Estate Planning and the Splitting of Heirs

It is often assumed that wealthy Canadians have it all figured out when passing money from one generation to the next. After all, financial institutions are filled with specialists who do nothing but figure out the best way to maximize the amount of the transition and keep it out of government hands. However, this is not the case. A recent RBC survey found that most high net worth Canadians are woefully unprepared to transfer their inheritance, with fewer than one in four having a full plan in place.

Far too many Canadians don’t take the time to actually put together that wealth transition plan from one generation to the next. More than half of high-net-worth families intend to pass on all their wealth to their heirs but are not doing a lot of pre-planning. Here are a few strategies they should consider.

Concepts

Start with a will – How can you best balance the relationship-based dynamics of an estate plan with the transactional elements, while maintaining harmony within the family? Experts say it’s less about what you give your heirs, and more about how you handle the estate and their expectations.

The process begins with making sure you have a will and it’s been updated so your wishes are communicated as needed. Perhaps this should be at the start of any to-do list for wealthy or not so wealthy Canadians. You would be amazed at the number of people in Canada who do not have a will. Seriously in today’s day and age. Powers of Attorney should be the identical twin to the will.

Estate plans should be revisited with families together once a year. They should sit down and spend three minutes looking at each other and say: Do we need to change anything this year? Has anyone been married or divorced or had children? Families see estate planning as a taboo subject, but shouldn’t. Remember you aren’t doing the estate planning for you. You’re doing it for the family. You’re trying to make their lives a lot easier when you aren’t here to help them anymore.

Family trusts – Trusts are a key pillar of many estate plans. They allow the older generation to dictate how the money is passed on, to whom and when. A lot of people are setting up trusts for postponing when the heirs are receiving money and graduating the release of money. Trusts also avoid probate taxes, and, unlike a will, which becomes a public document upon death, they allow a family’s wealth to remain secret. They also help families prevent legal battles between heirs.

Insurance – Even the most well-designed estate plan will likely result in taxes that can reduce the value of the estate upon death. Covering large capital gains on the sale of investments or real estate can be done by taking out insurance policies that provide a sizable payout upon the death of the insured individual. Most importantly, the payout is tax-free to the beneficiaries. That is one thing that government hasn’t messed with: The proceeds of a life insurance policy are tax free and the buildup within a life insurance policy is tax sheltered.

Estate freeze – The government allows a one-time capital-gains exemption of a little more than $800,000 for small business owners when a business is sold. But more substantial family businesses will likely face a sizable capital gains obligation upon the death of the owner and his or her spouse. One way to minimize that future tax hit is to institute an estate freeze is to basically freeze the business owner’s value in the business by restructuring the share ownership so that the future growth starts to accrue to the benefit of their children.

Individual pension plan – Another potential benefit for incorporated business owners is the ability to create an Individual Pension Plan (IPP). Not only does an IPP act as a “enhanced RRSP,” providing a defined-benefit-type pension payout, the funds can be shared by other family members in the business. The IPP allows for the creation of a pool of assets that can be used by different generations where you can have a surplus in that pool be transitioned to another annuitant in that plan.

Joint ownership of assets – This strategy makes sense at first blush but may carry some long-term negatives depending on family dynamics. Selling part of an asset, such as a family cottage, to a family member may still result in capital gains down the road and, more importantly, could result in family strife. For example, say parents make the partial sale of a cherished family asset to one daughter. By law, that daughter becomes the owner, and if she doesn’t like her siblings or feels greedy, she can just say that Mom left this to me through this joint ownership.

Strategies

Modern families – Today’s estate plans are also more complicated because of the modern family. That can include second and third marriages as well as stepchildren. Trusts are a way to divide up assets in more detail and over specific time periods. With a will you say who gets what. With a trust, you say who gets what, when and how. When you are creating a trust account you’re looking at a blank sheet of paper. You can get creative with them.

Incentive trusts, where the money is based on a specific achievement such as obtaining a degree, kicking a harmful habit, or matching income earned in a given year are a growing strategy. That way the children stay motivated to continuously improve themselves, instead of relying on an inheritance to fund their lifestyle.

The assets also don’t have to be split equally among children. For example, parents may wish to give a child with a long-term disability more of the assets or provide more to a child who is a single mother. Caution is advised though as this could cause a rift between siblings if the decision isn’t explained.

Giving back outside the family – More families are also leaving their money to charities, as well as their children. Some parents plan to give most of theirwealth to charity instead of just their family. This is about more than just passing down wealth. It’s about what you want to do with your wealth. It’s about building on a legacy, values, skills, and capabilities.

Many parents want their kids to understand and appreciate wealth should be shared and/or used to further a business or organizationFor example, some parents may want the inheritance money to be used to further a family legacy, whether it’s a business or maybe a charitable organization. A trust could therefore be set up with conditions that need to be met before the money is accessed.

Wealth inheritance has taken on new meaning beyond passing on material wealth and financial planning. For example, some people also want to leave a legacy of spiritual wealth, which includes a strong work ethic, the importance of education and family values. Parents start the inheritance discussion with their kids at a young age, making sure the expectations are clear. And, if those expectations change over time, they should be regularly communicated to the beneficiaries. That also means having clear boundaries about what can and cannot be transferred.

Be transparent – The key to keeping the peace with estate planning is clearly communicating your wishes – and not keeping any secrets. The worst is where it comes out that something has been hidden. That usually is a recipe for disaster. Often, it comes down to simple communication.

Parents should communicate the passage of wealth as a duty for the next generation to properly maintain. It’s not about who gets the house, the car, or the art collection. It’s coming at it from the viewpoint that your kids are really stewards of your wealth for future generations. They aren’t passing on ownership, but instead a sense of responsibility.

Splitting heirs does not have to be ad hoc, and with careful planning, you can achieve the desired allocation, transference of wishes, and control over estate wealth transition. Contentious and potential conflicts can be anticipated and accounted for if families engage in the estate conversation. As always, prudent thought and preparation go a long way to addressing estate issues.

Are you ready to review your estate plan? Contact us today at 587-349-2455 and one of our Exceedia Consulting Ltd advisors can assist you.

Article by Steve Bentley, CFP on LinkedIn

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