When your client wants to change beneficiaries

David Bassett’s client recently wondered about his adult son’s motives.

The man lived in a retirement home and told Bassett, a vice-president with Macquarie Private Wealth in Vancouver, B.C., he thought his only child was after his money.

Most advisors have had clients hint something’s amiss in their families, so much so that the problems could result in a change in beneficiary designations.

So when Bassett’s client began complaining about his son’s influence over his private affairs, he thought it could have been a sign the man wanted to change his will.

As Bassett probed, however, it became apparent the elder man’s suspicions were unfounded. The son had considerably more money than his father, and nothing in the transaction records indicated Bassett’s client had been transferring cash. “All evidence suggested that dad was delusional on that issue.”

Still, proactive advisors listen closely for clues—complaints about adult children, expressions of profuse admiration for a caregiver, passing mention of a new flame—that clients are gearing up to change the beneficiaries on wills, insurance policies, RRSPs and other elements of an estate plan.

But how should they act on that information?

Some experts take a strict legal view. Aside from handling the mechanics, beneficiary choices “are none of the advisor’s business,” says Elaine Blades, a TEP with Scotia Private Client Group. “Some clients change beneficiaries all the time. People are entitled to do that.”

That said, she says a request to change beneficiaries may raise concerns about the client’s capacity or undue influence if there’s also other evidence.

Wealth management professionals should heed the signs and make sure clients understand the repercussions of shuffling the deck. What’s more, advisors can ask whether anything else is going on besides family dynamics—for example, someone pressuring the client to alter an inheritance plan for fraudulent purposes. While only doctors and lawyers can make formal determinations about capacity or undue influence, advisors may be first to pick up on problems.

Discover motivations

“The first question will be why,” observes David Shlagbaum, a partner at Robins Appleby & Taub LLP in Toronto.

Advisors should know the state of the relationships with adult children, other relatives and spouses, and how those dynamics play into the estate plan, Shlagbaum points out.

He adds advisors should explain the potentially cascading impact on an overall plan, including potential for lingering tensions among the next generation. He uses the example of a company owner with two adult children: one who wants to run the business, and one who doesn’t.

The parent may opt to give the child in the business all the shares of the corporation, and then bequeath to the other child the equivalent value in other assets. Doing so avoids the potential complication of joint ownership when one child has nothing to do with the company.

If the parent decides to exclude one child from the will, Shlagbaum says, that child may try to go to court to seek redress. So the decision to disinherit, in this case, could lead directly to a court fight.

And, sometimes straightforward fixes aren’t actually straightforward.

A client may come in and say all she wants to do is draw up a codicil to augment an existing will. But codicils are for making quick adjustments to a will, and if the estate owner decides to make significant alterations, a new will is required.

At some point, Shlagbaum says, the document will be reviewed, alongside the codicils. “Does [your client] want to be in a position where the beneficiaries can see the different goals? If [she] scrapped the old will, nobody gets to see anything that came prior.”

If the client seems motivated to shift beneficiaries, estate planners might convene a family meeting to outline the implications of the proposed changes before implementing them.

“Quite often,” notes Errol Tenenbaum, another lawyer at Robins, Appleby & Taub, “people don’t like having those conversations.”

Some advisors rely on visual aids to explain the potential domino effect.

Lawyer Kathryn Bennett, a TEP with Desjardins Financial Services in Toronto, sketches new scenarios on paper so their implications are clear: “I find that’s often very helpful for clients because it helps them see what the new plan will look like.” (For examples of her sketches, see “Estate planning visualizations,” below.)

Estate planning visualizations

A. has 2 children, C1 and C2. C1 has 3 children (GC1, GC2, GC3) and C2 has 1 child (GC4). A wants C1 and C2 to receive equal shares of the estate. A has to decide what happens if C1 dies before A does.

Option 1 would have C1’s three children sharing the half the estate that their parent C1 would have received, and C2 getting the other half. This structure follows the branches of the family tree, with children only inheriting their parent’s share if the parent dies. This is known as a “per stirpes” distribution.

Option 2 would give each surviving child or grandchild an equal share of the estate. This option can end up skewing the estate distribution in favour of the family with the most children. Here, it would mean that C1’s children would get 60% of the estate, while C2 and GC4 would end up with 40%. This is a “per capita” distribution.

A would choose Option 1 as it would mean that each child (or the child’s heirs) would get 50% of the estate.

B. has no children or other family heirs. B wants three friends (F1, F2 and F3) and a charity to receive equal shares of the estate. B has to decide what happens if F1 dies before B does.

Option 1 would have F1’s share split between F2 and F3, so that the friends would share 75% of the estate and 25% would go to the charity. If F2 also died before B, then F3 would get 75% of the estate and the charity would still only get 25%. This structure maintains the original 75-25 split. The charity would only get 100% of the estate if all three friends died before B.

Option 2 would give the two surviving friends and the charity equal shares of the estate. This option would mean that the charity’s effective share would increase to one-third of the estate. If F2 also died before B, under this structure, F2 and the charity would each get half the estate. The charity would only get 100% of the estate if all three friends died before B.

B will choose the option that best reflects which is more important: benefiting the group of friends or giving each heir an equal share, no matter how many of B’s friends are alive when B dies. Make sure the client understands the implications of each option.

What it really means

Sometimes, suggesting a whole new round of family meetings and sessions with lawyers and accountants reveals the client was merely expressing passing exasperation. Bassett says when he explains the full implications, including potential tax consequences, clients can change their minds.

But how far should advisors go in trying to preserve an existing estate plan?

An advisor, in principle, should follow clients’ wishes. But Bennett says to beware if a new client immediately begins asking for changes in beneficiary arrangements. In some instances of elder abuse, seniors are pushed to seek new advisors and then ask them to expedite changes to a will, insurance policy or RRSP/RRIF plan.

“If you’re the advisor, I’d suggest a certain amount of caution” in those scenarios.

Bennett tries to find out who’s driving the agenda. Say an elderly person comes to talk about changing inheritance arrangements, accompanied by someone who stands to benefit from those changes. Or the adult child’s own children may eventually stand to benefit. In such cases, Bennett asks to speak with the client alone.

“If the client refuses, be prepared to push a bit. That could be a very uncomfortable conversation,” she adds, because such scenarios may hint at emotional abuse.

In some cases, Blades observes, the presence of that other person is legitimate—perhaps he needs to be there to translate, or to assist a client who has a physical disability. Still, she says, “If the person who is the beneficiary is in the room with the client, you need to get those instructions confirmed independently.”

Don’t go it alone

If you suspect coercion or undue influence, or a capacity issue, call in reinforcements.

“If [clients] have no idea why they’re doing it, and seem to be confused, that’s the time to go to the compliance officer,” says Blades. Sometimes, she’ll take instructions, wait for a day or two, and then call the client to get confirmation, only to discover “she doesn’t remember any of it.” Adds Tenenbaum, “In reality, it’s always a judgment call because we’re not doctors.”

And they can be tough calls. Shlagbaum recalls taking death-bed instructions for a new will from a client with an inoperable tumour.

“I was concerned about capacity and I brought in the doctor, who said time wasn’t on our side,” he says. But the physician pointed out that the patient had the mental acuity to give directions for his will. The client died the following day, after falling on his way to the bathroom.

When the will was probated six months later, Shlagbaum recounts, two children from a previous marriage who had been left out of the will “came out of the woodwork.” A lawsuit over the estate ensued, and those offspring won a substantial settlement.

In that case, there was no opportunity to encourage the client to consider the implications of the changes in the beneficiary structure. Ideally, Shlagbaum says, the advisor’s role is to reveal the big picture, and to help the client understand how the future will unfold.

“If there have been fundamental changes in terms of relationships with children because of drugs or alcohol or other considerations, I warn my client that they have to go through the whole process again, to rebuild their estate plan to create a sense of buy-in.”

Choosing insurance beneficiaries

An irrevocable beneficiary designation will limit policy owners: they cannot alter or revoke the beneficiary, change the policy coverage, transfer ownership, assign the policy or withdraw funds without the consent of the irrevocable beneficiary. A revocable beneficiary allows the policy owner to deal fully with the policy.

John Lorinc is a Toronto-based financial writer.