Better family inheritance planning

As an advisor, you may run into situations with your clients wherein their estate plans may be challenged by beneficiaries who feel they were not awarded their “fair” share of inheritance. The increased complexity of today’s society (blended families, individual financial arrangements, etc) requires well-documented estate plans.

One aspect of a good estate plan is helping your clients differentiate between “fair” and “equal” distributions to beneficiaries. An “equal” distribution may not always be “fair”. Working with your clients to establish adequate documentation can minimize the cost of legal challenges and ensure estate plans are followed. Of course, any plan should be reviewed by an estate lawyer to ensure that all existing laws and rules are also taken into consideration.

Here are some situations where your advice and objectivity can play a large role.

Inequality Factor 1 – Gift or Inheritance

Consider a situation where a deceased client intended to treat two or more beneficiaries equally, but one of the beneficiaries received substantial lifetime gifts already? Should the amounts already paid out be deducted from that beneficiary’s share of the inheritance? What if one child is successful but another requires ongoing support (loans or subsidies) periodically.

With no documentation to show otherwise, the gift or loan cannot be automatically deducted from the borrower’s inheritance. The child who never borrowed may feel that the sibling has an unfair advantage and hard feelings often results. As an advisor, it’s a good idea to suggest to individuals who support, or loan money to heirs to document their intention in memo form so everyone involved is clear about intention.

Inequality Factor 2 – The Family Business

A major part of many estates is a client’s business. If business owner clients intend to have their businesses stay in the family, you can help them put the needed plans in place to minimize the taxes due – and perhaps as importantly, ensure estate assets are distributed fairly to all beneficiaries. There are special capital gains exemptions for family farms, fisheries or shares of qualified small businesses. For family businesses that do not qualify for these exemptions, the capital gain on a business will generally be taxable at the time your client or the surviving spouse passes away.

Special planning needs to be done in the case of a child or children who will take over the family business and other children will not participate in the business. In this type of situation, it’s a good idea to remind your client that a fair division of assets does not have to mean equal. For example, you may suggest that the child taking over the business will be contributing time and effort and so may deserve more than an equal share of your client’s estate. In this kind of situation it is usually a good idea to suggest that your client and his/her family members work out terms and expectations in a family discussion. Communication and a general agreement about the division of assets can ensure the family minimizes conflict. You may also find life insurance a consideration as it can work as an “equalizer” because the death benefit can be paid to the child or children not involved or sharing in the value of the business.

Inequality Factor #3 – Blended or Complex Families

In Canada, many spouses and common-law partners are in second or even third relationships. Many new relationships involve children from prior relationships. Estate planning discussions in these situations need your guidance as clients wade through complex situations.

A will alone may not adequately address issues that arise in these circumstances. Your client’s will could be contested at death by members of the blended family who feel that the asset distribution is unfair. A challenge can defeat the over-all estate plan, or at the very least, cost the estate unexpected (and unintended) legal fees.

How can advisors help? Discuss the overall family situation, and the possibility of creating a family trust while your client is alive, or instead a testamentary trust in the will to hold assets upon the death of your client (although a testamentary trust is more vulnerable to challenge). The use of trusts will help your client establish terms relating to management of the trust assets, who will be in charge (the Trustee) and who will benefit from the assets in the trust (the beneficiaries). You, your client and an estate lawyer can work together to see if trusts are warranted.

Inequality Factor #4 – Taxable versus Non-Taxable Bequests

Advisors occasionally deal with clients who feel that it is important to specifically direct some holdings to one beneficiary, while leaving others to inherit the after-tax residue of the estate. This can happen when a parent designates one child as beneficiary on a registered plan, inadvertently leaving the other children to pay the tax on deemed disposition through the estate, and then splitting the residue. Reviewing beneficiary designations along with the entire estate plan can help you and your client ensure the “fair” tax burden at death does not unfairly reduce a beneficiary’s inheritance.

In today’s society, the assistance of an objective advisor can help clients set up estate plans that take “fair” and “equal” into the equation. Working with you can help your clients leave a positive lasting legacy for their loved ones.

Carol Bezaire

Tax & Estate

Carol Bezaire , PFPC, TEP, CLU, is the vice-president of tax and estate planning at Mackenzie Investments. Carol can be contacted at: cbezaire@mackenzieinvestments.com