All about estate planning, from the simple to the complex
Advisors can play a vital role in estate planning by connecting with their clients and asking the right questions
By: GAIL JOHNSON
Date: August 18, 2016
Most advisors would agree that estate planning is a key component of a client’s financial plan. It’s also an area that can differ greatly from client to client, from estates that are simple to those that are extremely complex.
Because a diverse range of factors often come into play when estate planning – from asset distribution to tax minimization, from a clients’ special wishes to a family’s unique needs – it’s crucial for advisors to be informed and connected to their clients, says Jennifer Poon, director of advanced planning – wealth, at Sun Life Financial.
“Most people want to maximize gifts and minimize taxes, but ultimately people just want to know their family is taken care of,” says Ms. Poon. “No one wants their passing to be a cause of conflict.”
At its most basic, estate planning can be straightforward. Consider, for example, the scenario of a widow who’s survived by a single child and whose assets are passed through an insurance beneficiary designation such as a death benefit of life insurance or segregated fund contract.
“Anything passed through an insurance beneficiary designation doesn’t go through the estate,” explains Ms. Poon. “The insurance company would cut the beneficiary a cheque, and that would be the end of that.”
Matters are often much more complicated, however. A client may have married several times and have multiple children from those previous unions that he or she wants to provide for. Some estates are subject to regulations and taxes in multiple jurisdictions – for example, a Canadian resident who is also a U.S. citizen with a child living in Japan and another living in the United Kingdom.
Other challenges may involve family businesses where succession issues arise and where it may be difficult to equalize the estate. Another area that is becoming more prevalent is planning for disability: people with children or grandchildren who have physical or mental disabilities wanting to plan for their dependants’ long-term well-being.
Ms. Poon – who is part of a team of specialists at Sun Life Financial who assists advisors with estate planning, particularly complex cases – says that although the specifics of each client’s situation will demand special attention, there are some key factors advisors should take into account with all estates.
The most obvious consideration in estate planning is taxes. “The bigger the estate, the more taxes you may have to pay,” she says. Tax implications can be planned for ahead of time, however, and there are techniques advisors can employ to minimize income tax and probate costs, which vary from province to province.
Another key factor is estate distribution, or, “getting the right amount of the right asset to the right person”, says Ms. Poon. For example, if an elderly parent is living with an adult child in her own home, it may seem logical to leave the house to that caregiving child. But the interests of other children would have to be addressed. This area can become even more complex when there are additional assets such as land, a business or a cottage.
“The principle of ‘fair’ versus ‘equal’ is a common consideration,” she says. “Advisors can work with clients to help find ways to equalize their estate.”
Estate litigation is a common concern in estate planning, given the stress and expense involved. This most commonly occurs when there’s a real or perceived unequal distribution of assets and one party challenges the will. To avoid this, advisors should open the line of communication early on to get clients thinking about questions like: Are you prepared? What are your wishes? Who do you want to get what assets, and what will the division be?
“Litigation comes in when there is ambiguity about what you want and the judge has to figure it out,” says Ms. Poon. “Letting people know what your wishes are is key. Start the conversation and get something on paper early.”
The problem, however, is that most people procrastinate.
“Most people don’t plan to die, and either don’t get around to making that estate plan or have a mental block about getting on with it,” notes James D. Baird, a lawyer at Vancouver’s Boughton Law Corporation. “The reason may be a family issue or a problem that they continue to mull over trying to come up with a solution – all the while delaying. Part of proper advice is reviewing the facts, analyzing and identifying the problems and then posing solutions.”
Another potential obstacle is neglecting to execute a power of attorney. While it can be hard for people to imagine not being of sound mind and able to handle their affairs, the best time to name a power of attorney is before mental incapacity is even an issue, says Mr. Baird.
“Estate planning and will-making should be done early, when one is healthy and competent,” he says. “It should be thorough and account for all contingencies. Consider provisions for grandchildren, and other descendants not yet born. What if a beneficiary pre-deceases, then where does their share go? Leaving preparation of a will until old age or illness invites the suggestion of undue influence by beneficiaries and the allegation of incapacity,”
People must be realistic in the assessment of their estates and their beneficiaries. If one has a modest estate, says Mr. Baird, long-term trusts that postpone the date on which children can receive their inheritance may simply be impractical.
“One should avoid trying to ‘rule from the grave’,” he says. “Complex directions or conditions for the receipt of gifts usually don’t work as intended and lead to resentment by beneficiaries.”
Another challenge is the choice of executors and trustees. “It is a difficult job, and not every family member has the ability or temperament for the job,” says Mr. Baird.
With so many different elements to address, a financial advisor can play a vital, central role in estate planning, says Ms. Poon. It all comes down to starting the conversation with clients early on and engaging their family members where possible as well.
“If you’ve known a client for 20 years and have built up a relationship with someone, it’s easier to understand family dynamics and come up with workable solutions,” she says.
Working closely with a family can bring peace of mind for everyone involved and could also have other positive side effects: it could help the advisor acquire the heirs as clients. But whether or not the money remains after a client passes away, the foremost goal of advisors is protecting and building family wealth, notes Ms. Poon.
“It’s a holistic approach, and advisors do this because they genuinely care for their clients,” she says. “Ultimately, people want the peace of mind of knowing that everything will be okay.”
|How to keep clients from panicking in turbulent times||The power of guarantees in legacy planning|