The crucial conversation

“It was a strange situation,” says Michael Berton, recalling one of his more unusual estate planning cases. “But it’s what the family wanted to happen.”

The story goes like this: Husband and wife, Chet and Marie (not their real names), had a joint account. It was assumed that since Chet, who had been in the hospital for 16 months, would be the first to die. That wouldn’t have been an issue, except Chet got better. That was the good news.

The bad news? When Berton, a CFP with Vancouver’s Integrated Planning Group, sat down with his client to discuss his situation, he immediately saw a problem. Chet had an estranged child from a first marriage who could potentially challenge his estate. If Marie died first, the money in the joint account would automatically go to Chet, producing that much more for the estranged child to claim.

To solve this dilemma, Berton and his clients severed the joint account and made the couple’s own son executor of Marie’s estate. The money would go to her child, not Chet, but at least that cash wouldn’t become the object of a court battle. It’s a complex case, but one that had to be dealt immediately, before anyone passed away.

It’s time to talk Many clients don’t want to talk about estate planning while they’re still healthy and working, but certain issues, like joint accounts, should be addressed before it is too late.

A will is the first thing that needs to be locked down, says Sara Plant, vice-president and national director of wealth services with BMO Harris Private Banking. “A client should do this as soon as they have a responsibility to others,” she says. “If they pass away without a will it will be very hard on the family.”

When Burton creates a financial plan for a client, he always asks to see the will. He wants to make sure they have one, but also needs to ensure that it designates the correct beneficiaries.

“I need to know if they wrote it 15 years ago and if it’s still what they intended,” he says. “[We determine] what changes have to happen and then we can work from there.”

Advisors can’t update a will themselves—a lawyer will have to be called in—but Burton usually briefs the legal team on the client’s background and the required updates.

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That review is also a good time to appoint an executor of the estate, powers of attorney for both the client’s health and financial needs, and—if minor children are involved—figure out who will look after the kids.

Edward Olkovich, a Toronto-based lawyer and author of Estate Planning in Six Simple Steps, says clients should also appoint “back up” people in case guardians, executors or powers of attorney refuse to do the job.

“You’ll have to name double the beneficiaries,” he says. “You never know, your first choice may not be available.”

Minimizing taxes At the same time, advisors and their clients should address life insurance to cover expenses, especially if real estate is involved. Many clients own cottages that have appreciated significantly over the years. If that person already owns a home, their estate could face a significant capital gains tax bill.

Jamie Golombek, CIBC’s managing director of tax and estate planning, says advisors can wait until a client dies to sort out real estate—you can decide which property would have the bigger deemed disposition and claim it as the principal residence— but, like Plant, he recommends sorting it out now.

Putting the vacation property in a family trust is another way to act now and save on capital gains later, he says. “It would be owned by the trustee so it may be possible to avoid or defer taxes,” he explains. “Let the kids use the principal residence exemption on the property.”

Advisors can minimize other taxes today too. Golombek says it’s never too early to make sure assets, such as RRSP, RIFF and TFSA can pass outside a will and avoid probate costs.

“You can name a beneficiary on those,” he says. The accounts will pass to that beneficiary and estate taxes won’t apply. “

Philanthropic clients can also take advantage of charity today to help pay their taxes after they die. Golombek points out that if a person donates now, not only will they pay less tax and have more money to pass down in the future, but any excess contributions—donations exceeding 50% of net income— can be carried over for five years.

A client could leave money to a charity in their will, but Golombek points out that if they’ve contributed too much for that tax year, they won’t be able to carry anything forward.

While these issues are difficult to raise, especially with young clients, Berton says the conversation has to happen. “It’s almost surreal to talk to people in their 30s about estate planning, but we bring it up when we create a full plan,” he says. “Young or old, though, everyone needs to have this conversation.”

Bryan Borzykowski is a Toronto-based freelance journalist.

(11/16/10)