Control the future, write your will

(August 2007) Let’s face it: No one likes to talk about mortality issues. This may explain why so few Canadians actually have wills. Writing a will is essentially conceding that you’re going to die. While we all know this to be true, it doesn’t make the process any easier.

Yet, clients need to understand that writing a will is crucial for anybody who wants to ensure that their legacy, the part of them that lives on, is left to the right people in the right way. Not writing a will is tantamount to taking a losing situation (your death) and carrying it over as your legacy, which will not have you as its author.

Instead the government, who knows virtually nothing about your life, will determine how you are remembered by those you care about. Your hopes, aspirations, friendships, goals, values, and history are ignored in this process. Your family will have to rely on very arbitrary government equations to figure out what you left to them.

As an advisor, how do you get the ball rolling to ensure this doesn’t happen to your clients? First, you need to broach the subject and get them thinking about wills and what they want their legacy to be.

Why not approach the talk this way? Simply ask clients if they have a will. If the client says no and looks uncomfortable, emphasize you are simply helping them to think about this legacy.

Colleen Bradley, president of Planned Giving Solutions in Toronto, points out that a will is the only way to ensure that a client’s true wishes are fulfilled. While clients can get squeamish about the unknown, they likely do have very specific intentions that they would like to see carried out.

“Basically wills are a game of ‘what if’ and ‘what happens,’ ” she says.

In that vein, ask open-ended questions. “What happens to your children if you and your spouse die?” Or “will your assets go to the people you intended?” You’ll hear more than a few silent pauses, which means your efforts to get clients thinking are probably having an effect. Let the pauses last as long as they need to — you’re not trying to convince your client that they need a will, you want them to think about what they want for their loved ones after they pass on.

Their legacy is their own, and only they can conceptualize what it is they want to happen. Once they know this, your job is to explain how an estate plan, with a will as their key tool, can make that vision a reality.

Once your client has a vision of what they want, have them outline their goals and what they would like their legacy to look like. To emphasize how effective estate planning plays a role, you might want to start off by describing the simplest scenario of what happens if they don’t write a will and do nothing.

Dying without a will means the government will decide how to distribute your client’s estate, which may, but more likely will not, fit with their intentions. The government determines asset distribution by a specific formula.

For example, in Ontario, if your client dies and leaves behind a spouse but no children, the spouse receives the entire estate. If they have a spouse and children, the spouse receives the first $200,000 of the estate plus 1/3 of the remaining balance, and the children receive the remaining 2/3 of the estate.

On the surface this might seem straightforward, and given the circumstances of no written instructions it would appear to be a reasonable “cookie-cutter” template for the average Canadian, but the equation will likely not sit well with most clients.

It’s likely your client is not the average Canadian citizen. They may have wealthy children who don’t need financial help, but may have a niece, nephew or sibling that does. They may be close with one child and estranged from another. They may have planned to leave all or part of their wealth to charities they cared deeply about. None of these situations or variations will be accounted for.

Worse still, a client’s failure to write a will could cause protracted estate battles, doing irreversible harm to the relationships of family and friends.

When you put things into this kind of perspective for clients, they do see the light, Bradley notes. “Your will controls the future after you die.”

Once you’ve convinced clients to proceed with a will, it’s not simply a matter of turning them over to a lawyer to draft one up. For starters, you can help clients to understand what happens to their assets after they die.

The government and creditors (if applicable) are first in line. Chances are your client is likely keen to keep their piece of the estate to a minimum.

The government in particular gets an especially large chunk of the estate. In some cases the payoff to the government can be huge. Bradley points out that the government assesses the financial assets of an estate as income, and the value of most estates pushes the deceased person’s income into the highest tax bracket, ensuring that all income, including hard assets and capital gains are taxed at the highest possible rates.

To put this impact into context, consider an investment portfolio that your client wishes to have dispersed to his beneficiaries. If the capital gains on the portfolio weigh in around $200,000, your client will be required to pay nearly a quarter of that, $50,000 to the government, regardless of what their income was while they were alive.

As an advisor you can demonstrate value to your client by showing how a properly set up will and estate plan can reduce these tax burdens and creditor payments. This will allow clients to understand what their real transfer of wealth to beneficiaries will be, and will give them a better sense of what their beneficiaries will actually receive.

When coming up with an estate planning strategy, Doug Carroll, a lawyer and head of estate planning at Empire Life, says it’s best to involve a group of professionals.

“What you need is a coordinated approach where the life broker, lawyer, accountants and the investment advisor all coordinate their activities so that everyone can use their expertise to make sure that the sum is greater than all of their parts,” Carroll says.

For example, Carroll says that lawyers understand what the legal implications of a life insurance policy are, but likely lack the knowledge of why the policy was set up or how it fits into their client’s long-term estate plan. A financial planner with knowledge of insurance is much better suited to select an appropriate insurance policy based on the client’s asset mix and estate goals.

On the flip side, Carroll says that he’s dealt with a lot of insurance brokers who have set up estate plans anchored around insurance policies with little regard for the legal ramifications.

“An insurance policy is like a great big sledgehammer, it can do a lot of things but it’s not an intricate tool where you can lay out detailed terms as to how things can be managed. Use a will to spell out those detailed terms.” In particular, he says, life insurance agents counselling clients when it comes to naming trustees for minor beneficiaries is “one of my great pet peeves.”

He says often there are no instructions as to how the trustee is supposed to manage assets for the children. “There are no instructions about how that person is supposed to manage those assets. The person who does it, the trustee, has to bear in mind that their role is a legal responsibility. You can’t just dip into those trust funds and use them willy-nilly.”

In many cases, as soon as the minor turns 18, all of the assets are theirs to do with as they please. He says he advises clients with insurance to develop a detailed and coordinated plan to delay distribution of assets and insurance proceeds once the beneficiaries are much older.

Carroll’s example also highlights the importance of having your clients pick responsible and competent people to serve important estate functions, such as trustees and executors.

Although an executor’s role sounds simple — this person manages the affairs of the deceased’s estate. In reality, however, it’s a very difficult job that few people are suited for.

Bradley says a lot of will-writers neglect to address simple steps in the process — some don’t even ask their would-be executor if they would like the job. It’s an extremely important step because there’s a good chance their first choice will refuse. After all, executors need to deal with banks, family members, lawyers and advisors to coordinate the estate’s dissolution, and the process occurs during a period where many of the stakeholders are emotionally vulnerable.

Who in their right mind wants to referee the situation where a half-million-dollar cottage in the Muskokas is willed to a group of siblings, only half of whom want to sell the property? These types of squabbles are not uncommon.

As well, if the cottage is willed to one sibling and estate assets are willed to another, the second could be left with nothing since the assets must first be used to pay capital gains taxes on the cottage — a deemed disposition — before any remaining capital is distributed to heirs.

Clients need to keep in mind that if a family member or close friend is chosen as an executor, they will likely also be grieving, making it more difficult to apply impartiality. What if part of that Muskoka cottage is willed to them? Can they make an impartial decision if they want to still be able to visit the cottage? All possible scenarios need to be considered in this game of ‘what if’ and ‘what happens.’

If a client can’t think of anybody whom they feel has the judgment and impartiality to serve as an executor, Bradley says it’s good to consider hiring a trust company. Trust companies have no emotional attachment to the situation and they have professionals with experience in executing estates.

Another client concern is how much a will costs. Carroll says you shouldn’t let a client’s fear of legal fees deter them from drafting an effective will. He says a lawyer’s services for wills are generally competitive given the amount of work they do. As well, he says the alternatives, will kits for example, can yield ambiguous results.

“Public perception is that wills are a commodity. Do-it-yourself will kits have made it so lawyers really can’t charge what they could be charging,” he says.

He also points out that the lawyer route is the best way to avoid legal loopholes or omissions that can undermine the estate plan and ensure the client’s wishes are carried out.

Filed by Mark Noble Advisor.ca, mark.noble@advisor.rogers.com

(08/01/07)