Kevin Greenard: Financially, second marriages can be especially tricky

Kevin Greenard

Part four of a four-part series

The statistics for second marriages succeeding are even worse than for first marriages. As a portfolio manager, my personal advice is based on many years of helping clients, and nothing I read in a textbook.

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Every situation is different and has to be customized to each client. Not all are tricky, but most have both financial planning and estate planning challenges.

My experience is that these challenges are often swept under the carpet and not dealt with appropriately. In an ideal situation, they are dealt with up front, prior to residing together or getting married.

Background information

Obtaining a bit of background information can assist me in providing the best recommendations. As a starting point, it is helpful to know the history. To help with this, we typically document which category of second marriages we are helping with:

1. Your second marriage and your spouse’s first

2. Your first marriage and your spouse’s second

3. Both you and your spouse’s second marriage

If my client is alone, I will typically ask questions with respect to any first marriages. In some cases, a spouse has passed away. If this is not the case, then it is helpful to obtain some background information on why the first marriage did not work out.

Family tree

Background information is always important to obtain before mapping out any recommendations. Some of the information that we will need is whether you, or your new partner/spouse, have any children from previous relationships.

We obtain this by asking you and your new partner/spouse to provide a family tree that lists all immediate family members.

Children

One of the more sensitive areas is when children from a previous relationship are involved. There are several different approaches depending on the situation.

The following are the eight main categories — each scenario has to be treated differently:

1. You and your spouse have no children.

2. You have minor children and your spouse does not.

3. You have adult children and your spouse does not.

4. You do not have minor children and your spouse has minor children.

5. You do not have adult children and your spouse has adult children.

6. Both of you have minor children from past relationships.

7. Both of you have adult children from past relationships.

8. One, or both of you, has a mixture of both minor and adult children.

Minor children, or children who are still living at home or dependant on a parent, have immediate needs. These immediate needs have financial considerations that should be discussed.

If kids are grown up and independent, then the issue revolves around estate planning. If something were to happen to you, what would you like to see happen to your assets?

Prior to your new relationship, the beneficiaries on registered investment accounts were likely listed as your estate, or your children. Your will may have named the children as beneficiaries of your estate.

Now that you are in a second marriage or common-law relationship, you have an obvious conflict to discuss. Do you leave assets to your children, your new spouse, or a combination of both? How does this look currently if you do nothing? How would you like things dealt with today? How would your spouse or common law partner like things dealt with? Do you see this changing over time? Have you talked about it?

I will always want to have the initial meeting alone with my client. It is important to have a plan and to have this open communication. I’m also willing to have a meeting where we openly discuss the structure with your new spouse.

Living parents

Provided you have living parents, we typically will gather a bit of information on them. Are your parents, or your partner’s parents dependant on you? Do they require financial assistance in any way? Do you anticipate receiving an inheritance from your parents? Does your new partner anticipate receiving an inheritance in the future from parents/other family members or friends?

Age discrepancy

When we get the family tree, we obtain birthdates and calculate the age discrepancy. The reason for obtaining this information is primarily to outline the most likely outcome for estate planning. The following are the age discrepancy categories we use:

1. You and your partner are roughly the same age (within three years)

2. You are older than your partner (between four to 10 years)

3. You are significantly older than your partner (greater than 10 years)

4. You are younger than your partner (between four to 10 years)

5. You are significantly younger than your partner (greater than 10 years)

The age discrepancy alone can lead to a lengthy discussion, especially in situations 3 and 5 above.

If the age discrepancy is significant, then an estate discussion should occur to plan for the most likely outcome. What happens when the older spouse passes away? What is the expectation on both parties? Will this change over time?

Marriage contract or cohabitation agreement

A prenuptial agreement is recommended in cases where assets exist prior to the relationship.

Before getting married or cohabitating, we recommend that people talk to their lawyer. For married couples, we typically refer to this as a marriage contract, and for common-law spouses we refer to it as a cohabitation agreement.

The easiest time to get this in place is before you begin living together and before any major financial issues arise in the relationship. Of course, if I hear about the new relationship afterward, then that is not possible. We recommend getting a marriage contract or cohabitation agreement as soon as possible.

Some may feel that this is only useful for the higher net worth spouse, but I disagree. For the spouse with the higher net worth, protecting assets in the event the relationship does not work out is important. On the flip side, if you have the lower net worth, you would want to know your financial situation in the event of a breakdown of your relationship, or upon death.

If you have completed a marriage contract or a cohabitation agreement, we will want to review the disclosures with respect to net worth prior to the start of the relationship. The marriage contract will also address details on how you wish your assets to be dividend in the event the relationship breaks down.

Housing pre-relationship living arrangements

As a preliminary discussion, I typically start the discussion off with respect to home ownership, prior to your relationship beginning. The following are the four possible scenarios:

1. You own a house and your new spouse also owns a house.

2. You do not own a house and your new spouse owns a house.

3. You own a house and your new spouse does not own a house.

4. Neither person owns a house.

Housing pre-relationship discussion

Assuming you currently live in separate residences and you plan to live together. It goes without saying that housing is most people’s main expense. I want to hear about the discussion(s) of where you will choose to live and how the associated costs of the household are to be dealt with.

Communicating about all aspects of housing upfront is critical. Create a document where you outline who is responsible for day-to-day expenses and the living arrangements. If you were sitting in front of me, these are some of the questions I would want you to answer:

1. Do you intend on purchasing a home together? If yes:

a. What is the financial contribution to the house (50-50 or other proportion)?

b. Will the house be registered as joint tenancy or tenants in common? Do you understand the difference?

2. Do you intend on moving into one of your pre-relationship houses?

a. Will the person moving in buy into the house?

b. Will the ownership interest in the pre-existing house change?

3. How do you intend to pay for housing expenses such as house insurance, property taxes, mortgage payments and utilities?

a. Have you prepared a budget with projected expenses?

b. From what source will these bills be paid?

4. What would each party like to see happen with the residence if either one of you passed away?

a. Property continues to be occupied by the surviving spouse having the right to live in the property indefinitely, or until it is sold.

b. Property continues to be occupied by the surviving spouse, and/or the survivor can choose to replace the property with a smaller, easier to maintain property.

c. Property continues to be occupied by the surviving spouse, for a period of time, after which the property will either be sold or transferred.

It is easier to deal with expectations around these issues before you begin cohabitating and before you get married.

Financial issues are often a major reason for relationships breaking down. The more time you spend dealing with this upfront, the more likely you will be successful in the long run. I’m always interested in hearing both parties’ interpretation of how they think things will unfold, especially if I see significant financial inequity between the two parties.

Joint tenancy or tenancy in common

We will always have a conversation with couples entering a second marriage about the difference between joint tenancy and tenancy in common, especially if assets are going to be put into joint names.

Spouses in a blended family situation may elect to hold their non-registered investment account in joint tenancy so that the investment account would pass to the surviving spouse on the death of the first to die. The same could apply to the real property that you reside at.

One conversation could be that the spouses agree that upon the second spouse passing, the assets would be passed onto the children of the first to die. This is always a risky approach, as the surviving spouse could change their will and excluded the children.

If this is a concern, then another approach would be to have the property registered in “tenants in common,” which effectively means that each would keep their one-half interest in the property. This would enable the one-half interest in the property to flow through to the estate.

The obvious challenge here is the conflict that will occur with the surviving spouse owning half the house and your children owning the other half. The spouse may want to stay in the house and the children may want the house sold.

Budget and financial plan

Financial plans for second marriages are more challenging than for first marriages. The process begins with obtaining an understanding of your goals. Some may be tempted to do two individual plans because it is easier.

I’ve always recommended one plan for second marriages that incorporates how everything is currently structured. Part of a financial plan involves an estate analysis: What happens if Mr. passes away, what happens if Mrs. passes away, and what happens if you both pass away.

The estate analysis can be a scary proposition for the lower income spouse. It is a good exercise as it is informative. The financial plan can reveal situations in which the surviving spouse would endure hardship if no changes are made.

In other situations, a financial plan reveals that their children were not getting their equitable share. The financial planning process will bring clarity and actionable steps to ensure you are structured appropriately to achieve your goals.

Insurance

Over the years, I’ve helped first-time married couples get inexpensive insurance coverage for a short-term risk. An example would be a mother who is home raising the children for a few years. If the father passed away, then the primary income is lost. To reduce the risk, we can take out an inexpensive term-10 insurance policy that would provide much needed cash if the worst-case scenario unfolded.

I’ve seen many situations in second marriages that have some similarities. If the higher income spouse has agreed to pay the majority of the household expenses, then the lower income spouse’s financial situation is fine.

Let us also assume that the higher income spouse wants to leave the majority of the pre-relationship assets to children, then what would happen if that spouse passes away? The risk to the surviving spouse is diminished over time. We have alleviated the concern for some by taking out a life insurance policy to cover the risk.

Depending on where the shortfall is, sometimes the children are named the beneficiary and sometimes the spouse. Insurance has solved many tricky situations with second marriages.

Joint bank accounts

In the majority of situations, I encourage individuals starting a second marriage to have an individual account to keep the majority of their savings. What has worked well is to also have a joint bank account. The joint account could be used to pay for household bills, holidays and other common expenses.

In order for this to work, both parties have to agree on funding the joint account with funds from their respective individual accounts.

Individual investment accounts

For most first marriages where net worth is built up together over time, I will typically encourage the use of Joint With Right of Survivorship (JTWROS) accounts. The information gathered above is critical on how we structure non-registered investment holdings.

If my clients ask my opinion, I nearly always encourage people to keep the majority of their individual investment accounts exactly as they are, even after marriage. The money they have at the start of the relationship should be kept in an individual investment account.

I always say to them that we can talk alternatives after five years have passed. By then, you’ll have a better idea of how the relationship is progressing. It is super easy to create a joint account in the future and move the investments from the individual account to the joint account. It is harder, and more complicated, to go the other way once funds have been comingled.

The one exception to this is if you both equally contribute to a joint investment account. Similar to a joint bank account, a joint investment account can be used to fund agreed upon expenses.

Beneficiary on RRSP and RRIF accounts

Even in second marriages a person can name their new spouse the beneficiary of their RRSP or RRIF account.

If you pass away, then your spouse would receive these funds on a tax deferred basis. If you name a child a beneficiary, then the entire RRSP or RRIF would be included on your estate tax return.

Take a $800,000 RRSP account, for example. If you name your new spouse, the entire account goes to your spouse on a tax deferred basis. If you name your child, up to 52.8 per cent, or $422,400, could be taxed by the CRA, and your children would receive $377,600.

The only exception to this immediate taxation is if you have a child with a disability. It doesn’t take too much thought to draw the natural conclusion is that naming your new spouse seems better. But if all of your assets are in RRSP accounts, your children would receive $0, and for many that is just not an option.

It is possible to name multiple beneficiaries. For example, if you have two children, you could leave 50 per cent to your spouse, and 25 per cent to each child.

Beneficiary on TFSA accounts

With over 10 years of steady contributions, many Canadians have amassed a significant balance within their TFSA. Since the inception of the TFSA, original contributions are $69,500. With a reasonable level of growth, most TFSA accounts that have been maximized annually are over $100,000.

Being a registered account, you are permitted to name a successor annuitant (spouse) or beneficiary. Similar to RRSP accounts above, there is preferential treatment if you name a spouse as the successor annuitant of your TFSA if you pass away.

The preferential treatment is that the entire TFSA balance can be rolled into your spouse’s TFSA without impacting the spouse’s TFSA contribution limit.

If you name children as a beneficiary, then the children will not be able to roll it into their own TFSA account, without impacting their deduction limit. If they don’t have the deduction limit then they will receive the funds into a non-registered account or liquidated and transferred to a bank account.

Whether received in-kind or cash, it will be tax free for your children. In the majority of situations when a client is wishing to provide for children and have limited assets we recommend naming adult children beneficiaries of the TFSA accounts. If you have minor children then we would encourage naming “the estate” — see testamentary trust section below.

Specific bequests

Sometimes people are enticed to name their spouse the beneficiary of RRSP and RRIF accounts for the tax-free roll-over of the RRSP accounts and to avoid immediate taxation. The same could apply to TFSA accounts, and a financial professional could explain the benefits of naming your spouse as the successor annuitant. I’ve seen situations where someone has prepared a will and has specific bequests for their children.

A parent, who has two children from a previous marriage, could have $860,000 in an RRSP and $140,000 in a TFSA. Thinking they could leave their spouse money and $200,000 for each of the two adult children, the parent has a lawyer prepare a will that has specific bequests of $200,000 listed for each child.

The will divides the assets that flow through the estate. If this same parent named their spouse the beneficiary on both their RRSP and TFSA accounts, then no assets would flow into the estate.

In this scenario, the spouse from your second marriage would receive 100 per cent of your assets and your children would receive 0 per cent, which likely was not the parent’s intent.

Equitable distribution

One of the exercises we do for clients in a second marriage is to do an equitable distribution calculation. These calculations need to be done over time as tax rates change and investment account balances change. It is possible to tweak the percentages for beneficiaries on registered accounts.

I work with both lawyers and accountants to ensure everyone is on the same page with respect to the decisions made today to accomplish the desired end goal for estate distribution.

For example, if someone has the majority of their assets in an RRSP or RRIF account then I would typically encourage pulling funds out early and pulling out more than the minimum levels.

If a parent is 65 or older, then the threshold to pull funds out of RRSP or RRIF accounts is to increase taxable income (Line 236) to just below the OAS repayment threshold (for 2020 this threshold is $79,400). Although you will be paying more tax in the short term, you may be reducing your taxes in the long term. You also have a better probability of achieving your estate distribution goals.

Once I have explained the math of the alternatives, most clients proceed with the registered account withdrawal strategy.

Establishing a trust

For many of our clients protecting or safeguarding the pre-marital assets from the first marriage, for the benefit of your children, is a priority. The only tried and true way to protect their estate to ensure their own children will ultimately benefit is by way of a trust. A testamentary trust is a trust that is established after you pass away per your will. There are also different types of inter-vivos trusts (joint partner trust, alter ego trust, spousal trust).

I’ve seen situations where the will says, “everything to the spouse in trust for their lifetime, and then upon that spouse’s death to my children.” This has no practical effect in situations where nothing will pass under the will of the first spouse to die.

Mutual wills agreement

There are situations where couples do not want to sever their joint tenancies. They also may not want to name the “estate” on their registered investments so that a trust can be effective in the context of a will to protect the children of the first spouse to die.

Some lawyers will give the option of a mutual wills agreement that is at least better than nothing. It is a contract between the spouses that essentially says that the surviving spouse won’t change their will. The agreements that are drafted can also say that if the surviving spouse marries or cohabits, they agree to enter into a cohabitation or marriage agreement with the new spouse to protect the assets of the surviving spouse.

The mutual wills agreement is a complex area of estate law and there has been a fair amount of litigation on mutual will agreements. Some practitioners are not eager to do mutual will contracts. Those lawyers that do these for clients will likely caution the clients on the risks associated with them.

Communication is the key component to working through the natural conflicts. Talking through things early on also allows all options to be considered, as some strategies involve time to implement. As a portfolio manager, I’m happy to share the solutions that have helped other second marriages work through the financial challenges.

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. greenardgroup.com

The series: Financial considerations when ending a marriage

Part 1: Picking the right lawyer

Part 2: Creating a departure plan

Part 3: After the separation agreement

Part 4: Second marriages are especially tricky 

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