By Brian Sung MBA, CFP, CA
IN THIS ISSUE: For many of us, raising a family and building a home is more than the responsibility of parenthood, it is the satisfaction of legacy. It is the satisfaction of knowing that our hard work will give our children a better life and a loving foundation upon which to raise families of their own. For this reason alone it is imperative that we take every possible measure to keep that legacy intact and safe for every generation that follows. In this edition of Tactics, Brian Sung brings to light issues that could potentially devastate a family and the ways we can steer clear of them.
As a parent and grandparent, I can think of no greater joy than knowing that the family I leave behind will be loving, harmonious and happy. This wish far surpasses any desire to leave an estate of material wealth.
However, many of us, by our procrastination and lack of communication with our family’s next generation, are inadvertently “paving this road”. Often, this procrastination is because we may find it “inappropriate” or “uncomfortable” to discuss matters of this nature with our children. Perhaps it is a function of superstition, or simply our fear as parents. Whatever the reason, our families may pay a huge price for our unwillingness to communicate our final wishes.
We could have the best intentions in the world, but unless those intentions are clearly expressed with precision in a properly and legally executed Will, we are creating the risk that our families might misinterpret our true intentions and result in a family dispute which can lead to much feuding, rancor and monetary expense.
A permanent family schism is not what we worked so long and hard for, nor is it what we dreamt of!
The transitioning of wealth from one generation to the next is a difficult and complex “road”. As the “transitioning generation”, we need to insure that we are putting our families on the “road to happiness”… and not the “other” road.
There are endless stories describing how mishandled Wills tear families apart. Those that follow are typical and form the basis for many a television soap opera.
Case #1: Appointing an Executor
Richard and Mabel have three children, Jesse, Ross and Lynn. Jesse, the eldest by 8 years and a professional, was named by his parents as Executor and Trustee of their estate. All three children were equal beneficiaries in the estate so that there was no question of favouritism in terms of distributing the assets upon their parents’ death. Furthermore, the parents did not think it necessary to communicate their detailed wishes to their children as all were going to be treated equally.
Years passed, the family prospered and enjoyed a harmonious extended-family life together. After Richard and Mabel passed away, however, a different set of family dynamics prevailed which led to a great deal of dysfunction.
Jesse, as sole executor and influenced more by his wife than by his bonds to his siblings, acted in a manner to maximize the net cash results without due consideration for his siblings’ nostalgic wishes. In addition, because he was given the power, Jesse often discussed the administration of the estate with the lawyers privately and made decisions without consulting and/or involving his brother or sister.
The three siblings’ relationship with each other chilled and deteriorated as Lynn and Ross were most unhappy about their inferior position to Jesse in the administration of the distribution of the estate.
Lynn and her three children were the main users of the family cottage located on Green Lake at Whistler, B.C. Jesse sold the cottage, as he and Ross did not use it that often and wanted the money instead. Ross, on the other hand, had issues with what family heirlooms he received. Jesse applied a dollar value to everything and was high handed in making the allocation decisions.
Today, Richard and Mabel’s three children neither see nor speak to each other.
Case #2: “Family Understanding”
Amanda and her sister, Diane, were very close until their mother developed Alzheimer’s and gradually required a full-time caregiver. Diane lived in Detroit and Amanda in Vancouver; they decided that for the present, Amanda would be the caregiver. Amanda moved into the family home in North Vancouver and continued her care giving right up until the time her mother passed away – a period of 13 years. Amanda sacrificed her own lifestyle to care for her mother, who had more than sufficient income and investment resources to support both of them.
Diane meanwhile, finished her university education, developed a prosperous career in law, married and had two children. It was understood “within the family” that Amanda would be left with the house when ‘mother’ passed away, in return for the sacrifices she had made over the years.
When the Will was probated it divided the estate equally between Amanda and Diane. The Will did not provide a special grant of the house to Amanda. Other family members could not convince Diane to “honour” the “family” that Amanda was to receive the North Vancouver family house which was now valued in excess of $760,000. Diane had her own financial requirements and through her own legal counsel forcibly insisted on enforcing all of her rights under her mother’s Will.
Amanda felt very much taken advantage of by her sister’s failure to recognize her sacrifices over so many years. Unfortunately the mother’s gradual descent into dementia led to this unfortunate outcome.
You cannot simply stamp an equal sign on your affairs and assume all is well. Equity is dictated by the circumstances in your family and these circumstances always have the potential to change.
Case #3: Preparation of a Will in Vacuum
It is often a failure on the part of the person composing their Will to appreciate what he or she will own at the time he or she dies. There are planning steps which are sometimes misunderstood, such as:
- Putting property into joint-ownership with right of survivorship
- Naming a beneficiary on a policy of life insurance
When these strategies are professionally coordinated, they constitute an excellent estate planning tool. However, when they are utilized without the proper knowledge or guidance, they can wreak havoc upon a family. Consider the following:
Property in Joint Ownership:
Janice is one of three children (two daughters and a son) of a recently deceased widow. In her Will, the mother left her entire estate equally between Janice, Brenda and Granger. There was a bank account with $35,000 held jointly between Brenda and their late mother. The reason the bank account was jointly held with Brenda was because it was convenient for her mother – she lived near Brenda’s house. Brenda helped her mother with the banking. Shortly after her mother passed away, Brenda cleaned out the bank account.
When asked by Janice and Granger to pay 2/3’s of the proceeds back, Brenda refused, stating that, because the account was held jointly, ownership of the funds transferred to her upon the death of their mother. Both Janice and Granger argued that it was obviously the intention of their mother to distribute that account equally between all three children as in the Will. They stated that it was obvious that the bank account was in joint-ownership with Janice only as a matter of convenience.
Upon consulting with lawyers, Janice and Granger found that their only remedy was through the court system. This would involve time, money and a long period of negative emotions which neither Janice nor Granger were prepared to undertake.
Needless to say, Janice and Granger would never speak to her sister or her sister’s family again.
Naming a beneficiary on a policy of life insurance:
Upon the death of their father, Andrew and James were left with an estate of $6,000,000 which was made up as follows:
- Family home $1,000,000
- Family retail company $2,000,000
- Father’s life insurance $3,000,000
The father, being self-made, frugal, and only relying on the opinion of his bank manager, left the assets as follows:
- Family home – 100% to Andrew
- Family retail company – 100% to Andrew as he was the only one to take an interest and had been running the company for over 7 years
- Life insurance – 100% to James
The father arrived at the above allocations based on his desire to treat his sons equally.
Andrew and James, who were over 40 at the time of their father’s death were estranged from one another. They were never close during their adult years and had vastly different beliefs and lifestyles. James was a musician in Los Angeles and in a same-sex relationship. Andrew, married and with 4 children, lived in the family house where his wife, Cynthia, gave loving care to his father in his declining years.
After probate, each son received the following assets:
- Life insurance death benefit -$3,000,000
- Family house – $1,000,000
- Family retail company – $2,000,000
In drawing up his Will over 17 years ago, what the father did not account for was tax on the capital gains of the increased value of the company. The father’s estate was assessed tax of over $400,000 as the adjusted cost base of the family company was very low.
As the life insurance proceeds were “outside” of the estate, James was not under any legal obligation to pay “his” share of the taxes. Andrew ended up paying all the estate taxes!
It is hoped that this newsletter will serve as a “wake-up call” to those of you who haven’t adequately planned for your estate. Having worked this long and hard to build up family assets materially, morally and spiritually, we must exercise the leadership that will leave our family a legacy of unity, harmony and love. Having laid the foundation through the raising of our children to maturity, we must now complete the final step needed to guide them when we’re gone. We must leave them a roadmap known as our “last Will and Testament”. This roadmap must be carefully drawn, as it will be our vision of the family legacy that we hope to continue. Proper planning is a major component in seeing your vision through.
Within the limited scope of this newsletter, please give the following notions serious consideration when drafting your Will.
Passing away without a will:
Provincial law will dictate who benefits after your death. If you have a spouse and children, the Province will set out that your spouse will have to share your entire estate with the children according to a formula. This often leads to conflict between your surviving spouse and your children.
Provincial law will also appoint an executor and guardians to your children. For these and many other reasons you are creating a potential nightmare for your family if you do not prepare a Will.
Appointments of Executors and powers of Attorney for Property and Personal care:
If you’re planning to give this to one or all of your children – know your own family situation thoroughly and ask yourselves if your children can work together. Dissension can be created amongst them if you’ve chosen wrongly. The most important factor is trust – whomever you appoint must have your complete trust. There must also be agreement from and full discussion with the person(s) you choose.
The Use of Trusts:
“Intervivos” (Living) and “Testamentary” (after death) trusts are planning instruments which can be used before and after your death. The setting up of a ‘trust’ is when you ‘conditionally’ gift to someone. When you set up a trust in a Will, you are not giving the gift outright to your beneficiary upon your death. The gift will be managed and invested by your executor until the event occurs which allows the beneficiary to take the gift in accordance with your Will.
Trusts are a very useful planning tool when we believe that the beneficiary will not have the maturity to deal prudently with large sums of money. Trusts are also useful to protect your beneficiaries against capital encroachment in the event of divorce. Trusts are also useful in a second marriage situation.
In Provinces other than British Columbia, these are known as “Enduring Power of Attorney”. This important estate planning document allows you to appoint someone you trust to act on your behalf with respect to your financial affairs in the event you become incapable.
The Care-Giving Child:
In a situation where the aging parent(s) has a number of children, the caregiving obligations will fall disproportionately amongst the children. Recognition should be given to the “caregiver” otherwise they will feel exploited, unappreciated and embittered. Consider conferring ‘gifts’ outside the Will. Name that child as the beneficiary on a policy of life insurance – gifting during your lifetime. Consider leaving a “letter of explanation” to the non-care-giving children.
The best recommendation we can give as professional financial planners is when you’re engaged in planning your estate and preparing your Will you should:
- Consult and retain a professional Financial Planner to assist you in the implementation of your estate and Will
- retain a lawyer specializing in estate planning & Wills for the purpose of preparing a Will
- retain an accountant specializing in estate taxes as there will be taxation, creditor and marital considerations involved in these strategies
- implement your plans and execute your Will
Many clients have said to us that because their wishes are so “simple and straight forward” they would save a substantial amount of money by getting a “COSTCO Will Kit” and doing it themselves. These “homemade Wills” contain general and often nebulous language subject to many interpretations.
“Homemade wills” often fail to use precise language and fail to recognize those contingencies which might arise if events unfold in a pattern different from how the layperson assumed in the course of drafting their Will. If a homemade Will is capable of being interpreted two different ways, you will in all likelihood have two different family members asserting two different claims, thereby generating costs and bitterness which will vastly exceed what you saved by neglecting to spend money on a lawyer. In addition, if there is no professional lawyer involved, there is a real danger that the Will may be improperly witnessed and improperly signed, making it null and void.
On top of the monetary costs, come the heartbreaking costs of tearing a family apart.
It is a certainty that the post mortem legal costs (court and lawyers) will vastly exceed the savings that the deceased realized by doing their own Will without the advice of a professional lawyer who specializes in this area. Remember, the monetary costs are minor in comparison to the hostility and acrimony created that may forever cause family dysfunction.
It is absolutely impossible for you to express your wishes after you become incapable, or after you’ve passed away. Don’t let small vices such as oversight and procrastination, or the trivialization of potentially major issues devastate your legacy.