Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
By Sarah Bull, CIM®, FCSI
Love is always better the second time around, as the old song goes. And Canadians seem to believe it: according to Statistics Canada, more than a quarter of adults in a couple relationship are in their second (or subsequent) marriage. Yet the reality is that new relationships later in life can be fraught with peril, especially from a financial perspective. Unlike most first-time marriages, second marriages tend to bring together people who already have established careers, assets and obligations, and that can make everything more complicated. If not addressed correctly, those issues can not only hurt your financial situation, but can also seriously undermine your relationship with a new partner – and quickly turn a second chance at love into a sour and disappointing experience.
As a wealth management advisor, I often help high-net-worth individuals prepare for new relationships, and the good news is that avoiding the financial pitfalls of second marriage is not that difficult – if both parties are committed to preparation, honesty and lots of communication. Here are five steps that, in my experience, are essential to “getting it right” the second time around:
- Go in with your eyes wide open
Love might well be blind, but you don’t have to be. Before they enter a second marriage, I always recommend that clients have an open, honest conversation about their financial situation and – crucially – how they plan to combine household assets. That typically means dividing assets into three buckets, which for convenience we can label “What’s mine is mine,” “What’s yours is yours,” and “This is what is ours.” Then, write whatever you decide into a domestic contract, such as a cohabitation agreement or a marriage contract. Having that written document is not just important if the relationship ends; it can also alleviate a lot of stress between partners and help the relationship work better.
- Have the cash-flow conversation
Second marriages tend to be more financially complicated than first ones. One partner might make substantially more money than the other. One partner might have children and the other doesn’t, or two sets of children might be coming together as a blended family, or one spouse’s kids might need more financial support than the other spouses. The question is, how are you going to jointly manage and contribute to the cash flow needed to meet these spending needs? Generally, I recommend couples open a joint account to which both spouses contribute equally, and then all expenses that they have agreed to share come out of this account. Meanwhile, any expenses that accrue from the prior marriage (such as alimony or child support) come out of individual accounts. The key here is full financial disclosure – and writing what you agree upon into a domestic contract, so everyone knows where they stand.
- Revisit and revise your estate plan
When entering a second marriage, it is important to have a good sense of estate planning and insurance needs. In first marriages, spouses generally leave their estates to one another, with division among the children after both spouses’ deaths. In second marriages, however, a spouse with children often has to figure out how to care for the new spouse while also protecting the estate for the kids. One option is to leave assets to the second spouse and buy life insurance naming the children as beneficiaries, but there are myriad other ways to approach this challenge. All of them, however, requires planning, and it is best to do so before entering a new marriage.
- Update your beneficiaries
In the event of your death, the assets in your registered retirement savings plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) will pass on to your
named beneficiary. If you had started one of these savings vehicles before or during your first marriage, that beneficiary was probably your first spouse. Often, however, people neglect to change their beneficiary when a marriage ends. I have seen many cases where people in second marriages are unwittingly still leaving their RRSP and TFSA assets to their ex-spouses. So, remember to go through each of those accounts and do the (minimal) paperwork required to ensure your assets will be passed along to the intended parties.
- Revisit your divorce agreement
Divorces are stressful events, and they can get messy. So can divorce agreements, and it is quite common for people to forget all of the compromises and stipulations that they may contain. When contemplating a second marriage, however, those details can be important. For instance, some agreements might stipulate that spousal support ends when the recipient cohabits with someone; others might place restrictions on where you can live, especially if you have children. My advice: revisit your divorce agreement before formalizing a new relationship, and make sure your second marriage will not put you offside of the conditions of your settlement.