Key takeaways:
- Joint ownership can unintentionally disinherit your children.
- A spouse trust can protect both your spouse and your children.
- Life insurance can often help to equalize a will for blended families.
- Both spouses should sign a formal agreement to honour each other’s original wishes.
- Heirlooms and family mementos may pass to a new spouse by default.
Blended families — where some or all of the children are from a previous relationship —face a specific set of complications when it comes to estate planning and writing a will.
It may seem straightforward to leave everything to your spouse. But doing so could leave your own children with nothing — both when you die and when your spouse eventually dies. To protect your children’s inheritance, you need a carefully structured estate plan. That means avoiding arrangements where all assets automatically pass to a surviving spouse, such as full joint ownership or naming a spouse as the sole beneficiary on registered accounts (such as RRSPs and TFSAs) and life insurance policies.
How estate planning for blended families can go wrong
Deciding how to structure a will and an estate quickly becomes complicated when children from a previous relationship are involved. The following example shows how a seemingly straightforward relationship can leave those children with nothing.
Pierre and Melissa are married, each with children from a previous relationship. Their home and non-registered investments are jointly owned, and they have named each other as direct beneficiaries on their insurance policies, TFSAs and RRSPs. Here is what could happen:
If Pierre dies first, Melissa inherits everything automatically; his assets pass directly to her as joint owner and named beneficiary. Even if Melissa’s will says her estate should be divided among “her children,” that language covers only her natural or adopted children, not Pierre’s. For Pierre’s children to receive anything, they must be named explicitly in Melissa’s will.
- If both have wills that include all the children but Pierre leaves everything to Melissa, her will could be revoked if she later remarries — depending on the province or territory where she lives.
- If Melissa remarries without updating her will, she may effectively die without a valid will (intestate) if she lives in a province where marriage automatically revokes a previous will. Her assets would then pass to her new spouse and her own children only.
- Even if Melissa makes a new will that names Pierre’s children, her new spouse may have a legal claim against part or all of her estate. If Pierre’s children are not named, they will likely receive nothing.
- If Pierre and Melissa want their original wills to remain binding after one of them dies, both must sign a formal contract agreeing not to change their wills. Without that contract, a court may not uphold the original terms.
- Even with mutual wills and a contract in place, it’s still possible for some children to be disinherited. Melissa could, for example, add her new spouse as a joint owner or direct beneficiary on all her assets — effectively passing everything outside the estate and leaving nothing for Pierre’s children.
The lesson is clear: if you leave everything to your spouse and you die first, you have very limited control over whether your children ultimately receive any inheritance. The following strategies can help.
Spouse or common-law partner trusts
A spouse trust identifies specific assets — such as the family home — that the surviving spouse may use during their lifetime. When that spouse dies, those assets pass to the children named in the trust. The trust is governed by the will of the spouse who died first, since those assets never legally belong to the surviving spouse.
For this to work, those assets must flow through the estate rather than passing automatically to the surviving spouse. That means avoiding joint ownership or direct beneficiary designations (such as naming a spouse as beneficiary on a TFSA) for assets you intend to place in the trust.
One important caution: if the trust is not drafted carefully, there can be tax consequences when the first spouse dies. An experienced estate lawyer is essential.
A spouse trust is not the right solution for every situation. Consider these drawbacks:
- Age gap between the new spouse and the children. If the new spouse is close in age to the children from the previous relationship, those children could wait decades before receiving anything.
- Potential for ongoing disputes. If the spouse has the right to withdraw money from the trust — which may be necessary to satisfy family property rights — this can create recurring conflict between the spouse and the children over how much is being taken.
- Maintenance costs. While the spouse is generally responsible for routine upkeep of a property held in trust, children are typically responsible for capital improvements — even though they do not yet benefit from the asset. This arrangement often breeds resentment, and properties can fall into disrepair when children refuse to absorb those costs.
Spouse trusts can be a useful tool, but they should be considered carefully and structured with expert legal guidance.
Dividing assets between your spouse and children
Rather than using a spouse trust, another approach is to leave a portion of your estate directly to your spouse and separate assets directly to your children.
This is not without complications. In many provinces and territories, a surviving spouse has legal rights that can include applying for dependant’s relief, a wills variation claim (in British Columbia) or an equalization of family property. Disinheriting a spouse entirely is difficult, which is why the will must be carefully structured — and your spouse may need to formally waive any right to challenge it.
Leaving assets to anyone other than your spouse can also trigger tax consequences. Capital gains tax may apply, and RRSPs or RRIFs left to children are generally taxable immediately, except in narrow circumstances.
Do not overlook family heirlooms and sentimental items. These may carry significant emotional value for your children, and if they are not specifically addressed in your will, they could end up with a new spouse. Ask your children whether there are particular items that matter to them, and either specify those items in your will or gift them during your lifetime.
When splitting an estate between a spouse and children, work with both an estate lawyer and a financial advisor. The lawyer can tell you what your spouse is legally entitled to; the advisor can calculate the approximate after-tax value of your estate, so you know how much is actually available to leave your children.
Using life insurance to ensure everyone is treated fairly
If your assets are not sufficient to fairly provide for both your spouse and your children from a previous relationship, life insurance may bridge the gap. It can fund both obligations simultaneously, often with less complexity than other approaches, and can reduce the potential for family disputes.
One important caution applies if you have young children. If minors are named as direct beneficiaries on an insurance policy, the provincial government may take control of those funds until the children reach the age of majority — at which point the full amount is paid out in a single lump sum. An insurance trust, managed by a designated trustee, gives you more control over how and when those funds are distributed.
Estate planning for blended families FAQ
What are beneficiary designations?
A beneficiary designation names the person who will receive the proceeds of your RRSP, RRIF, TFSA or life insurance policy when you die. These assets do not form part of your estate and are not governed by your will.
What is a spouse trust and how does it protect children from a prior relationship?
A spouse trust gives the surviving spouse the right to use specified assets — typically the family home — for the rest of their life. When they die, those assets transfer to the children named in the trust. It is designed to balance the spouse’s financial security with the deceased’s obligation to children from a prior relationship.
Can life insurance be used for estate equalization in a blended family?
Yes. When an estate cannot adequately provide for both a spouse’s legal entitlement and a fair inheritance for children from a previous relationship, life insurance proceeds — which pass outside the estate and avoid probate — can fund one or both without requiring the sale of other assets.
Should I name minor children as direct beneficiaries on an insurance policy?
Generally, no. If a minor is named as a direct beneficiary, provincial authorities may take control of the funds until the child reaches the age of majority, when the full amount is paid as a lump sum. An insurance trust managed by a named trustee provides more control over timing and distribution.
Do mutual wills between spouses legally bind the surviving partner after one dies?
Not automatically. For mutual wills to be legally enforceable, both spouses must sign a formal contract stating that neither will change their will after the other’s death. Without that contract, the surviving spouse is free to revise their estate plan entirely.
Does provincial law affect estate planning for blended families?
Yes, significantly. Spousal entitlements, intestacy rules and the validity of estate structures, such as spouse trusts, vary across provinces and territories. What works in Ontario may not apply in British Columbia or Quebec. Jurisdiction-specific legal advice is essential.
How to get started with income tax splitting options
Estate planning for blended families is complex, and the stakes are high. You should work with both your advisor and an estate lawyer with experience in your province or territory, as the rules can differ considerably across Canada.
If you have a blended family, arrange a meeting with your IG Advisor to discuss a plan that works for your specific situation. If you don’t have an IG advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
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