Financial Planning Considerations For Second Marriages And Common-Law Couples

Money is often cited as a common source of disagreement between spouses. Spousal stress stemming from money matters can be challenging enough in a first marriage. Second marriages and other later life common-law relationships can make financial planning that much more difficult.

One of the biggest challenges for couples who come into a relationship with their own money, children, or expectations is determining the split of expenses. There is no “right” way to do things, so couples would be well advised to talk it through early.

Some split expenses equally, or possibly based upon their incomes. Others have their own personalized approaches, paying certain expenses separately, and contributing to other expenses together, based upon their own rules.

Common-Law Versus Married

Many later life relationships are common-law marriages as opposed to legal unions. This can make a difference in the obligations upon separation or death depending where you live.

British Columbia, Saskatchewan, Manitoba, Northwest Territories, and Nunavat all treat common-law couples the same as married couples in terms of property division when a relationship breaks down. Others allow common-law couples to maintain more financial independence.

Spousal and child support can still apply when a common-law relationship comes to an end, just like in a legal marriage.

Income Tax

The claiming of tax deductions and credits is generally the same for married and common-law spouses. Spousal tax credits, charitable donations, medical expenses, and child care expenses, for example, are all treated the same way.

The opportunity to contribute to spousal Registered Retirement Savings Plans (RRSPs) while working, and the ability to split eligible pension income in retirement, are also the same.

For income tax purposes, a couple is considered common-law after 12 months of cohabitation, though it may be different for family law purposes, and varies across the country.

An occasional mistake made by common-law couples is to file their taxes separately and to not disclose their common-law status. Sometimes, this can lead to the payment of certain benefits like the GST/HST credit or Guaranteed Income Supplement (GIS) pension to someone who should not otherwise be entitled. Often, though, filing tax returns together leads to tax savings.

Insurance Needs

Insurance needs are an important consideration in a second marriage, whether you are the primary breadwinner or not. Death and disability are the main risks to insure.

Life and disability insurance provide income replacement if someone dies, or is injured, ill, or otherwise unable to work due to disability. In addition to providing funds for a current spouse, an ex-spouse may be entitled to spousal or child support.

If you have insufficient insurance, your children, your current spouse, or your ex-spouse could experience financial difficulty if something happens to you.

If you do not provide for your ex-spouse adequately in the event you die, they may be able to sue your estate for compensation. This could occur if you are paying spousal support, but also if you have minor children, even if you are the spouse who is receiving child support. This is why separation agreements often require separating spouses to maintain life insurance policies payable to each other. Not taking this into account may reduce assets you otherwise expect to go to your current spouse or be held in trust for your minor children to be paid to them as adults.

The incremental cost of a 5- or 10-year term life insurance policy to cover a temporary life insurance need is usually not significant.

The cost of proper disability insurance, perhaps supplemented with critical illness coverage, can often be more significant. One reason is that the likelihood of experiencing a disability or developing a critical illness may be higher than the likelihood of dying, especially earlier in your career. Expensive insurance coverage often turns consumers off, but high insurance costs are usually indicative of higher risks as well and support why you need the protection in the first place.

Investment Planning

Combining risk tolerances can be difficult if one spouse is conservative and the other is aggressive. Trying to find a happy medium somewhere in between can be an investment solution that is much like other marital conflicts—benefitting from compromise. Investment risk tolerance assessments can help identify midpoint asset allocations for jointly held assets.

Managing your investments independently is an option that is not unreasonable and happens sometimes even with married high school sweethearts, let alone those who merge money later in life after developing their own money management habits.

For spouses who fully integrate their finances, it can be beneficial to look at their situation holistically. There may be a net family benefit to contributing to one spouse’s RRSP or pension over the others due to a higher tax bracket or a company match on contributions. It may be beneficial to use one spouse’s non-registered investments to contribute to the other’s RRSP or Tax-Free Savings Account (TFSA).

Spousal attribution, where investment income is attributed from one spouse to another and taxable to them, does not apply with RRSP and TFSA contributions (an exception is spousal RRSP withdrawals within two years of contributing). Attribution does apply when non-registered investments are used by one spouse to invest in the other lower income spouse’s name, so those with significant non-registered investments who wish to reallocate investment income may need to consider other solutions like spousal loans or family trusts.

Estate Planning

In the event of separation, beneficiary designations on RRSPs, TFSAs, pensions, and insurance do not automatically change. Divorce does not nullify an existing Will either, though marriage does invalidate a Will unless it is made in contemplation of marriage and states this explicitly.

Updating beneficiary designations and preparing new Wills, powers of attorney, personal directives, mandates, and similar estate documents is a must on a post-separation or divorce checklist.

There are certain assets, like tax-sheltered RRSPs, that may be a better type of asset to leave to a spouse or common-law partner to defer income tax instead of children if there is a choice of different assets to divvy up. RRSPs can be rolled over tax-deferred between registered accounts between spouses. TFSAs can also be transferred from a deceased spouse’s TFSA to a surviving spouse’s TFSA to maximize tax-free assets for the survivor.

A defined benefit (DB) pension may be payable to a spouse by default. Some DB pensions can be paid to minor or dependent children but may not be payable to adult children once the pension has begun (more flexibility exists before a DB pension starts).

Remember that the beneficiaries of your Will are notified and may receive a copy of the Will upon your death. One discreet way to leave money to a beneficiary is with a life insurance policy payable directly to them. Anything payable to your estate will be dealt with under the terms of your Will and everyone will become aware of it.

A home can be a major source of stress if it is not left to a surviving spouse. So, if you are in a second marriage and leaving your share of a home owned jointly as tenants in common to your children, be sure you include explicit terms in your Will about how it is to be dealt with in the event of your death. Common terms might include allowing a surviving spouse to stay in the home for a period before it is sold or giving them first right of refusal to buy the property at the appraised value. A joint first to die life insurance policy payable to the surviving spouse could be a good way to ensure funds are available to buy half the house from the children of the deceased, or simply to pay off a remaining mortgage.

Summary

This summary is hardly an exhaustive discussion of the intricacies of financial planning in blended families or later life relationships, but as an increasing share of Canadians become common-law, or divorce and remarry, it is important to consider the differences compared to planning financially in a first marriage.

Established money mindsets, children from other marriages, and support obligations can make certain decisions more challenging for new partners. This emphasizes the importance of collaborative and open discussion. There are legal and technical distinctions, but many of the same family financial considerations still apply.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.