Marriage & Common-Law: Pt. 2
Join us as we continue our in-depth look at major milestones in life and how to navigate them. Today we’ll finish off our look at marriage and common-law by looking at ways to protect your household and finally, what happens in the unfortunate situations when a relationship breaks down.
Now, these are not the most exciting or uplifting topics, but they are vital to include in your ever changing financial plan. Having these protective strategies in place and having the knowledge on how to handle these situations will definitely come in helpful to you or someone close if a situation arises.
Protecting The Finances of Your Family
So start by looking at ways to protect the finances of your household. No one doubts that life can be difficult – unless of course you the child of a billionaire – but for most of us, taking steps to protect your household’s finances is key to the success of any financial plan. There are many ways to do this – some ranging from being fairly easy to challenging to put in place.
Basically, you want to put up as many protective walls as possible. So here are a range of different recommendations that start from easiest to most tedious to put in place. As always, if you need more guidance on these topics it’s recommended to speak to a professional.
Set Beneficiaries and Successors
So the easiest way to protect your finances is to ensure that you have selected your beneficiaries and successors on all registered products – including TFSA, RRSPs, Pensions, and more. These are the people that you have designated to receive the funds if you pass away.
You would be surprised how many households have not done this, have outdated information or simply have it listed as to the estate. Not having anyone listed can lead to a funds being stuck in an estate after death or being subject to unnecessary taxation and probate.
Listing a spouse also has unique benefits that can further avoid taxation.
So let’s look at a real example, what happens when a person passes away with a TFSA? If there are no beneficiaries listed or the estate is listed as beneficiary, the funds will cease being a TFSA and usually added to the estate. We’ll talk more about this situation a future episode, but this become tricky and depending on the situation would likely be subject to probate fees – which can be very expensive. Furthermore, any returns after death would be taxable under the estate.
Now, if a beneficiary was listed – these funds would bypass the estate and be given to the recipient listed with taxes chargeable to the beneficiary for any returns after the holder passed away. Now if a spouse is listed, there is an additional option to move the deceased’s TFSA into the spouse’s TFSA – this is called an exempt contribution and can even be done if the spouse has no contribution room.
For RRSPs, generally the full value of the RRSP at death is taxable in the deceased’s terminal taxes and after taxes are paid – is payable to the beneficiary. However, there is a special spousal rollover clause that allows the RRSPs to be rolled into the spouse’s RRSP or similar product and this simple set-up could avoid a very large tax bill. The easiest way of doing this is to list them on the RRSP but they can also be noted in the will.
Use Joint Accounts
Another way to protect your finances is through joint accounts. Having a joint account designated as rights of survivorship will simply shift the ownership of the funds to surviving account holder. Again, this allows one to by-pass an estate and allow easy access to funds. Care must be made as all joint holders have full access to the funds and I’ve unfortunately witnessed the abuse of joint accounts
Next up in ways to protect your household is through insurance. Now this is a massive topic, so I’m just going to cover some of the key points.
The main purpose of life insurance is to provide funds to your family to pay off existing responsibilities and provide ongoing replacement income. Disability insurance on the other hand provides a stream of income if you’re ever disabled usually up to 75% of what you were earning before.
There’s two major categories of life insurance – Term and whole life insurance. Term life insurance lasts for a specific time period while whole life insurance means that you’re insured for life.
Term insurance is typically the cheapest of the two and is best used to provide funding for concerns that are not permanent – such as having amount that can pay off a mortgage or provide ongoing income while a child is a minor.
To pay for the insurance you have to pay a regular premium and you’re listed beneficiaries will receive the listed proceeds. These proceeds will also usually be tax free and avoid estate proceedings.
Not everyone needs to have insurance, but if you do its recommended that you speak to a professional or use an insurance needs calculator.
Wills, POAs, and More
Moving on, the last way that we’re going to look at protecting your household is through various legal documents.
The first is called a power of attorney and what this does is allows you to designate a substitute decision maker to make choices that affect your property. So for example, if you’re injured or even just away and unable to act the attorney can pay for your expenses, make investment decisions, and perform other duties that benefit you. An important detail is that POAs are only valid if the grantor is still alive.
Care of course must be made when with whom you pick to manage your POA. In some rare and unfortunate cases, the attorney may abuse their abilities and commit fraud. Thankfully that doesn’t happen too frequently though.
In many cases couples will set up mirror POAs that name each other as attorneys. This allows a partner to easily act for their spouse if they are unable to. It’s also possible to list another individual as a contingent in case the other attorney passes away.
POAs can be set-up by a law firm or they can in many cases be set-up at a financial institution to cover the property held there.
There’s also another type of POA called POA for care that allows you to make decisions on the lifestyle choices that the grantor receives – such as living arrangements, food, and clothing.
Another valuable way to protect you household is through the usage of wills. They allow an individual to express their wishes at time of death – most commonly how property is distributed, if there are any special income tax elections, and other affairs. If someone dies without a will then they are deemed to die interstate and are subject to provincial rules of how assets are disbursed.
These are all topics that we’ll discuss more in our episode on what happens when we pass away.
Wills can be extremely valuable for those that have property that goes through an estate and when you have dependents. The wishes in your will also need to meet several requirements and in some cases wills to be modified or even invalidated. An important consideration is that you may want to set it up in a way that avoids conflict.
Having a will also allows a family to state other final wishes like whom the temporary guardian of a child will be or if any donations will be made.
The best way to put a will together is through a lawyer but there are also high-quality templates that can be used. Holograph wills are handwritten and usually without witnesses, so these should be avoided as they are easier to challenge.
Marriage or Common-Law Relationship Break Down
And then, moving on to the final part of today’s episode, let’s look at what happens in the unfortunate cases where a relationship breaks down. I genuinely hope that this never happens to you any of you lovely listeners but for this is usually an extremely confusing and emotional process. Understanding the foundations of how it works can be very beneficial knowledge to have.
The rules are very different for those that married and those that are common-law. You can check out the last episode for a primer on what the differences between the two are.
Generally, those that are married typically have a lot more rules to abide by. For example, the whole divorce process is only a thing for those that are married. Also common-law relationships will also often not require a division of property or spousal support (however, this differs from province to province).
The rules also vary heavily from province to province and even case by case. There’s also a trend where more rules are being implemented to those that are common-law.
So, the overall processes can be broken down into three major components – how property is divided, child support and finally, spousal support.
Division of Property
Of the three, the division of property can be one of the most contentious areas that is difficult and extremely emotional to navigate.
When I was doing some back-end research on this topic, I noticed that the Federal Government’s page on property division has a special escape button that redirects back to Google if clicked. This illustrates how difficult this process can be.
The way that this property is divided varies heavily from province to province, but usually involves the splitting of joint assets. To calculate this, usually two dates are used to determine which assets are joint and how much they are valued. The first date is typically deemed to be the beginning of when assets are tracked – such as date of marriage. The second date is when the relationship is deemed to have been ceased – such as the separation date. The dates that are used vary from province to province.
Often joint assets will include those added after the first date but in many cases assets that were brought into the marriage do not need to be count. However, any increase in assets brought into the relationship usually are included – eg. like an investment fund and even CPP credits.
Every province also has assets that are usually excluded. For example, in Ontario inheritances, life insurance payouts, lawsuit proceeds, and other assets are usually excluded if they can clearly be proven as one’s property.
Special rules apply to the matrimonial property – such as a home that the couple lived in – but can also include cottages, boats, and more. These properties are typically always divided 50/50.
Once all assets are reported, each partner will usually be allocated 50% of the total value of joint assets. The way that these assets are split and transferred will be based on the provincial rules.
The next big area is child support – the basic idea is that usually the non-caregiving spouse will have to make regular payments to help support the child and it’s lifestyle. Usually these payments have to be made until the child turns 18 or until they finish their undergrad.
The final area is spousal support – this is a regular payment made from one ex-spouse to the other. Often these payments will be from the higher earning spouse to the lower earning spouse and are based around the details of the relationship – including if one partner took time out of their career to raise a child, if they have specific financial needs, and more. The terms are usually set by either a separation agreement or through a court order.
Of these two support payments, the payer can claim spousal support on their taxes as a tax deduction but not child support. This deduction acts just like an RRSP contribution as they it reduces their taxable income. On the other hand, the receiver needs to claim spousal support as income.
One of the strategies that can be put in place a domestic contract also known as a prenup. These are documents that outline what happens if a relationship breaks down.
The creation of a prenup needs to be done with care and it’s recommended that both partners seek independent legal advice in their creation. The terms can also be over turned in courts in some cases.