Blended Family Estate Planning and Living Trusts (a.k.a. Inter Vivos Trusts)

As estate and incapacity planning professionals, we are frequently approached by folks living in a blended family (a spousal relationship in which one or both spouses have children from another relationship). Understanding the unique challenges of estate planning for blended families and incorporating appropriate safeguards is vital for them. Failing to navigate the relevant factors carefully can lead to disputes that strain familial relationships and disrupt the estate plan.

In a previous article, we discussed one of the key considerations for blended families, the risks presented by the possibility of will variation claims. Essentially, in British Columbia, the court may change one’s will after one’s death if the court is asked to do so by any of one’s spouse and children. This is because one’s spouse and children have special standing to ask the court to change or “vary” one’s will.  The court can then decide to change the terms of one’s will so that the disgruntled spouse or child will receive more of the estate than what the will says they should get, if the court thinks it would be fair to do so.

The court determines what is fair by considering one’s legal obligations to one’s spouse and children (if any) and contemporary community moral standards (as determined by the court). One's adult independent children and adopted children are considered one’s children for this purpose, but stepchildren who have not been adopted are not.

Successful will variation claims can significantly impact the distribution of one’s estate. Even failed claims may cause long delays in estate administration and enormous expenses for the estate. They also can make the lovely relative or friend who agreed to be one’s executor regret having ever taken on the role.

The risks of will variation claims and the risks of one’s children from a previous relationship being disinherited can be particularly acute in a blended family context. This can be readily seen by considering the following.

It is common for blended family spouses to want to:

(A) co-own all or the bulk of their assets together as joint tenants

(B) name each other as the beneficiary of all or the bulk of their respective beneficiary-designatable assets (e.g. Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), life insurance policies, pensions, etc.), and

(C) hope (but not legally require) that the surviving spouse will maintain a will instructing the surviving spouse’s executor to distribute the surviving spouse’s estate equally among the surviving spouse’s children and the children of the first-to-die.

(A) generally allows the surviving spouse to keep the co-owned assets after the death of the first-to-die without those assets passing under the will of the first-to-die. After the death of the first-to-die, the surviving spouse can usually continue to own such assets by right of survivorship, which is one of the defining features of ownership as joint tenants.

(B) generally allows the surviving spouse to keep the proceeds of beneficiary-designatable assets such as life insurance, RRSPs, TFSAs, and pensions outside of the will of the first-to-die. After the death of the first-to-die, the surviving spouse, as the named beneficiary of life insurance, RRSPs, TFSAs, pensions, etc., usually receives the proceeds of such assets directly from the relevant financial institution.

(C) Leaves the children of the first-to-die entirely reliant on the unenforceable hope that they will be provided for appropriately upon the death of the surviving spouse.

This approach is a common plan that clients in blended families bring into an initial estate-planning meeting. This is understandable. It is relatively easy to comprehend. It is often straightforward to put in place. It has an intuitive ease to it, but it might be appropriately nicknamed the “Simple but Dangerous Plan" for blended families. It can (and frequently does) result in the children of the first-to-die receiving little or nothing in the way of inheritance. It can also lead to expensive and acrimonious estate litigation after one’s passing.

Some Risks of the Simple but Dangerous Plan

Why is the Simple but Dangerous Plan dangerous? Mainly because it is risky for the children of the first-to-die. Consider the following:

1. On the death of the first-to-die, all the assets pass to the surviving spouse outside of the will of the first-to-die. As a result, the children of the first-to-die generally cannot make a meaningful will variation claim against their parent’s will because there is no (or little) estate passing under their parent’s will.
2. The surviving spouse may change their will so that the children of the first-to-die receive nothing on the surviving spouse’s death. The children of the first-to-die will have no standing to ask the court to change the surviving spouse’s will because they are not children of the surviving spouse. (Remember, one’s stepchildren who have not been adopted are not considered one’s children in the context of will variation claims in British Columbia.) A contract, sometimes called a mutual wills agreement, may be used to attempt to constrain the surviving spouse’s ability to change their will or disinherit the children of the first-to-die. However, as has been succinctly stated in the 2024 edition of Continuing Legal Education Society of British Columbia (CLEBC)’s British Columbia British Columbia Estate Planning and Wealth Preservation at §8.8, “the law surrounding mutual wills agreements is complex and enforcing the agreement may prove difficult; their use should be approached with caution.” We will discuss mutual will agreements more in a future article.
3. The surviving spouse might spend, give away, lose, or otherwise dispose of or be deprived of the assets before death. For example, the surviving spouse may give assets away to their children or add their subsequent spouse to the title to the assets as a joint tenant before their death. (This is a risk that many of the mutual will agreements we have seen fail to address.)
4. The surviving spouse may remarry or begin living in a marriage-like relationship, resulting in a common-law spousal relationship. This may result in the surviving spouse’s assets being subjected to family law claims (e.g. spousal property division, spousal support, child support) or will variation claims by the new spouse.

Generally, the risk of one or more of these outcomes grows throughout the remaining lifetime of the surviving spouse. As the years pass after the death of the first-to-die and the surviving spouse has, for example, expensive new habits or health problems, a falling out with the children of the first-to-die, a new spousal relationship, or a combination thereof, the risk grows.

As noted in a previous article, several strategies can be used, alone or in combination, to address these risks. The focus of this and an upcoming series of articles will provide some information about what may, at present, be the most robust method available to both reduce probate fees and manage the risk of potential will variation claims. This is the use of a trust created while one is alive. This is sometimes known as an inter vivos trust (inter vivos just being Latin for “while alive” or “between the living”).

Living Trusts (also known as Inter Vivos Trusts)

A trust created while one is alive can be used to pass one’s assets to one’s intended beneficiaries on one’s death in a manner similar to a will. In this way, an inter vivos trust can act as a substitute for a will, allowing one to use a similar document (i.e. a trust deed) to specify how one wants one’s assets to be distributed upon one’s death.

Assets held in an inter vivos trust can pass to (or be use to care for) one's intended beneficiaries outside of one’s estate upon one’s death. Such assets are usually not governed by one’s will and are, therefore, typically not subject to will variation claims by one’s dissatisfied spouse and/or children.

While using a trust as part of a blended family estate plan can be highly effective, it is also an excellent example of the old cliché about no lunches being free. In this case, some of the potential downsides are:

• There is a need to have a sufficient understanding of the relevant concepts to fully grasp the proposed plan and relevant considerations.
• There is a need to secure (and endure listening to) the appropriate professional advice and assistance from well-qualified tax and legal professionals. This is important both initially and on an ongoing basis to assist with proper administration. For example, vigilant record-keeping and annual tax filings for the trust are required. Periodic investment, tax and legal advice for the trustee are also prudent (e.g. to get general guidance and to keep abreast of changes in tax or trust law).
• The cost and hassle of setting up a trust can be significant (e.g. the expenses and work associated with drafting the trust deed and transferring assets into the trust). Routine administration costs can also be non-trivial (e.g. the cost of annual tax filings, record keeping, and routine professional advice).
• There is a need to pick suitable (competent, trustworthy, and impartial) trustees to step in once one dies or if one becomes incapacitated. Finding willing and reliable friends and family can be difficult. Surviving spouses and children are problematic choices due to the clear potential for conflicts and conflicts of interest. Professional trustees can be prohibitively expensive.
• There is a need to decide upon and thoroughly document what restrictions will be placed upon the use of assets held in the trust once one dies or is incapacitated.

The typical upsides of using an inter vivos trust as part of an estate plan are:

• There can be significantly lower (or no) probate fees on one’s death because assets are passed outside of one’s will.
• The risks posed by the potential for costly will variation claims by disgruntled spouses or children can be dramatically reduced. [1] This increases the chances that one’s intended beneficiaries will inherit what one intended as intended.
• The risk of one’s surviving spouse failing to pass one’s assets along to one’s intended beneficiaries (e.g. children from a previous relationship) can be reduced or eliminated.
• There can be more privacy surrounding one’s estate plan; probated wills become part of the public record; trust deeds can usually remain private.

Before using any trust, one should, with expert professional guidance, ensure a basic understanding of the fundamentals of trust law and the taxation of trusts and estates. One should also ensure that the terms of the trust are detailed, carefully considered, and thoroughly documented.

As explained at §6.7 in the CLEBC’s 2024 Edition of British Columbia Estate Planning and Wealth Preservation, “the importance of careful drafting [of a trust] cannot be over-emphasized. … There are three reasons why one must take particular care when drafting a trust deed:

1. Fundamentally, a trust is a conveyance of property. As such, the terms of the conveyance are fixed and unalterable, unless the governing trust deed provides otherwise.
2. The trust relationship is a fiduciary one requiring the trustee to meet the highest standard of conduct imposed at law. Consequently, common-law rules governing trusts tend to be very strict and narrow. Similarly, the existing Trustee Act provides little expansion from this common-law approach. As a result, if it is intended that a trustee be granted more liberal authorities and powers than those permitted under rigid trust law rules, the drafter must have a good understanding of the common law and statutory rules, and the governing trust deed must, from the outset, expressly allow for that kind of flexibility.
3. The mere form of a trust deed can create fundamental and irreversible tax problems under the Income Tax Act.

… A properly drafted trust deed should, within its four corners, address all possible aspects of asset administration and entitlement, whether presently known or entirely contingent and avoid creating fundamental tax problems. It should also contain sufficient flexibility to accommodate future changes in trust or tax law (for example, it may be appropriate to include powers to amend or resettle trust property) [emphasis added].”

In all estate planning, but especially when it comes to using trusts, it is critical to obtain the assistance of qualified tax and legal professionals. It is also a good idea to keep checking in with them regularly once a trust has been established. Regular professional advice can help ensure you remain well advised, your plan is up to date as the legal landscape changes, and the trust is being administered properly.

The landscape of trust law and the taxation of trusts and estates can be murky and dangerous terrain that one should only venture into with the assistance of those with the appropriate expertise. That said, the benefits of an inter vivos trust can, in the right circumstances, outweigh the cost and hassle. For example, if a person is living in a blended family and there is sufficient concern about the risks listed above under the heading “Some Risks of the Simple but Dangerous Plan,” an inter vivos trust may be the right tool for the job.

When a trust is appropriate, several different kinds of trusts can be used. We will discuss some of those options in more detail in some upcoming articles. For now, you can click here to see one of our previous articles titled “What is a Trust?” for a quick overview of the basic ideas underlying trusts.

By working with qualified professionals to proactively attend to the kinds of considerations addressed in this article, individuals can build a robust foundation for a well-executed estate plan that aligns with their overall goals and reduces the risk of leaving an unintentional legacy of expense, conflict, or outright harm. This can be a challenging process. It requires carefully considering the details of one’s assets, wishes, and goals. It also requires keen attention to one’s family structure and dynamics as well as the relevant legal and tax considerations.

Careful planning like this is always a worthwhile exercise. An ill-conceived estate plan (or, worse, the lack of a plan entirely) can have two primary undesirable outcomes: (1) significant expense, delay, confusion, and prolonged legal conflict for surviving family and beneficiaries, and (2) a few estate litigators get to purchase fancier toys and go on nicer holidays at the expense of your estate and family members. If you have any questions about estate planning involving blended families or any other estate planning or administration matters, we can be reached here.