A Blended Family: Protecting Your Loved Ones

I met James and Laura for the first time in our office. They have an investment portfolio at another firm, and they share that their advisor is very knowledgeable with respect to the economy and broader geopolitics. But they’re not here to discuss the specifics of their investment portfolio. They’re here to discuss their family. It becomes clear that the complexity of their situation necessitates a deeper conversation and exploration of their wishes.

The Family Context

• James and Laura have been married for 20 years.
• It is the second marriage for them both.
• They are now in their late 50s. James is still working as a city planner.
• Laura has retired.
• Their estate planning has been neglected.
• Together, they have a 21-year-old daughter, Marie.
• Marie was recently in a cycling accident and now has a severe physical disability. She is financially dependent on them and will need both financial and physical support for the rest of her life.
• James and Laura also have children from their previous marriages. Both are financially independent and in their mid-thirties.
• James’ son, Andrew, is an electrician with steady work, but he is bad with money.
• Laura’s daughter, Sarah, has an excellent income working as an engineer. However, she recently had a significant financial setback following a division of assets in a divorce.
• Both James and Laura prepared wills during their first marriages and have not updated them since.
• They own their $1.5 million home in Vancouver.
• They have $2.5 million in financial assets held in investment accounts:
  • $1,000,000 in RRSPs through their group plans
  • $500,000 in TFSAs
  • $1,000,000 in a joint non-registered account
• They are not sure who they named as beneficiaries for their RRSPs.
• They each have $500,000 of Term 20 life insurance.
• They have heard about Registered Disability Savings Plans (RDSPs), but do not currently have one.
• They are in good health, but Laura has a heart condition that reduces her life expectancy by five to 10 years.
• They are close to all the children.
• They know they need to take action, but are unsure where to begin.
• James wants to understand where to prioritize.
• Laura wants to ensure James will be able to handle things if she is the first to die.
• They are both concerned about Marie.

Priority #1: Update Their Wills

Their current wills do not reflect:

• Their marriage to each other
• Their desired division of assets
• Marie’s disability and long-term care needs
• Appropriate executors and backup executors

James was under the impression that his original will, drafted during his first marriage, was automatically revoked when his divorce was finalized. That is not necessarily true. In fact, his executor will still be Andrew, as stated in his original will, which is a less-than-ideal appointment. They can create new wills, but without careful planning, an overly simplified “everything to the spouse” approach can unintentionally disinherit the children from their first marriages, which would also be an undesirable result.

Key questions to address:

• How much should go to the surviving spouse?
• At the second of their deaths, how should assets be divided between Marie, Andrew, and Sarah?
• Are they seeking equal treatment for the children?
• Or should support be allocated according to each child’s dependency and expected needs?
• How can ongoing support be provided for Marie? Who will provide it?
• Who should be the backup executor if they are unable to act for each other?

Priority #2: Develop a Long-Term Plan for Marie

This is the most emotionally important issue in the case. Marie will not be able to earn employment income over the course of her lifetime. She will also be unable to effectively manage an inheritance on her own.

More importantly, an outright inheritance could jeopardize the receipt of her disability benefits, as those benefits are asset tested.

Key questions to address:

• How much money would be required to support Marie for the rest of her life?
• Does Marie qualify for the Disability Tax Credit? This is required to open an RDSP and begin collecting the Canada Disability Savings Grant.
• Have they considered establishing a discretionary testamentary trust for Marie?
• Who could act as the trustee?
• Where will she live if they both die?
• Who would oversee her care?
• Can James maintain his lifestyle if Laura dies first?

Priority #3: Review Beneficiary Designations

James and Laura have significant registered assets, with approximately $1.5 million held in their RRSP and TFSA accounts. They also have $500,000 of Term 20 life insurance coverage.

Key questions to address:

• Who are the named beneficiaries of the RRSP and TFSA accounts?
• Have they considered designating contingent, or secondary, beneficiaries?
• Have they designated contingent beneficiaries on their life insurance policies?
• Are there any beneficiary designations that could potentially conflict with their new wills once their estate documentation is updated?

Priority #4: Define Fairness

One of the most difficult conversations will be deciding what is fair for the children.

Consider their situations:

Child	Situation
Marie	Lifetime disability; dependent
Andrew	Financially independent but poor with money
Sarah	High income but recently experienced divorce-related losses

Fair does not necessarily mean equal.

Key questions to address:

• Would Andrew and Sarah understand a disproportionate inheritance, given Marie’s situation?
• Would Andrew benefit from a financial consultation to provide a roadmap for financial stability?
• Is Sarah well-positioned to recover from her recent financial setbacks?

Summary & Next Steps

As financial advisors, sometimes we can answer questions right “off the hop.” More complex situations, however, often create the need for further discussion, exploration, and discovery.

It is our job to ask those questions.

Given the facts, there are clear steps that can be taken now.

They should update their wills.

They should apply for the Disability Tax Credit and open an RDSP, naming Marie as the plan beneficiary.

They need to have a family discussion about the division of assets, ensuring Marie’s long-term well-being is protected. They should document their reasoning and explain to the family that support will be based on need and designed to protect everyone.

They should also consult an estate lawyer who specializes in blended family and disability planning and discuss a trust structure for Marie.

All these priorities should be documented in a financial plan that provides recommended actions and the rationale for those actions. The plan should be reviewed annually and after any major change.