Few options on tap to divide estate in non-traditional family

One of the estate planning challenges facing patriarchs and matriarchs of nontraditional families (those families reconfigured due to divorce, second marriages or common-law living arrangements) is how to provide for their significant other in the event of their death, and then repatriating those assets for distribution to the children of their first marriage in the event of the second spouse’s death. In theory it may seem easy but, in practice, it is extremely complex to arrange, especially when it comes to one’s registered assets such as RRSPS, LIRAS, RRIFS and LIFS.

After the principal residence, often assets in registered plans can form the largest portion of your estate and therefore the main source of capital that can provide for your significant other’s income following your demise. However, many have the illusion that once they have bequeathed their RRSPS or RRIFS to their surviving spouse that following their surviving spouse’s death the remaining registered funds will revert to their intended

“In theory it may seem easy, but, in practice, it is extremely complex to arrange.”

ultimate beneficiary: their children or estate. In most cases, they are sorely wrong.

According to Nathalie Marchand, a partner with the national law firm Miller Thomson and one of the editors of its coming book, Miller Thomson on Estate Planning (published by Carswell with a release date this fall), “once an RRSP, RRIF, LIF or LIRA has been rolled over to a surviving spouse, they then control all benefits of that policy or account. They become the new owners of the plan. As such, they make decisions as to how the funds are invested, what the flow of income might be and to whom to direct the proceeds remaining (if any) at their own death. Controlling registered plans from the grave is simply not possible.”

Marchand explains: “A taxfree rollover of an RRSP or a RRIF to a trust for the benefit of a spouse during his or her lifetime, with the children as the ultimate beneficiaries, is not feasible. Instead, the RRSP or RRIF must pass to the spouse directly to qualify for the tax deferral.

“Once you have bequeathed your registered plan over to a spouse, it is a matter of hope and trust that they will in turn bequeath these RRSP assets back to your original children after they, in turn, are gone.”

Some may think otherwise, as complex wills are drafted with clauses dictating that the surviving spouse must ultimately bequeath the funds back to their late spouse’s estate or children upon his or her death.

However, Marchand does not think these clauses would be “enforceable.” In fact, she does not believe that it would be possible to bequeath the remaining RRSP on the second spouse’s death back to the former spouse’s estate. “It would have to be bequeathed by the surviving spouse to the children of the former spouse or to testamentary trusts for the children that may have been created under the former spouse’s will.”

In order for this transfer back of the RRSP assets to be actually done, (which at this point would be taxable), the surviving spouse would have to draw up their own, new, will in order to bequeath those registered funds to their former spouse’s children or desired heirs (because beneficiary designations are generally not possible in Quebec for registered plans unless they are with a life insurance company or trust company and meet certain specific requirements).

Sure, in many instances, the stepmom or stepdad loves those children of their spouse’s first marriage very dearly, but sometimes that is just not the case. So, can you imagine your surviving spouse sitting in their notary’s or lawyer’s office drafting up a new will, with the clause that the registered funds that they have just inherited will hereby be bequeathed according to your wishes? If so, good. If not, you may want to consider alternative solutions.

So what are those alternative solutions? we ask Marchand.

“You will have to be careful if you want the distribution of an estate’s assets to be equitable” she says. “Many wills are driven by tax and ways of minimizing taxes at death. Certainly the tax-deferred rollover of the RRIF or RRSP to a surviving spouse or common-law partner is attractive. However, how do you compensate the other estate beneficiaries if the RRSP/ RRIF then becomes ipso facto owned by the surviving spouse?”

According to Marchand, “directing the non-registered assets (the proceeds of the sale of the principal or secondary residences, the investment portfolio, etc.) of the estate to the intended children or heirs is one approach, but this must be specifically addressed in the individual’s will.

Another option is to direct your liquidators to liquidate the RRSP/RRIF along with all other assets, pay the related taxes and then distribute the proceeds in an equitable manner. Failing that, one can also purchase life insurance to supplement any potential inadequacies.

But this is only possible for those who are insurable, and who have the cash flow to support the life insurance premiums.”

Probably the simplest approach is to take a hard look at all your potential estate assets and liabilities, and to instruct that all of the desired allocations and distributions be made, once and for all, during the execution of your will, even if this means kissing your RRSP or RRIF goodbye.