BY: VALERIE DYE
In the last publication, I touched on the use of mutual wills to deal with issues affecting blended families. One of the main issues that affect such families is the desire of both spouses who have children from previous relationships to leave assets for each of their children after their death. Concerns may exist that when one spouse dies the other spouse may inherit the estate of the deceased. The surviving spouse can possibly leave the entire estate including assets inherited from his deceased spouse to his or her children and not for the children of the spouse who died first.
Even where parties do not have children from previous relationships it is still likely that the surviving spouse may remarry. If this happens there is no guarantee that the children of the previous marriage will receive any assets from the estate. In this regard, it may be important to protect assets held during the first marriage for the benefit of the children of that marriage.
Apart from the mutual wills, beneficiaries may be protected through a (testamentary) spousal trust. This trust is created in the will and allows a testator to leave assets or income to his or her spouse in trust and ensure that the capital goes to his children or other intended beneficiaries when the surviving spouse dies. For instance, if a home is left to the surviving spouse in trust she is allowed to live in the home throughout her lifetime but after her death, it will be passed on to the beneficiaries named in the trust. While the spouse enjoys the benefits of the assets he or she cannot dispose of the capital assets as they are being held in trust for other beneficiaries.
A spousal trust may be for the benefit of either a married spouse or common-law partner and may also be referred to as a common-law partner trust.
If one is considering a spousal trust it is important to remember the Family Law rule which allows a surviving spouse to elect not to take benefits under the will of the deceased spouse but to choose instead to have property equalized (as is usually done during separation or divorce). If for instance, the deceased spouse has a net family income of $800,000 at the time of death and the surviving spouse has a net family income of $200,000, the surviving spouse will be entitled to receive $300,000 from the estate of the deceased. The surviving spouse can elect to take the $300,000 or to take whatever is left for him or her under the will. If the surviving spouse elects to take an equalization payment this will defeat the purpose of creating the spousal trust which is created through the will. To avoid this the testator who desires to create a spousal trust should also consider having a domestic agreement whereby the parties will waive their rights to equalization upon the death of either of them. Once such a contract is in place then the surviving spouse will only be allowed to take benefit under the will and the spousal trust will apply.
It is important to note that there are certain tax considerations that apply to spousal trusts and to trusts generally. These should be carefully examined when considering the establishment of a spousal trust.