Advisors play a key role in families’ financial affairs. In recent years, the advisor’s place at the family kitchen table has expanded beyond investment management to include tasks such as estate planning and wealth transfer that underpin family unity.
A TD Wealth survey of real estate professionals found that family conflict is the top threat to estate planning. What poses a threat? Respondents said the main cause of family conflict was beneficiary designation (30%), followed by lack of communication (25%) and blended family dynamics (21%).
We are increasingly seeing the effects of family conflict on property in Canada. Counselors must pay attention to better serve their clients and, in turn, their clients’ families.
Beneficiary designation
In Canada (except Quebec), the ability to designate beneficiaries for insurance policies, segregated funds, pension plans, TFSAs and RRSPs/RRIFs provides a way for annuitants and policyholders to avoid inheritance tax. It also ensures a relatively smooth transfer of plan proceeds to the beneficiaries of their estate.
Two cases in Alberta and Ontario highlighted the designation of beneficiaries as a major cause of family conflict.
Morrison Estate (Re), 2015, Alberta Court of Queen’s Bench
John Morrison, predeceased by his wife, died in 2011, leaving a valid will which provided for his estate to be equally divided among his four children: Robert, Douglas, Cameron and Heather. He also made a bequest of $11,000 from Robert’s portion of the estate, to be divided among John’s grandchildren. Each child also previously received $25,000 from the sale of John’s primary residence.
At the time of John’s death, the largest single asset in his estate was a death-date RRIF worth $72,683. Douglas became the sole beneficiary of the RRIF. The estate’s assets, including the RRIF, were $77,000.
Because Douglas was not a “qualified beneficiary” (a spouse, common-law partner, disabled child or financially dependent grandchild), he could not receive the $72,683 RRIF proceeds on a tax-deferred basis. The estate was responsible for paying income taxes to the RRIF, which amounted to $28,780.
After paying RRIF taxes, debts, and funeral expenses, the remaining estate to be distributed to the children was $21,733 ($5,433 for each child). Therefore, Robert’s share was not enough to repay the $11,000 bequest to John’s grandchildren.
Cameron made an application for advice and directions, seeking an order to recognize the RRIF income as part of John’s estate, which would then be divided equally between the four children, rather than as a “gift” to Douglas.
The court found, among other things, that the fact that John’s will provided for an equal division between his children and fair treatment for each of them did not undermine John’s intention that the RRIF proceeds would go to Douglas, to the exclusion of his other children. Therefore, the RRIF proceeds remained with Douglas. The court further found that the estate’s payment of the RRIF tax liability was unfair, and Douglas was ordered to repay the estate $28,780.
Finally, the court explained that John “…was unaware of the tax consequences of designating his son as a beneficiary (and that) the designation of a beneficiary must be made with full knowledge of the benefits and detriments and consequences of making a designation or not making a designation…”.
McConomy-Wood v. McConomy, 2009, Superior Court of Ontario
Lillian McConomy, predeceased by her husband, died in the fall of 2015, leaving a valid will that provided for the equal division of her estate among her three children: Lewis, Roland and Lisa. Lillian, among other estate assets, had an estimated death date RRIF worth $392,190. Lisa was surprised to learn that she was listed as the only designated beneficiary of the RRIF. As the sole beneficiary, Lisa ultimately received a check for RRIF proceeds in the amount of $392,636.
Lisa’s brothers, Lewis and Roland, filed suit, arguing, among other things, that Lisa had entrusted the RRIF to each of the beneficiaries of Lillian’s estate and should not have been the sole recipient of the proceeds. They claimed that their mother had always (especially in the weeks leading up to her final days) maintained that her children would be treated equally in their inheritance, stating things like, “Don’t worry, all my estate will be divided equally between the three of you.”
The court was satisfied that, based on Lillian’s history of treating her children fairly and equally throughout her life, it was her intention for all three children to receive equal income from the RRIF. Lillian was ordered to share the proceeds with her siblings.
Mixed families
According to the 2016 Canadian Census, 9.7% of children under 14 years of age (567,270 in total) live in blended families — with or without half- or half-siblings. Advisors must be mindful of the unique estate planning challenges for blended families.
In many cases, each spouse or partner brings independently created wealth to the relationship, but they also create wealth in the new family unit. The question arises how to deal with assets after death.
There are several options available, depending on family composition and circumstances. They may consider establishing a spousal trust, where certain assets are transferred within the trust to the surviving spouse and children from the previous relationship are contingent beneficiaries. This provides ongoing financial support to the surviving spouse or partner, while protecting the capital/inheritance of the deceased’s children. This usually does not include the surviving partner’s children. The insurance can also be used to provide an inheritance for children from a previous relationship.
Communication
In the beneficiary designation cases discussed above, the court ruled in the first case (Morrison), that the father’s intention was for one child to receive the RRIF income. In the second case (McConomy-Wood) the court found that the mother’s intention was for all three children to receive the RRIF income. Of course, the resolutions did not satisfy everyone. Better communication would reduce the need for court intervention.
Because communication is the basis of successful wealth transfer and estate planning, advisors should encourage family meetings to discuss some or all of the following topics:
- last will and beneficiaries
- permanent power of attorney (for property/personal care matters)
- personal/health care directive, representation agreement
- records
- charitable donations
- candidates for the position of enforcer or substitute enforcer
- validity and justification for the designation of beneficiaries
- disability planning
- use of a family cottage/cottage
- tax planning
- business succession planning
- protocol regarding personal items
- trust planning
- investments.
As advisors become aware of the increasing role they play in their clients’ lives, they should encourage them to have timely and meaningful conversations about the very serious topic of wealth transfer to help prevent family conflict. The benefits are incalculable, as is the value of the advice.
Tim Brisibe, TEP, is the Director of Tax and Estate Planning at Mackenzie Investments
