if the parents don't use it up, you could direct that any money left over goes back to your estate.

Defer taxes - It might be a smart idea to put certain assets, say the shares of a privately-owned business, into a trust for a spouse so that the capital gains tax that would otherwise arise will not arise until the spouse passes away (or disposes of the shares).

Split income - If a parent is paying significant taxes on financial assets, he or she might want to put some assets into a trust, such as a family trust, so that the tax burden is shared with others in the family, or paid by the trust itself.

Achieve a purpose - Trusts can be set up to fund trusts that are not for an individual person but are intended to meet some purpose. An example would be setting aside some money in your Will for the care of your pets or animals after you pass away.

These are very general descriptions, and of course there are other types of trusts as well, but this list is intended to give you some ideas about how readily trusts can be used to achieve certain estate-planning goals. As a word of caution, please do not try to draft a trust without help from an experienced lawyer, as the wording is absolutely critical.

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.