Managing Disputes That Arise From Second Marriages – Hull on Estate and Succession Planning #157
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss managing family disputes that arise out of second or third marriage relationships.
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Welcome to Hull on Estates and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag. The podcast you’re listening to will provide information and insights into estate planning in Canada. From the offices of Hull & Hull in Toronto, here are Ian and Suzana.
Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening to episode 157 of our podcast on Tuesday, March 24, 2009.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian. How are you today?
Ian Hull: Great. Welcome back.
Suzana Popovic-Montag: Thank you very much.
Ian Hull: From your great vacation.
Suzana Popovic-Montag: It’s great to be back.
Ian Hull: Yes.
Suzana Popovic-Montag: Better to be away but still good to be back.
Ian Hull: Well we had a couple of fun podcasts with Jordan Atin while you were gone and touched on some Will drafting and charitable gifting issues. So today we thought we’d talk a little bit about what is probably one of the most prevalent problems we have in our practice that we’re engaged with in the litigation side, and that is, managing family disputes that arise out of second or third marriage relationships.
So the scenario, of course, is that we’ve run into and we’ve talked about in the past certainly is the classic scenario where there is a second marriage but there are children from the first and the second marriage. And so there’s a surviving spouse and then the estate plan unfolds and the issues that arise out of that.
So not that this is a new problem, but one of the classic ways to manage the second marriage scenario, and it certainly was very big in the 60’s and the 70’s, was this idea of creating a spousal trust for the surviving spouse. So that one is still a live issue. Let’s spend a few minutes just talking about that option.
Suzana Popovic-Montag: Sure Ian. And when you’re talking about a spousal trust, you’re referring I guess to an arrangement where the testator can create a situation where his or her spouse will get an entitlement, a life interest in the estate for as long as that person is alive and then on his or her death, there’ll be a gift over to probably the children or the other family members from the first relationship.
Ian Hull: Absolutely. And so that gives an opportunity to take the family wealth, pass it on in a nice tax-free basis because it’s rolled over into this trust. As long as the trust is used for the exclusive benefit of that surviving spouse, the rollover works and that surviving spouse has and is allowed to live on and in some cases with the power to encroach to enhance their lifestyle, with as you say this gift over to the family. And at that point, often it’s a question of to both sides of the family, to family number 1 and to family number 2. Therefore you have avoided the contentiousness in some respects because you’ve had the surviving spouse live a long and fruitful life but whatever is left is divided equally per se between the two families. So that’s one option in terms of dealing with and managing through scenarios with a second marriage.
Now let’s spend some time talking about some, what I would say, maybe let’s think outside the box a little bit because that one is the conventional classical approach. What other approaches can we think of to help manage through this so that the two children, both generations are not ending fighting with each other.
Suzana Popovic-Montag: Well one of the other things that we’ve talked about as an alternative, Ian, in the past is an estate freeze. And I think that’s one of the easiest suggestions that sort of comes to mind apart from the spousal trust in this kind of a scenario.
Ian Hull: And the estate freeze would allow for some more, especially in more complex holdings, allows for the freezing of the wealth so to speak in the first generation and then allows the growth to pass on to the next generation and you could, for example, create a family trust that holds the common shares, the growth shares, and that family trust benefits both families.
Suzana Popovic-Montag: Right.
Ian Hull: Both the first family and the second family.
Suzana Popovic-Montag: And it can also specifically, with some creative drafting, provide for the surviving spouse on a tax advantageous basis.
Ian Hull: Alright. So when we’re dealing with the second family relationships and the estate planning behind them, one of the things that we often and always encourage our clients is to really hang on to the no secrets rule. And that no secrets rule stems from the old adage that was created when mirror Wills are drawn. And maybe let’s spend a few minutes talking about the no-secrets rule.
Suzana Popovic-Montag: Well Ian, we’ve just spent a lot of podcasts talking about the family conference idea and I think that really stems from this whole rule of no secrecy so that there is a forthcomingness, there is a communication and a disclosure that’s made all the way through the estate planning process for the benefit of the family members.
Ian Hull: And for sure that family conference allows us a great venue to deal with this and historically this idea of no secrets comes from the classic scenario when a couple comes in to see you to draw your Will and both of them are there and you say look, I’m jointly being retained here. So I just want you to know from the outset that there will be no secrets as between each other and so that if in two years, one of you calls and says I want to change my Will, you can’t accept that retainer. And you get yourself out of that situation because you’ve communicated that to your client. And that next level is why are we keeping secrets as between the first family and the second family in the same context? Because the estate plan is going to impact on both of those families.
Suzana Popovic-Montag: That’s right.
Ian Hull: Let’s spend a couple of minutes here on some creative solutions as well. What if we don’t have the cash to fund these two families? And second marriage relationships can be created obviously when you’re a bit younger; or can be created when you’re older, it depends. But say it’s a scenario where you’ve got a couple that are remarried with young kids, both sets of young kids. Sort of the Brady Bunch scenario, that’s a good idea. What are some creative tools that we can use at that stage in life when you are a bit younger to manage what is going to be possibly some tension later down the road on the fact that one of you is going to die first and the others are going to leave a family.
Suzana Popovic-Montag: And I bet you’re alluding to the concept of different kinds of life insurance policies…
Ian Hull: Sure.
Suzana Popovic-Montag: …and proceeds that can be set up because I know you like to speak about this topic quite a bit with the family history in the insurance industry.
Ian Hull: Well we do have that. But I also, not withstanding my bias, I do have a propensity to enjoy the solution because we see it so effectively on the estate planning side. And so what are some of the ideas that we could use on the life insurance side to manage through this testy issue of two families?
Suzana Popovic-Montag: Well there certainly is the concept of a whole life insurance policy and the difference between that and a term life insurance policy. And I think when you’re in these situations where there might be an age discrepancy between the spouses, that might be something that you’d be looking to.
Ian Hull: So what would we want to do in that scenario? Say we have a couple that are married and there’s say 15 or 20 years’ difference in their age. What would we use on the life insurance side for that?
Suzana Popovic-Montag: Well the older spouse would probably be looking at a whole life insurance policy or purchasing something or an instrument of that kind of nature. Whereas the younger one would be looking for a term life insurance policy, just because of the economics and the costs of buying those policies at certain parts and certain ages in your lifetime.
Ian Hull: And the other creative tool with life insurance that I’ve seen used is the joint first to die, or the joint last to die policies which all again, I mean, we don’t do tax, we don’t do life insurance. But what all these different policies do is that they give you options and they give you funding options which is the key element in ultimately avoiding the fight at the end of the day, is that have you funded in what is going to be perceived as fair and equal – maybe not equal but fair – between the two families. And as I say, the insurance industry gives us one other option and that is, we can look to a funding mechanism and what that specific funding mechanism is would impact on each individual’s scenarios.
So those are sort of some central issues around the second marriage scenario and some solutions, as opposed to just talking about the negatives, some of the positives.
In our next podcast we’ll spend some time talking a little bit about what we do in a scenario with a Power of Attorney because as equally problematic with an estate plan can be your incapacity planning when you have a second marriage scenario. So we’ll delve into that issue on our next podcast.
Thanks very much.
Suzana Popovic-Montag: Thank you Ian. And I look forward to our next podcast.
You have been listening to Hull on Estates and Succession Planning by Ian Hull and Suzana Popovic-Montag. The podcast that you have been listening to has been provided as an information service. It is a summary of current issues in estates and estate planning. It is not legal advice and you are reminded to always speak with a legal professional regarding your specific circumstance.
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