Avoid Disinheriting Your Children
In today’s family it is not unusual for spouses to enter the marriage with children from previous relationships. Parents work hard at getting these children to functionally blend together to create a happy family environment. Often overlooked is what happens on the death of one of the parents. In most cases special consideration for estate planning is needed to avoid relationship loss and possibly legal action. Â
Typically spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children. The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.
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6 Estate Planning Considerations for Blended Families
The Family Home
In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately. Â
Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.
Registered Retirement Savings Plans
To take advantage of the tax free rollover from their RRSPs each spouse should consider naming each other as beneficiary. Â If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.
Other Assets and Investments
If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could direct that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs.  Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.
Choose a Trustee Carefully
With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee. Â For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance. Â Some situations may call for multiple trustees or perhaps the services of a trust company.
Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step parent. Â Life insurance may be the ideal solution. Â Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.
Advantages of Life Insurance for Blended Family Planning:
Can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;
Death benefit is tax free and could be creditor and litigation proof;
Ability to name contingent owners and beneficiaries (including testamentary trusts);
Death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;
With a named beneficiary proceeds pass outside of the will so cannot be challenged under any wills variation action;
Provides for a significant measure of control and certainty as to when and where the proceeds will end up.
The Elephant in the Room
It is important to remember that whatever planning options are used, total and open communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs. Â Full discussion will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.
Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children. Â Call me if you require help in this area or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.
Owners of very successful private corporations are well aware of the importance of cash flow. Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed. Â
The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.
What is an Immediate Financing Arrangement (IFA)?
An IFA is a financial and estate planning strategy that:
Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.
Who should consider this strategy?
IFA`s are not for everyone. For those situations that best match the necessary criteria, however, significant results can be achieved. The best candidates for an IFA usually are:
Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;
Of good health, non-smokers, and preferably under age 60;
Enjoying a steady cash flow exceeding lifestyle requirements;
Paying income tax at the highest rate and will continue to do so throughout their life.
How does it work?
An individual or company purchases a cash value permanent life insurance policy and contributes allowable maximum premiums;
The policy is assigned to a bank as collateral for a line of credit;
The business or individual uses the loan advances to replace cash used for insurance purchase and re-invests in business operations or to make investments to produce income. This is done annually;
The borrower pays interest only and can borrow back the interest at year end;
At the insured’s death the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;
If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.
Proper planning and execution is essential for the Immediate Financing Arrangement. Â However, if you fit the appropriate profile, you could benefit substantially from this strategy.
If you wish to investigate this strategy and whether it can be of benefit to you, please contact me and I would be happy to discuss this with you and/or your accountant. Â As always, feel free to use the sharing icons below to forward this to someone who might find this of interest.
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