TO TELL OR NOT TO TELL

While most adult Canadians acknowledge the need to prepare for the transfer of their wealth to the next generation, there is merit in preparing for the transfer of wealth from the prior generation. Both the parent and child can benefit from engagement in a discussion about how, when and why the wealth is going to be transferred.

Let’s assume your clients agree that a comprehensive, integrated estate plan that contemplates possible future incapacity is important. Assume further that they understand it’s important to review that plan regularly to ensure it continues to meet their needs and wishes.

Perceptive clients may then ask whether they should share the contents of their will or larger estate plan with their beneficiaries, generally their children. (There are, of course, many other possible beneficiaries — friends, family members other than children, charities — but the discussion in this article is most relevant when adult children are the intended heirs.)

There is no one right answer to that question. Legally, the testator is not obligated to divulge the contents of his or her will to beneficiaries — or anyone else, for that matter, including the executor.

While it may be imprudent not to do so, the testator isn’t even required to consult the person and/or trust company they’ve named as executor before appointing them. The same holds true with guardians — no need to seek their permission before naming them to such an important role. Of course, failure to consult or seek pre-approval of the appointment may result in the party declining the appointment when the time comes.

Not only is there no obligation for a client to let his children know what the will says, many estate practitioners would argue against letting them know.

A will has no force or effect until the testator’s death. So long as the client retains the requisite legal capacity, he is, with certain limited exceptions, free to change his will whenever he wants. This is a strong argument in favour of keeping the contents of the current incarnation of a will private.

Moreover, in our experience, many parents are rightly concerned with the potentially de-motivating effect inherent in the promise of a large inheritance. What happens to the incentive to work hard when you know you’re in line for a substantial windfall down the road?

There is debate in the estate- planning community as to whether sharing one’s estate plan with beneficiaries should be considered a standard best practice. Notwithstanding such dissensus, there are a few situations where disclosure is always in order. Three general situations come to mind:

1. where the inheritance comes with obligations attached;
2. where the plan has the potential to cause discomfort or tension among the beneficiaries; and
3. where some prep work on the part of the beneficiaries may be warranted.

The gift that keeps on giving…

The family cottage and the family business are two assets which should not be bequeathed in a vacuum. These assets entail both rights and obligations. Moreover, family dynamics being what they are, an equal distribution will seldom be the fairest distribution. As such, the succession of these particular assets falls squarely into the first category and may also stray into the second and third.

The succession of the family cottage plays a starring role in a great many estate litigation files. Failure on the part of the parents to realistically explore the options with all interested parties is often to blame. At a minimum, you should ask your client to address the following questions:

• Are any or all children interested in owning the cottage?
• Are any or all children in a position to shoulder the costs and other obligations inherent in ownership?
• Is co-ownership truly realistic?

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Don’t forget to factor sons- and daughters-in-law into this equation. The same goes for succession of the family business, where the stakes are likely much higher. Too many family businesses have faltered or collapsed because the parents have failed to address whether any of the children are actually interested in or capable of taking over the business.

The only way to create a truly viable succession plan is to involve the family in the plan and ask the tough questions. Parents may be surprised to learn that a child has no interest in taking over the cottage; loves the cottage but accepts they are unable to handle the financial obligations; or loves the cottage, but cannot envisage co-ownership with their sibling and his or her family.

Similarly, encourage your clients to realistically explore their children’s interest in and aptitude for taking over the family business. An open discussion where your clients discuss the essential facts and realities is essential to crafting a truly workable plan.

Fair vs. equal

Equality does not necessarily translate into treating everyone the same. Equality is best defined as treating like people equally.

Consider a family where one child, George, still lives at home and has a learning disability that impedes his ability to work. Emily holds a professional degree and earns a high-end salary.

Would an equal division of the parent’s estate between such unlike individuals result in the fairest distribution? In an example like this, it may make the most sense to bequeath the family home to the underemployed, yet competent George, along with an equal or disproportionate share of the residue of the estate.

If consulted, Emily may agree with and support this plan even though it means she will be receiving a smaller share of the estate than her brother. If, however, Emily first learns of the unequal distribution when the surviving parent dies and the will is read, she may not be quite so receptive.

Along the same lines, bequeathing the cottage to the one child who still lives in the province and continues to make use of and participate in the upkeep of the cottage may be patently fair, particularly so if the other children receive an equalization payment in lieu thereof.

However, if parents fail to discuss this with the children and explain the reasoning behind the distribution, it may seem unfair when the terms of the will are read. Communication and the sharing of information are key.

Planning for the big day

There is a third scenario where clients may wish to speak with their adult children about the estate plan: when a significant amount is involved.

In many cases, the parents have spent a lifetime amassing, and learning to manage, their estate. An outright blind transfer to the next generation may not be the wisest option. Advisors often recommend testamentary trusts to facilitate the actual transfer. A trust can be structured to provide a fixed income stream with staggered capital distributions, allowing beneficiaries to mature into their wealth. In many cases, this may be enough.

Depending on the quantum involved and the maturity and financial acumen of the recipients, additional preparation may well be in order. This can, and often should, be done without divulging the actual dollars involved.

No matter their level of education or degree of sophistication, the children may have minimal, if any, experience dealing with professional advisors (investment managers, trust officers, financial planners, accountants and lawyers), coupled with limited financial literacy. As such relationships will no doubt be crucial down the road, it may make sense to begin the introductions now.

Opening lines of communication

Family meetings may be the most appropriate forum for addressing issues such as cottage succession or an unequal division of assets. The meeting can be informal and provide an opportunity for the parents to present the proposed plan.

Sometimes, the purpose is simply to put the children on notice of what is to be done. At other times, the purpose may be to either gauge reaction or welcome input to a developing plan.

Depending on the issues and family dynamics, more formally structured meetings may be recommended. A formal family meeting, facilitated by an outside mediator, may be most appropriate for addressing estate plans that are potentially more contentious.

We have found including children as guests at special annual or semi-annual advisor meetings successfully addresses any knowledge or maturity gaps. The meeting may include advisors from a number of disciplines — the family lawyer, accountant, trust professional — or be the purview of the investment advisor only. The agenda should include an educational component tailored to be of benefit to the inheritors.

An effective estate plan should reflect the goals and wishes of those transferring the wealth and, at the very least, be understood and accepted, if not embraced, by those expecting to inherit.

So, encourage clients to consider the plan from the perspective of the recipients and, where consultation and/or explanation may be prudent, to get the conversation started.