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Kevin Greenard: Blended families need a blended Total Wealth Plan

Opening the communication channels is key when helping couples in blended family situations.
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Kevin Greenard

Nearly half of the clients we work with have some form of a blended family. All too often we hear of situations where blended families don’t talk about money or they keep their finances completely separate. The focus for the family members in these situations is typically around how the bills for the household will be paid. This approach may seem suitable for the early period of a relationship; however, an integrated Total Wealth Plan is a critical component needed in the long run.

Opening the communication channels is key when helping couples in blended family situations. The earlier the communication starts for blended families, the more options that are available. As a Portfolio Manager, we start these discussions as part of the account opening process. We ask probing questions beyond the checklist of mandatory questions to open an account for the purpose of guiding blended families through sometimes-uncomfortable conversations.

Overcoming fears

One of the best parts of this process is overcoming each family member’s fears. One may fear that they will lose control of a larger portion of the nest egg they brought into the relationship. Another may fear that they will be left destitute if anything should happen. In some cases, they worry that when they pass their wishes may not be honoured.

Financial discussions

Often there is a disparity between the value of assets, or net worth, of each party. Rarely are the assets equal. One party may have more equity in real estate while the other has more stock and bond investments.

When couples do not go to financial meetings together, it is not always easy to have open communication with both parties. Often, they have different advisors and different financial institutions. If this is the case, then it is common for the couple to maintain the status quo with their separate finances. I always encourage couples in blended families to come in together, even when they are maintaining separate finances. Once this happens, and once there is open discussion and communication, then progress can be made on a variety of financial decisions. Having open conversations early and often about financial, estate and succession planning is key.

Non-financial discussions

Non-financial discussions often centre around children from a previous relationship. We ask that our clients each provide us with a family tree. Having this family tree is important as it provides information on all individuals who are part of the blended family.

What are your goals?

Before going into these conversations with your advisor and blended family members, it is important to establish what your goals are. Write down your goals and bring them with you to these conversations. It can help both facilitate the conversation and help the blended family arrive at a win-win situation. It will also help your advisor to know your goals so they can provide tailored financial advice.

What are your spouse’s goals?

In arriving at your goals, it is also key to discuss them with your spouse and learn what their goals are. Making objective financial decisions can be challenged by the simple notion that “blood is thicker than water.” For example, many parents want to provide for their children from a previous marriage. However, this can conflict with the many tax benefits provided for married or common-law relationships. This conflict is especially challenging when it comes to estate planning.

What happens if you do nothing?

If nothing is done, then those thoughts you might have feared (losing control of a larger portion of the next egg, being left destitute, or not having your wishes honoured, etc.) have a chance of coming true. By taking charge and having those sometimes-difficult conversations, your blended family can structure its finances and estate planning with a clear understanding of the outcome.

Total Wealth Plan

The purpose of the Total Wealth Plan is to open the discussion and document the most tax-efficient steps to achieve the extended family’s combined goals. In almost every meeting we have had with blended families they have walked away feeling good about the process and learning of unique strategies that can be tailored to their specific situation. A Total Wealth Plan is designed to address different situations, such as what happens if either spouse passes away early, and what if both live to an old age. Total Wealth Plans address all of these eventualities to provide you with the peace of mind that your financial and estate planning is in order.

By going through the Total Wealth Planning process, actionable steps can be identified to incorporate everyone’s goals in the blended family and arrive at an integrated solution. Each family’s circumstances are different and have varying levels of complexity. For example, early Registered Retirement Savings Plan (RRSP) withdrawals, funding insurance policies, and the establishment of trusts have been some of the solutions for our clients. We have also assisted clients who have blended families where the members live in different tax jurisdictions. When members live in different tax jurisdictions, the planning becomes even more complicated and even more important. By taking a Total Wealth Approach, we involve various team members ranging from Estate and Trust Consultants, Insurance Consultants to Business and Family Planning Consultants.

Part of the Total Wealth Plan also involves an educational piece in learning about the different types of accounts. Below I have listed a few common assets and basic challenges couples in blended families may face.

Non-Registered Account

The term taxable account or non-registered can be used inter-changeably. Often young people do not have non-registered accounts as they are busy paying off mortgages and/or contributing to their registered accounts, such as RRSPs. Older couples with adult children are more likely to have taxable accounts when they enter a blended family. When a person has non-registered investments just in their name, this is called an “Individual Account”. The monthly statements and confirmation slips have just the one person’s name on it, and the year-end tax slips (i.e. T5 and T3 slips) are in the same individual’s name.

Couples in a first marriage who have built up equity together will typically open a taxable account called a Joint With Right of Survivorship (JTWROS) account. This type of account has many benefits for couples, including income-splitting. The primary benefits of these joint accounts are probate is avoided, income tax continues to be deferred, such as for unrealized capital gains, and simplicity of paperwork after the first spouse passes away.

Some couples have two JTRWOS with each person being primary on their own respective account. By primary I mean their name is first on the account and their social insurance number is on all tax slips. This enables couples to still keep funds separate, but it will still provide the same benefits above.

Tenants in Common

Another option for taxable accounts is Tenants in Common. With Tenants in Common a taxable account is set up with two or more owners, where the ownership percentages do not have to be equal. Upon the passing of any owner, their portion represents part of their estate, and the other owners do not have the right of survivorship. Many of the benefits of JTWROS are lost with Tenants in Common, but for some couples this may be the right decision. A couple that would like to combine their assets to pay household bills could simply allocate the ownership based on the amount originally contributed. F

or example, Mr. Smith and Ms. Jones entered into a second relationship and now find themselves in a blended family situation. They would like to combine their assets to benefit from some advantages of consolidating assets (such as simplification, lower investment counsel fees, etc.). Mr. Smith contributes $300,000, and Ms. Jones contributes $700,000. If they open a Tenants in Common account for these assets, then the allocation for ownership could be 30 per cent for Mr. Smith and 70 per cent for Ms. Jones. If either spouse passes away, their Will would dictate how their proportionate share is divided.

Registered Accounts

The two most common types of registered accounts are Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA). RRSP and TFSA accounts can only be in one person’s name.

However, with both of these types of accounts you are able to name a beneficiary. With couples in a first marriage and building equity together, your spouse is likely always named the beneficiary on registered accounts. At the time of death, Canada Revenue Agency allows the owner of an RRSP (called an annuitant) to transfer their RRSP to their surviving spouse or common-law partner, on a tax-deferred basis. If there are financially dependent children because of physical or mental impairments, then it also may be possible to transfer the annuitant’s RRSP on a tax-deferred basis. Outside of these two situations, the annuitant’s RRSP is fully taxable in the year of death.

A person who has a spouse, and chooses to name an adult child the beneficiary should understand the tax consequences. If you name your spouse the beneficiary, your spouse receives 100 per cent of the value until the funds are pulled out gradually (taxed when taken out). If you name someone other than a spouse, the funds are deemed taxable in one large lump sum, so the marginal tax bracket of 53.5 per cent could easily be reached. Many people would cringe if they could see the amount of tax paid to CRA from RRSP accounts resulting from a lack of planning.

Although the TFSA has no immediate tax issues on death, there are still some benefits to naming your spouse or common-law partner the beneficiary. As an example, let’s look at Mr. Smith and Ms. Jones’ blended family. Mr. Smith has $121,000 in a TFSA and Ms. Jones has $152,000 in her TFSA.

Mr. Smith has the option of naming the Estate the beneficiary, naming Ms. Jones the beneficiary, or naming another individual such as a child or children from a previous marriage. If Mr. Smith names the Estate the beneficiary, then the account would likely have to be probated to validate the Will. The Will would provide us direction as to who the beneficiary of the TFSA will be. If Mr. Smith named Ms. Jones the beneficiary, then we can roll over the entire $121,000 into Ms. Jones’ name (without using contribution room). After the roll over, Ms. Jones would have two TFSAs that we would consolidate to create one TFSA valued at $273,000 – all of which is fully tax-sheltered. The roll over can be done once we receive a copy of the death certificate – and no probate is required for the transfer of assets. The only time individuals are permitted to put more into their TFSA accounts, other than their standard annual limits and replenishing amounts withdrawn in an earlier year, is when their spouse or common–law partner passes away and they are named the beneficiary.

If Mr. Smith named the children from the first marriage the beneficiary, then Ms. Jones does not get the additional room and the children could receive the funds but would not be able to roll this amount into their own respective TFSA accounts without using their available room.

While there are many solutions available for blended families, it is important to talk about these options and then document the plan. Gathering all the information and creating a plan that both parties are content with can take some time. A plan should include all standard types of assets such as personal residence and vehicles, as well as liabilities. One of my most rewarding moments as a Portfolio Manager is assisting my clients with their Total Wealth Plan. A Total Wealth Plan ultimately provides peace of mind for clients in what is often viewed as a complex situation that was either too sensitive to talk about or simply not addressed.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com or visit greenardgroup.com/secondopinion.