How to tackle 3 wealth-transfer challenges

Over the coming decades, it’s estimated that approximately $400 billion of wealth and assets will be passed down from one generation to the next. However, the majority of Canadians are not prepared to successfully transfer their wealth.

Only one in four Canadians have a full strategy in place to transfer their wealth to the next generation, according to research conducted by RBC Wealth Management. This means you have the opportunity and responsibility to help clients make decisions that suit their individual and family situations.

Let’s focus on three common pitfalls that many clients will face in the wealth-transfer planning process.

Pitfall #1: Heirs being unprepared to handle or manage inherited wealth. For wealth to be transferred successfully, clients need to focus on boosting the financial knowledge of receiving generations. Structured financial education often doesn’t take place until individuals are in their 20s.

Example: Say your client is the last remaining heir of her family; she’s a 28-year-old who’s about to take over a substantial family estate from a recently deceased family member. Unfortunately, she has received little education on how to manage wealth and she’s worried about her ability to manage the legacy.

Solution: It’s never too early to start educating family members. As such, make clients aware that early guidance can improve financial confidence and literacy later in life. Family members and professionals are two of the main resources that individuals rely on for financial education, so offer to help. You can provide access to financial literacy resources, and promote ongoing dialogue with heirs by facilitating family meetings and assisting with creating family financial inventories—long before estate plans are finalized. You can also provide supplementary information on wealth transfers.

Pitfall #2: Personal wishes or biases driving wealth-transfer decisions. Clients need to understand the pros and cons of passing down wealth during their lifetime versus upon death. The issue is clients’ personal preferences can carry a fair amount of weight in their wealth transfer decision-making process.

Example: Say a couple enters into retirement without developing a wealth-transfer plan. While they’ve decided not pass down any of their wealth during their lifetime due to their fear of not having enough to fund their lifestyle until death, they’ve also failed to craft a plan and update their heirs on this decision—leaving them in the dark. The couple needs to consider all factors objectively and focus on more than their fears.

Solution: Using a comprehensive financial plan as a foundation will help determine whether individuals have assets to give during their lifetimes, beyond what’s needed to cover for their current and potential needs. Help clients focus on striking a balance between acknowledging their personal preferences and giving adequate attention to important factors. For example, clients need to consider the risk or benefit of reducing the size of their estates, as well as factors such as probate fees, potential tax advantages or implications and, specific to property, capital gains taxation.

Inform clients about the range of options available for giving (e.g. outright gifts or inheritances, beneficiary designations, or inter vivos and testamentary trusts) so they’re able to develop a thorough understanding of how and why certain strategies may be more beneficial.

Pitfall #3: Dealing with a unique, complex and/or stressful family situation. In addressing this, an advisor’s approach should be twofold: 1) demonstrate that options exist to effectively suit every unique need, and 2) reinforce the importance of communication and open dialogue to promote family harmony.

Example 1: Say a client owns a family business and has two children—one who’s actively involved and one who’s not. The client worries that passing down the business to the involved child only may cause disharmony, so he wants to ensure his children are treated equally. It’s important to reassure this client that there are succession planning tools he can use to keep fairness at the forefront.

Solution 1: The client can consider the following options:

• using non-business assets to equalize the other child;
• using life insurance as an equalizer for the uninvolved child;
• leaving the other child in the business, but keep her without voting rights or shares; or,
• if there are no other usable assets, establishing that the involved child has to buy the other sibling out.

Example 2: Blended families create similar issues, as many clients in this situation want to ensure their spouse and natural children are taken care of. Trust structures stand out as effective tools for these types of scenarios, even though some individuals view trusts as daunting because they’re more complex.

Solution 2: Offer guidance regarding the various trusts available, including alter ego, joint partner, testamentary and testamentary spousal trusts.

With all of these examples, focus on highlighting the value of ongoing communication among family members to maintain harmony. In all cases, advisors shouldn’t underestimate their key role as an advocate for positive and objective communication, which can help smooth the wealth-transfer process.

Tony Maiorino

Tony Maiorino Vice President and Head, RBC Wealth Planning Services, RBC Wealth Management.