AN INTRODUCTION TO ESTATE PLANNING – PART 3.1
When people get around to making a will, they often think of their family first. If they are married, they will think of their spouse first. Some assets can be inherited directly, outside of the will. Here I am thinking of joint bank accounts where both you and your spouse are named, or registered plans like RRSPs or TFSAs, where the spouse can be named a beneficiary or successor holder. For assets that cannot be passed on outside of the will, for the most part one spouse will typically name the other spouse the beneficiary of all the assets that are to be distributed through the will, such as individually owned financial accounts.
But what happens when there are minor children and both spouses die at the same time? A carefully prepared will can take that possibility into account.
If you have minor children, one of the most important reasons to create a will is so that you can name a guardian for your children. You cannot simply assume that your brother and sister-in-law will automatically take care of your kids if you haven’t made formal arrangements in advance. The court may have other ideas in mind that have nothing to do with your ideas. There are several factors to consider:
Are your children’s potential guardians’ parenting skills up to the task? Is their relationship capable of thriving with this extra responsibility of caring for an additional child or children? How old are they? On this last point, you may be considering your own parents as guardians, but if your children are young, i.e., the age of majority is many years away, and your parents are older and lacking in the required energy, you may want to consider someone else.
Can the children stay at the same school? Can they all live together? For several years, my wife and I lived in Japan. Our expectation was that ultimately, our children would settle and make their lives in Canada, so we had in our will that my relatives in British Columbia would be the guardians. That would most definitely mean they would need to be resettled. There would be no staying in the same school. Furthermore, we had four children which, combined with the children that the guardian family had, would have been quite difficult for them to manage. Frankly, we never even thought about the possibility of our children being split up. But that doesn’t mean that you shouldn’t consider these factors.
Have you provided adequate insurance, or do you have the assets available for the financial burden of your children’s care? If not, do the potential guardians have adequate means? Depending on the household, these costs can vary significantly, but according to a 2015 article in Moneysense magazine, it costs a little over $13,000 per year to raise a child from infancy to age 18. Adjusting for inflation, let’s suggest $15,000 per year in 2020. Let’s further imagine that you have two children, one aged 12 and the other 9. For the 12-year-old, that means your children’s guardian would need about $85,000 for the next six years. For the 9-year-old, an additional $123,000 might be needed. Do you have at least $208,000 available to support the costs of raising your children? Probably not a lot of young parents do, unless they have life insurance.
Of course, age 18 only gets your children through high school. What about post-secondary education? That is an additional reservoir of money that you need to consider, somewhere between $10,000 to $20,000+ for a year at university, depending on whether they live at home. Have you been saving for that part of their lives through a Registered Education Savings Plan (RESP)? If the 9-year-old stays with his guardians for 4 years of university, something like $32,000 is needed, while $65,000 might be needed if the 12-year-old will begin studying away from home in six years. Educational expenses of $97,000 brings the total to $305,000. Once again, adequate life insurance needs to be seriously considered as part of your estate plan.
If you have multiple children and the potential guardians have multiple children, can they house your children together? How much disruption will your children bring? Here I am referring to the home that they will be going to. What if your four children are going to a family that already has three children? It’s quite possible that in order to accommodate your kids, your guardians will need to move to a new home.
This is a challenging issue, to be sure. What if your household is vegan and your potential guardians raise beef cattle? What if you and your spouse come from a long line of Conservative entrepreneurs while the potential guardians of your children are members of the NDP who are involved in organized labour. What if you are indifferent to ideas of religion or spirituality but your potential guardians are uniform-wearing leaders within the Salvation Army? Perhaps it is unlikely that these sorts of connections would exist but do you agree on every point with your friends and relatives? Ultimately, you must decide on what is most important for you in considering who you would ask to raise your children if you die.
About a decade ago, a movie came out starring Katherine Heigl and Josh Duhamel, called Life as We Know It. The premise of the movie was that two single adults became caregivers for the daughter of their mutual best friends who had died in a car accident. As far as I can remember, they were not aware of their responsibilities before this sad event occurred. That should not happen. If you want to name someone as guardian, make sure that they agree, and it’s probably good to give them some time to think about it.
It’s difficult enough to choose one guardian (or guardian couple), but it’s also a good idea to name an alternate in case the first-named guardian(s) are unable or unwilling to take on that role.
In my next blog post on Estate Planning I will discuss Children: Trusts and RESPs.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.