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Advisors be warned: Diligent estate planning is required for common-law couples because of the complexity of their situations.
says Kevin Wark, managing partner of Integrated Estate Solutions in Toronto and author of The Essential Canadian Handbook of Estate Planning – Second Edition. And suddenly five or ten years have passed and no planning has gone as the relationship has evolved into a permanent arrangement.
Although federal Mr Wark says income tax law generally treats married couples and common-law couples similarly for tax purposes, and this is not necessarily the case in relation to the division of property on separation or death under provincial family law legislation.
“For example, in Ontario, there is no automatic entitlement to division of family assets upon separation or death for common-law partners, even though they may have been living together for more than 20 years,” he says.
Here are three key issues that financial advisors and planners should consider for their affected clients.
1. Death without a will or power of attorney
Updating will and power of attorney documents is critical for common-law partners who, otherwise, may find themselves disinherited without these legally binding documents.
Many common-law partners assume that when their partner dies, they, as the surviving partner, will automatically inherit assets under intestate rules—a specific county-level calculation that determines who will receive the deceased’s assets when there is intestate. But in some provinces, married couples and common-law couples aren’t seen as synonymous, which would leave common-law partners with nothing, says Wilmot George, vice president of tax, retirement and estate planning at CI Global Asset Management in Toronto. .
“Having a will is important if you want to support a common-law partner after death,” he says. “Married spouses and children often inherit under intestate rules, but depending on the county, common-law partners may not.”
Moreover, it can also produce unfavorable tax effects. For example, because a partner under common law is not considered a close relative for intestate purposes in some provinces, there may be cases where a child or other family member of the decedent inherits the estate, creating a potential tax problem.
When married couples or common-law partners inherit directly, the assets can pass to the surviving spouse or partner tax-exempt, but this is generally not the case with children or family members, Mr. George explains. The end result, he adds, is that the property faces immediate tax liability.
And who administers the estate of the deceased common-law partner in the absence of a will is another topic.
Since common-law partners may not be considered close relatives, Mr. George points out that the courts may not appoint the surviving spouse as the estate manager. He adds that the completion of this matter will reduce these risks in addition to the risks of real estate challenges from other family members.
Without full power of attorney documents, Mr. George says, another family member can be appointed to make financial and healthcare decisions.
2. Division of property
If a common law couple wants to own property, such as a house, it may make sense for them to own it jointly.
“If the relationship is long-term and it is clear they will stay together, joint ownership will allow ownership to pass to the surviving common-law partner automatically,” says Wark.
Holding an asset jointly also overrides the estate and, if it is a principal domicile, passes to the tax-exempt common-law partner.
Modern cohabitation agreements or wills are other options that would allow spouses to address issues of division of property upon separation or death, which can be useful when one partner owns the home or has significantly more financial resources than the other partner.
3. Designations of beneficiaries
Mr. George advises common law partners to ensure that their beneficiary designations are up to date for their registered accounts such as a tax-free savings account, registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). When this is done, the assets usually go directly to the beneficiary.
But in the case of separated common-law partners who intentionally continue to be beneficiaries, unintended tax consequences can arise. Unlike married persons who are separating, there is no opportunity for a tax-deferred rollover for separating common-law partners. Therefore, the tax bill for RRSPs and RRIFs will flow into the estate of the deceased.
Mr Wark also recommends naming a common-law partner as the beneficiary of any life insurance policy held by the other partner, as this money is paid tax-free to the beneficiary immediately upon death. He adds that the designation of an insurance beneficiary can be made irrevocably to protect the surviving common law partner.
Additional complications can arise if one or both partners are previously divorced or widowed and have children from their first marriage. There may be financial obligations to a former spouse or children which must also be taken into account in planning arrangements relating to the new partner.
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