Financial planning for your second marriage

Call Canadians lovebirds: one in five who’s divorced, separated, or widowed is starting over again in a new relationship, according to a recent TD survey. But before heading off on that honeymoon, those entering second marriages or common-law relationships may well want to do some financial planning first.

For proof of the importance of having the Money Talk, consider some of the ways things can go seriously awry without it.

Financial speaker and author Jim Yi recalls a woman whom we’ll call Judy whose ex-husband died. The two never got formally divorced, even though he was living with someone else in a common-law relationship when he passed away. Judy’s kids are the beneficiary on his life insurance, while she was listed as the beneficiary on his pension plan and RRSPs. The man’s common-law spouse, meanwhile, claimed that she should have rights to his pension plan. Although details are still being ironed out, the common-law spouse may not get a cent.

“In my experience, it is critical for those are going into second marriages or even common law [relationships] to think about wills, estate planning, and beneficiary designations,” Yih says. “This is even more critical when there are kids from the first marriage."

Renewing wills is a must, as they become null and void upon entering a second marriage. Changing beneficiaries on registered plans is also a key step, says Kathryn Jankowski, vice president and financial divorce specialist at T.E. Wealth.

“RRSPs roll over to a spouse tax-free, but they are taxable on second death,” Jankowski says, “Perhaps you can negotiate, with your spouse, to leave them the RRSP assets in lieu of other assets moving to your children for the purpose of increased tax efficiency.”

Consider the after-tax effect of your estate planning strategy, too.

“If you do leave your registered plans to your kids, then your kids may get the full amount, depending on how it’s written in your will, and your estate will pay the tax on the de-registration of the asset--which can be as high as 46.41 per cent," she says.

Prenuptial agreements, aka marriage contracts, seem to be becoming more common, says Marian G. Gage, collaborative family lawyer and accredited family mediator.

“With a marriage contract, both parties are essentially setting out their expectations and agreeing to these so that there will be less conflict, less to argue about, in the event that they separate,” Gage says.

Marriage contracts are also very useful as part of peoples’ estate planning. "The concern isn’t always what will happen if people separate, but ‘how can we minimize conflict with our beneficiaries and the possibility of estate litigation if one of us dies?"

“In a second marriage it may be more important to a person to protect the assets he or she already has from a situation where the value of those or the increased value of those would be shared on separation or death,” she adds.

Record-keeping can help make things smoother if things go south, with some experts suggesting you list of all your assets and debts on the day of your second marriage, with supporting documentation for each.

“A prenuptial agreement can not only protect any children or other family members you may have had from a previous relationship but also it can bring peace of mind to the new relationship if you are not financially on the same footing,” Jankowski says.

If you’re buying a principal residence with your new partner, it’s important to understand the way it can be owned. Joint tenancy comes with rights of survivorship, while with “tenants in common”, each owner owns a portion of the property, which forms part of his or her estate upon death.

“A principal residence is treated differently than other assets and you might want to consider owning it as tenants in common, based on the percentage of equity that you have put into the property, rather than as joint tenants,” Jankowski says.

If you do own on a percentage basis, your newly drafted will should reflect your wishes related to what happens to this asset when you die.

Child and spousal support are other issues that need to be addressed.

If your new partner has children who are not yet adults, you may be vulnerable to a child-support claim in the future, Gage notes.

“People may have different expectations around spousal support in a second marriage,” Gage says. “In a first marriage, where a couple is just starting out, with no children and careers not yet established, it’s more difficult to come to agreements about what would be a reasonable and balanced way to deal with financial support in the event of a breakdown in the relationship.

“In a second marriage, it’s more likely that people are coming from a place where each has an established stream of income and is financially independent. T]hey may have no intention of having children together and it may be reasonable for them to expect that if the marriage ends they will maintain their financial independence from each other.”

Once again, it all comes down to open and honest conversations.

“I find it’s very important … for spouses to talk to each other about their expectations,” Gage says. “What do they expect to share with each other? What do they want to leave to other beneficiaries? What do they feel they should not have to share?

Just remember: The conversation will be difficult for any couple, but it's better to address the tough subjects now rather than when your relationship has dissolved.