Help prevent family financial feuds with careful estate planningBy Rosemary McCracken | April 01 2016 07:00AM
Families are often hotbeds of contention. Family feuds can be financially and emotionally draining with spouses and siblings sometimes going to extreme lengths, such as suing one another, over their differences. Financial advisors need to be aware of some of the problems that may arise in the families of the clients they serve, and how they can help prevent them.
The blended families that result from second and subsequent marriages can add fuel to financial disagreements. “They’re the biggest reason for family discord that we see because of the complicated nature of the relationships,” said Peter Glowacki, regional co-leader of Borden Ladner Gervais LLP’s Vancouver Family Wealth Counsel Group.
Blended families can create major problems in estate planning, noted Christine Van Cauwenberghe, a lawyer and vice president, tax and estate planning, at Investors Group in Winnipeg. “Spouses who have children from previous marriages need to decide what is fair in their particular circumstances. If one spouse has brought more financial assets into the marriage, it would probably be fair if his or her children were left a greater share of the estate than the children of the other spouse. Usually both spouses have some assets they want to protect for their kids, so both may have a vested interest in coming to an agreement in order to protect the two branches of the family.
“We don’t recommend that all the assets be left to a surviving spouse,” she added. “Rather, the estate should be carved up upon the death of the first spouse. The surviving spouse can be left the home and perhaps the registered investments, while the children of the late spouse may get the other investments. Life insurance is a tidy way of creating an estate for another branch of the family.”
Spousal trusts—whereby your client’s surviving spouse has the use of the home and the trust assets during his or her lifetime, and they become the property of the children from the first marriage upon the surviving spouse’s death—are not usually practical, Van Cauwenberghe said. “That’s because they only provide the children with funds after the death of the surviving spouse, which can take place years later, especially if this spouse was considerably younger than your client.”
Property held jointly
Property held jointly can also create a major problem in estate planning. “We’re seeing a lot of elder financial abuse today,” Van Cauwenberghe said, “which sometimes involves adult children trying to convince their parents to add them as joint owners of their investment accounts.”
The reason that is usually given is to avoid probate fees, because assets held jointly with right of survivorship pass directly to the surviving joint owner and are not subject to the probate process. But a joint owner can clean out your client’s account, or take out loans against it. “In order to save the estate probate fees [as high as 1.5% of the value of the assets subject to probate in Ontario to none for notarial wills in Quebec], naming a joint owner can undermine the entire estate plan,” Glowacki said.
“And if a joint owner should divorce,” Van Cauwenberghe added, “his or her ex-spouse would have a claim.”
Some clients may think a joint owner will make it easier to maintain their assets in the event that they are no longer capable of doing so, she said. “But that’s exactly what the person they appointed as their power of attorney is supposed to do.
“And when your client makes a child or children joint owners of an account,” she said, “he will need to report the proportionate amount of unrealized gains at the time the child or children are added on. In order to save the estate probate fees after his death, the client will be paying capital gains tax right now.”
Financial advisors need to explain all this to clients who are thinking about naming their children as joint owners, she said. “And if a client is still adamant about adding joint owners, we recommend that they see a lawyer and put their intentions for doing so down in writing.”
An adult child may give up her job in order to care for an elderly parent. But if the proper steps aren’t taken, this can lead to a family crisis before and after the parent’s death. “A legally binding agreement, signed by the parent, should be put in place outlining the terms of the arrangement,” Glowacki said. “The parent should get independent legal advice in order to avoid allegations of ‘undue influence’ from the other children.”
The terms of the agreement should include whether the caregiver will receive a share of the parent’s estate as part of her compensation, or whether she will be compensated on an ongoing basis during the parent’s life, such as with a monthly salary, Mr. Glowacki said. “The agreement should also address whether the child is living in the parent’s home and whether she contributes financially to its upkeep, and whether the caregiving is a 24/7 arrangement. Or, on the other hand, whether the elderly person has moved into the home of the adult child, and the details of that financial arrangement.”
A family meeting with all the children in attendance should be held before or shortly after the agreement is drawn up, he added.
A legally binding agreement should also be drawn up if an elderly relative moves into the home of an adult child. “It should spell out whether the elder pays rent, which party pays if renovations to the house are required to accommodate the older person, and who will benefit if these renovations add to the value of the home,” Glowacki said. “Big dollars may be involved here, which may affect the inheritances of the other children.
“And, down the road, expensive third-party caregivers may have to be hired. The agreement should also address this possibility.
“The agreement should be put together by the lawyer of the older person,” he added. “And this lawyer needs to be told if there are mental capacity issues so that he can do a proper job of documenting his client’s file—stating, perhaps, that he took extra time to explain so that his client understood all the terms of the agreement, and that he or she was under no undue pressure from family members.
“The agreement should be shared with all the children in the family so that they are all on the same page.”
Some families try to ensure that their children get off to a good start by giving them money to help purchase a home. Often gifts of money are given as wedding presents, but what happens if the marriage breaks down? “Family property legislation varies widely across Canada,” Glowacki said. “Depending on where your client lives, gifts of money used to acquire a family home may be sharable by the spouses upon a marriage breakdown.”
Your client should document the gift so that it is clear that it is a gift to the child, not to the couple, he added. “And speak with a lawyer in his jurisdiction who is familiar with family property legislation.”
A better strategy, he said, may be to lend the child money to purchase a home rather than gift it. “Have the client document the loan so it is clear that he intends to be repaid, and secure it by taking out a mortgage with it. And spend some money to ensure that the child’s spouse gets independent legal advice so he can’t claim he did not understand the situation.
“And, at some point if the marriage survives, your client can always forgive the loan.”
Cottages and other vacation properties are often lightning rods for family squabbles, Van Cauwenberghe noted. “Family members have a lot of emotional attachment to these homes. The parents may dream of them being passed down from generation to generation, but it is usually not practical for them to have more than one owner. One child may have very clear ideas of what she wants in terms of renovations, while another child may not have enough money to contribute to the property’s basic maintenance, and a third child may live far away and not be able to use it.”
“The reality is that it is often not viable to pass these homes down to another generation,” Glowacki said. “The family should sit down and discuss what should be done about the property. What does it cost to maintain it every year—taxes, insurance, hydro, heating and repairs? What capital expenses may arise in coming years, such as a new roof and a septic system?”
“It may mean selling the property and dividing up the proceeds of the sale,” Van Cauwenberghe said. “Or having one child purchase it from his siblings.”
If the decision is made to keep the vacation property in the family, Glowacki said, “a legally binding co-owners’ agreement should be put in place, spelling out everything, including what will happen if one of the children should want out down the road.”