Still More Wills, Chills And Thrills

During these times of turmoil and COVID confusion, many of my clients have had Wills on the brain. Although many Wills do a good job covering the basics, I still finish reviewing my new clients’ old Wills with a vaguely uneasy feeling that there are a few too many “what ifs” left floating in the wind for my liking. And when I also review their beneficiary designations, I really start to get fidgety. Thus, in effort to stop my squirming, I am inflicting this article upon you today.

In law school, I was trained to imagine the worst and to make you think about things that you don’t like talking about at cocktail parties. Fortunately, my job is also to provide you with safety valves and solutions to protect you and yours if the worst does come to pass. Admittedly, in many cases, this extra worrying will be unnecessary, and any extra issues, tension and confusion left unresolved will eventually work itself out with few permanent scars. On the other hand, if life does come up snake eyes, a little extra planning can easily pay for itself many times over in terms of problems avoided, relationships preserved, and dollars saved. In my view, when you’re talking about the transfer of a lifetime’s worth of hard work, sacrifice and saving to the people and causes you love most, in amounts that can profoundly their futures, this is one of those times when it’s worth sweating the small stuff.

Noting all of this, here are a few of the extra things I suggest considering before you sign your Will’s back page:

• Not being able or getting around to update your Will and beneficiary designations on insurance or registered plans in the future.

I am particularly thinking of clients who lose their capacity to make legal decisions due to disease or injury but may linger for many years after diagnosis or mishap. Most people assume that they can just make changes to their plans if someone dies in the wrong order or life throws a curveball, but this isn’t always possible. To counter this contingency, I like to include:

• Backup guardians and trustees and perhaps secondary backups.
• Indexing cash gifts to inflation or making them a percentage of the estate instead so they keep up with inflation or grow/ shrink with the size of your estate if it is larger or much smaller than anticipated.
• Distributing assets like accounts, real estate and company shares as part of an heir’s share of the estate rather than a stand-alone gift. In other words, if the goal is to equally divide an estate amongst your three children but for your youngest son is to get the cabin, divide your estate evenly but specify that your son’s share includes the fair market of the cabin at death net of taxes. In that way, regardless of what the cabin is worth in the future, your boy still gets his mancave, but the estate is divided equally. Worried about the cabin being worth more than his fair share? Either he can get a mortgage to buy out his sibs at death or you can provide other options in your Will like him paying out his siblings over time at an interest rate that is based on the market rate at that time.
• Contingency planning for life insurance and registered plans if leaving these assets jointly to your children with descendants of their own or who might have them in the future. Without this planning, if a child with descendants predeceases you, it is very likely that your other children would just get a larger piece of the pie and the children of the deceased would both go hungry and might even be stuck indirectly paying for some of the taxes on some registered plans they never received. Although many clients accurately assume that children who receive this extra share would do right by their nieces and nephews:
  • Some of your kids may honestly believe that they are just following your wishes when keeping the extra share or may never understand that there has been an injustice in the first place,
  • If the recipient children have creditor issues or are incapacitated, they might not be able to set things right even if they want to and
  • If the grandchildren are still minors or even young adults, it could be messy and complicated to determine how to get the money back to the children, avoid unnecessary taxation and determine who is to manage the money in the meantime.
  • Including provisions to hold an inheritance in trust if your now-healthy heirs are incapacitated at the time they inherit or perhaps beset by other problems, like creditor issues or addictions. Why take the chance that an inheritance might end up managed by the government, squandered, used to feed an addiction, or handed over to creditors rather than your kith and kin?
  • Flexibility to move any trusts created in your Wills to other jurisdictions if your children or other heirs end up living abroad. It’s also really important to get good advice if you have heirs with U.S. citizenship or living in the U.S to avoid having your heirs pay far more taxes than necessary.
    • Contemplating potential money issues and uncertainties might arise amongst your beneficiaries and trying to head off as many at the pass in advance. Along those lines, I suggest dealing with the following:
    • Stipulating executor fees and ongoing fees for trustees managing trusts for your heirs directly in the Will. Although courts generally award fees based on a percentage of your estate and you can do the same in your Wills, this can cause problems. Either the person doing the work doesn’t want to rock the boat and claim a fair (or any) executor fee or perhaps they do claim a fee and the rest of your heirs feel (perhaps with justification) that it is more than you would have wanted, particularly if the executor is also an heir and doing some of the work for their own benefit. The size of the estate doesn’t often match its complexity so naming a percentage in your Will might over or undercompensate your executor. Ultimately, although this is not a perfect solution, I have landed on picking a flat fee and indexing it to inflation or, if using a percentage, including a minimum or maximum value that is also inflation indexed. I also suggest doing the same thing for trustee fees in order to ensure that they also get paid yearly if required to manage trust funds for some of your heirs in an amount that is fair, transparent and not open to creative interpretation.
    • Including a memo that distributes your personal effects and then stipulating a way to divide the remainder, with provisions for compensation payments if there is a significant disparity in the value of the assets distributed. Some people fight more about the picture albums and artwork than the bank accounts. Trying to head this off at the pass in advance or even sitting down with your children to get clarity about who gets what and agreeing upon a process for divvying up your “stuff” can go a long way to eliminating sour faces at future family picnics. Some people even put masking tape labels on the back of contentious possessions with the name of the future heir on the back! Others have an auction between heirs to buy your velvet Elvis print and bobblehead collection, although others think starting a bidding war over the family heirlooms and assets is just a recipe for disaster.
    • Providing guidance or perhaps including even a guardian fee for the people caring for your children. It is often exceedingly difficult to quantify the extra costs your guardians might incur raising your children and it can be an awkward conversation if the person managing their money and the person managing your children are not the same. Providing a statement of general principles to your trustee, such as to take a liberal and expansive view of expenses and to clarify things like including your guardian’s vacation costs when travelling, or to with your children might make your guardian and trustee’s relationship far more comfortable and productive. It is also a great idea to provide guidance on the sort of lifestyle you wish to provide your children. See my earlier articles on “Voices from Beyond the Grave” that discusses this and other related issues in more detail on either my or the Canadian Moneysaver websites for more details.
    • Considering whether the same person should be trustee and guardian. This is often done without incident, but there is a significant conflict of interest if the person deciding how much of the guardian’s mortgage, cable bills and property tax should be paid from the a child’s trust fund is the same person incurring these expenses. Every now and then, we lawyers hear cautionary tales about guardians who may have dipped into their charges’ trust funds a little too liberally, perhaps so that the children can’t afford to attend university or don’t have that down payment for their first home that mom and dad anticipated would be there. This may be due to fraud or overly generous accounting, but it also might be due to picking people to raise your children who are not also good at managing an investment portfolio or budgeting for the future. Moreover, both jobs require significant time commitments. Perhaps picking different people to watch your money than those you’ve picked to watch your kids is actually doing your guardians a rather large favour.
    • Not automatically picking children or spouses as executors or trustees. Being an executor is a generally thankless task and it takes longer to wind up many estates that most people expect. Although it can be expensive and not without problems, picking a professional trustee or at least someone who isn’t one of your heirs to do the job might sometimes be the best solution. Do consider the following before naming family as your executors:
      • Do your children get along and work well together if you pick them to act as a team? Do you want to include tie-breaker provisions in case they can’t agree? Does it make sense to name children who now live in distant lands or to require that they also sign off on every decision?
      • Will any children feel excluded if their siblings are picked as executors and they are not? As well, siblings not chosen may have unrealistic expectations regarding how long an estate should take to settle and have been noted to unfairly hound executors for their piece of the pie far sooner than is reasonable. The excluded siblings may also often feel without justification that the chosen child has not done a good job at maximizing the value of an estate or overpaid everyone involved, from the estate lawyer down to the woman hired to clean out your refrigerator after you’re gone.
      • Does your new spouse really want to be executor if it means your old kids are breathing down her neck? Conversely, how would your children from prior relationships feel if the new spouse is your sole executor or perhaps managing trust funds for them or their children? How do they feel about your spouse even managing his own trust fund if whatever is left at his goes to them, particularly if that spouse has unlimited spending powers? Likewise, if the children are managing your spouse’s trust fund and deciding both how much to pay out each month and how to invest the cash, how would your spouse feel about that? If the kids are to get what’s left down the road, there is also a real temptation for them to both be cheap when budgeting money to your spouse while also picking riskier investments that focus more on growing their own future inheritance than the more conservative income-focused portfolio that better ensures your spouse will never run out of cash. The expression “conflict of interest” was perhaps invented with these situations in mind. The expression “family squabble” certainly was.
      • Is there even the slightest chance of a Will challenge, particularly if you have a blended family or you don’t treat your children equally in some provinces? An inheritance is a once in a lifetime windfall and no matter how people get along until that point, big money can still lead to big problems, particularly if you are not around to make sure that everyone plays nice. Moreover, if your children are forced to wait until your new spouse dies before getting their inheritance, they may actually get legal advice telling them to challenge your Will since they will have little chance of challenging their stepparent’s Will at a later date, assuming that there is anything left to challenge by that point anyway.
      • Is there a reasonable chance that anyone acting as trustees of any ongoing trusts will have to act as “bad cops” to their siblings, nieces or nephews and thus wreck Christmas dinners for decades to come or who will ultimately cave to pressure in order save future Christmases? This is another great reason to consider a professional trustee, particularly if dealing with heirs with potential addiction issues, creditor problems or a money management handicap.
        • Determining whether it makes sense to pass on or sell family assets like businesses and cabins. Will passing along these assets in kind to your family mean starting a new family feud rather than continuing a family legacy? Issues include:
        • Treating children with sweat equity in the business or farm fairly while also providing for your other children.
        • Balancing your business children’s desire to potentially run and grow the business vs. non-business children’s desire for cash flow and safety.
        • Do your children have the experience to run your business and to work together? Is this a recipe for success or the ingredients for creating a family disaster?
        • Who gets to make business decisions? Equal voices can mean gridlock or non-business children having too much say in matters they don’t understand, however providing control to one can cause resentment or make unfair or unpopular decisions. Who sets salaries for the business children? Are profits to be reinvested or a set percentage paid out each year? What if the child you pick isn’t up to the task and ultimately squanders not only his inheritance but his siblings’ as well by running the business into the ground?
        • What if any of the children wants to sell their share of the business or cabin and the others can’t or won’t buy them out?
        • Are your children able and willing to pay ongoing property expenses and do their share of the maintenance for family cabins and cottages? If one child really doesn’t use the place as much, should they be paying the same portion of costs? Does that child really want the place?
        • Balancing financial autonomy with financial prudence.

Except for smaller gifts, I generally recommend holding a youngster’s share of an estate in trust until they are at least 25 years of age and often suggest handing over the inheritance to those children in stages so that they can learn and make mistakes with only a small portion of the inheritance before being entrusted with the big bucks later. Some of my Wills even require the children to co-manage their trusts with the original trustee for a while so that they get on-the-job experience managing investments, budgeting, and taxes before getting to call their own shots. Although there are horror stories about younger heirs burning through their legacies and many years of their lives when trusted with too much too soon, I worry almost as much about responsible, well-intentioned kids hiring the wrong financial advisors or trying to do too much on their own with insufficient experience. On the other hand, in Wills that hold a child’s share of the estate until they are in their mid-30’s or so on, I usually draft the trusts in such a way that the money can be handed over ahead of schedule if the child has proven themselves along the way if the trust is no longer worth the expense. For trusts with a larger dollar value or time-line, also consider appointing a “protector”. This gives your heirs someone to notify if the trustee is not up to scratch and the protector can swoop in, fire the incumbent and appoint a new trustee if appropriate. Otherwise, getting rid of a bad trustee is as hard and frustrating as getting ink stains out of your favourite shirt and far, far, far more expensive.

• Decoupling family finances.

While money is probably not the root of all evils, I do see it as a major cause of many family spitting matches. Accordingly, I ask my clients to carefully consider whether to leave assets like private companies and real estate jointly to multiple family members for the reasons expressed previously. In situations where it is the right decision or the only practical choice, I encourage clients to take additional steps, like signing agreements or having family discussions in advance to set up ground rules, particularly to cover what would happen if one of the children later wanted out, such as a buyout procedure, valuation formula and the appropriate timeframe for payouts. Investigate life insurance in these situations as well in the hopes of paying some of the children out in cash rather than making them get shares in the family business instead. You might even make the children who will get the business or cabin pay for this insurance in the first place!

• Providing surety in blended family situations. Decoupling finances can be even more important for blended families.

For first marriages, it is common for the surviving spouse to inherit all or most of the family assets and that usually makes sense. In second marriages, however a lot can go wrong if the children from your first kick at the can are forced to wait to inherit until your second dearly beloved is no more. This can poison relationships, result in those Will challenges I mentioned earlier in places like B.C. and might even result in your children missing out on any part of your estate if your new spouse outlives them, remarries, goes on a decade long spending spree or ultimately leaves their inheritance to their favourite charity, the pool boy or their own children instead of yours. If it isn’t possible to provide for your children while also protecting the surviving spouse (again, more life insurance might be a solution in some cases), many families leave the survivor’s share in a trust that ensures that the remainder flows to the children or their descendants eventually. While this situation isn’t ideal, picking the right trustee and providing sufficient guidelines in the trust can at least go a long way to minimizing family tension, particularly if the children at least receive something at the first passing, perhaps when they need a financial leg up the most.

• Equalizing inheritances for children with large age gaps.

If you’ve already put some of your older children through school, covered their spring break adventures, paid for 10 years of interpretative dance or tuba lessons, funded a closet full of must-have jeans, two decades worth of pizza and so on, is it fair to leave your estate equally to all your children when the younger ones never received such benefits? In situations like this, I often use a general education and maintenance trust to cover all expenses for anyone in school or under a set age, with the remainder divided equally amongst all of your children, regardless of age, when the last of them no longer qualifies for payments. This might comprise 40% of the estate if no surviving spouse and is designed to provide the younger children with the support and extras that their older siblings received during your lifetime. The remaining 60% would be equally divided amongst all the children, with older children receiving their portion of the 60% immediately. When the dust settles, all the children have been provided with the same leg up and luxuries prior to get their university diplomas or reach adulthood but your older children are not forced to wait until their youngest sibling gets a diploma before having the cash to buy their first home.

• Including provisions to gift over an inheritance on a child’s death.

Although most Wills contemplate what happens if a child predeceases you, most don’t deal with what happens if a child inherits but passes on while leaving behind a spouse. In most cases, your son or daughter-in-law would likely inherit, and your grandchildren would only inherit what’s left after (s)he is also deceased. If that spouse remarries, has additional children in the future or squanders the cash, then your grandchildren may end up with nothing, less than you would like or perhaps inherit it far later in life than you would have wanted. Leaving the money in a trust that names your child and their own descendants as beneficiaries can ensure that your grandchildren get what’s left on your child’s passing or can even gift over to your other children instead at that time if none of these grandchildren exist and you really don’t like your son /daughter-in-law. As an added bonus, this type of trust structure can actually save your child a lot of money along the way in taxes avoided by allowing gains and income to be taxed in your grandchildren’s hands at their rates, making any inheritance go a lot further. You might even name your child to be their own trustee in some cases to maximize flexibility and decrease both complexity and costs of running the trust.

Conclusion

My job as a lawyer is to find the dark cloud hidden inside the silver lining, no matter how small and unlikely. Although many of the extra provisions I’ve just enumerated in copious detail may be ultimately unnecessary in many cases, the downside is generally just a few extra dollars and hours “wasted.” On the other hand, taking a bit more time now to think and plan for the unpleasant and unthinkable might be a game changer.

Colin S. Ritchie, BA.H. LL.B., CFP, CLU, TEP and FMA is a Vancouver-based fee-for-service lawyer and financial planner who does not sell investment or insurance, just advice.

To find out more, visit his website at www.colinsritchie.com.