One couple’s story
Howard talks about a couple she’s familiar with but has changed their names. ‘Sarah’ is in her 40s with a 10-year-old child. She started a relationship a few years ago with ‘Jeff,’ a successful, self-employed artist who has no children. They are the same age.
Sarah runs a business and has two corporations (an operating company and a holding company to hold assets and help minimize tax consequences when she winds down the operating company). She has maxed out her registered savings plans (RRSP, TFSA) as well as her daughter’s registered education savings plan.
She also has a life insurance policy inside her corporation to ensure taxes are paid on any capital gains owed inside her holding company. And her daughter has an insurance policy that includes a savings component. “Much of our planning was done with the end goal of taking care of her daughter should her mother die prematurely,” Howard says.
When Sarah and Jeff decided to live together, they talked about a cohabitation agreement — and then drew one up with a lawyer and signed it. Sarah is exploring having Jeff pay the premiums on a life insurance policy that would ensure he could afford to keep the house if she died before he did.
It’s a big leap. Before they started their relationship, Sarah planned for her daughter to inherit everything. The insurance money means Sarah’s daughter would receive a cash inheritance to offset the fact that Jeff will be taking the house.
Because her daughter is still financially dependent, Sarah’s plan to name a trustee and have her RRSP go to her daughter remains in place. But once the daughter becomes an adult, Sarah is prepared to name Jeff as the RRSP beneficiary for both tax purposes and for their joint retirement planning.
“If Jeff is holding himself out in a father role in the child’s life, that can change everything for common-law couples,” says Howard. “The way to address this is to have a cohabitation agreement … outlining the understanding within the relationship and to protect your assets in the event of a relationship breakdown.”
Cohabitation agreements are critical
Howard says it’s a red flag if you and a partner can’t start a conversation about what your finances will be like when you’re a committed couple.
If a dialogue about writing a prenup leads to conflict because one person has kids and the other doesn’t or one person is a better saver or retirement planner, she says those divisions will only get worse if they’re not dealt with.
“Tensions don’t mean it’s the end of the relationship,” Howard says. “It means the other person has to be open to learning.” Through that lens, cohab or prenup agreements are a starting point for a couple to talk about how money impacts the things that are important to them.
The wills can get complex
When a couple that’s formed a blended family needs to write their wills, Howard says it starts with a familiar first step: Talk to each other.
“It’s better to have the conversations about your plans before going to a lawyer, because the lawyer is more expensive,” she says. “You have to decide how you want things distributed when the final of your two deaths occurs.”
That can be complicated for older people who’ve worked a long time, had children, been divorced and accumulated assets. “And then there’s the trust piece,” she says. “I need to trust that my partner is going to do the right thing if I go first, even though I have insurance policies in place to address the needs of my family.”