Planning for – or even thinking about – one’s demise or incapacitation can be daunting for most people, but for high-net-worth individuals it can be particularly challenging.
And yet, as experts in the estate planning field like to point out, if you don’t have a plan, the government has one for you, and it may not be what you wanted.
One of the first things that business owners, professionals and other high-net-worth individuals should put in place is a power of attorney, said Suzana Popovic-Montag, an estate lawyer and managing partner with Hull & Hull LLP in Toronto. “You want to make sure there’s someone who’s authorized to be a business decision-maker when you can no longer make those decisions or run the business,” she said.
She sometimes recommends two separate powers of attorney, she added, “one just to deal with the business, and one to deal with the rest of your affairs, so that you don’t necessarily have the same person involved in your personal matters.”
For Krista Kerr, chief executive officer of Toronto-based Kerr Financial, a multi-family office practice and integrated wealth-management firm, both preparing a will and assigning the right executor are key to successful estate planning.
“It’s important to choose carefully,” she said. “If you’re a business owner or have a large estate, then it gets more complex.”
Liquidity can be a big issue
Being an executor is a tough job, and even more so when dealing with features such as holding companies, trusts or U.S. resident beneficiaries. Ideally you want someone who knows you and cares about you, she explained, but for younger family members, being the executor of a large estate can become overwhelming.
“Then it can be helpful to have an advisor appointed jointly with your family member,” Ms. Kerr said, “or to say in the will that it’s okay for them to hire a professional to assist.”
Liquidity is a big issue when the head of the family is gone, either suddenly or not, or suffers from mental or physical incapacity. When it’s the former, obviously a life insurance policy is one solution, as are financial instruments such as RRSPs, RRIFs or savings accounts with designated beneficiaries. An added plus of having those set up means that the proceeds do not have to go through probate or be taxed.
Do you have a good senior management team? ... All of a sudden something happens and the business could be stuck without direction if you haven’t thought about those things.Krista Kerr, Kerr Financial
Many family offices help their clients deal with the potential tax implications of legacies, said Kevin Algar, chief executive officer of Algar Virtue Family CFO, a multi-family office based in Calgary and Victoria. One way of minimizing the tax burden, for example, is an estate freeze, “where a person introduces a structure that passes the value on to the next generation without tax consequences,” he explained.
Trusts, which are often part of an estate freeze, he added, “give you a way of passing on assets to minor beneficiaries, in addition to providing a desirable tax result. If there isn’t a trustee set up to manage the affairs for a minor, a public trustee will represent them, and that person may not necessarily care about things in the way a family business would.”
Indeed, business owners need to make sure they have set up some kind of mechanism so that the business will carry on successfully when the owner isn’t there, said Kerr.
“Do you have a good senior management team that can run the business in your absence? Or an ongoing board of directors, or an advisory board? That’s an extra level we would go through with business owners, because it’s hard if you’re so focused on your business and the day-to-day is so busy. All of a sudden something happens and the business could be stuck without direction if you haven’t thought about those things,” she said.
Money flows like a waterfall
Understanding the size of the estate and who would get what is also important when making decisions, she said. The team at Kerr Financial help clients visualize that by using a waterfall illustration.
“It looks at how much money goes to each person who’s named in your estate. If you are a business owner and all your money is in the company, and you’re not thinking about how big it’s getting, or you’re now at the point where the business is much more valuable, or you’re going to have a sale of the business, it’s good to think about how much money is available.”
Being aware of who would inherit how much could forestall a potential situation where the children or family members receive more than the legator is comfortable seeing them get at a certain age.
Meanwhile, like succession planning, reviewing or updating estate plans is always the right thing to do.
“People think that once they’ve prepared a will, made their estate plan, they’re done. They never have to go back to it. And that’s just really not the case,” Popovic-Montag said.
“As an estate litigator, so I can tell you how often these things go badly because people just don’t take the time to revisit them. Any time there’s a change in the family circumstances – maybe someone you’ve named as a beneficiary has died, or you suddenly have increased or decreased wealth – these are all triggers to consider whether or not you should be talking to your estate planner.”
She recommends doing so every three to five years as a rule of thumb, she added, but “when there’s a trigger, I would be suggest you should be looking at it right away.”
At Kerr Financial, reviewing a client’s estate plans is on the annual calendar. “We may not make changes,” she said.
Prepare a video
But there are reasons to make adjustments. A drastic change in the size of one’s estate because their company has gone public is one example, she said. “Or you’ve got all sorts of extra assets for some reason. Or there’s a change in your marital status or that of a child, or one of the beneficiaries moves to another jurisdiction.
“It’s common in Canada to leave some money in trust for children,” she added, “but if one of them has moved to the U.S., being the U.S. beneficiary of a Canadian trust is complicated.”
As part of estate planning, it can also be a good idea to prepare a testamentary letter or even a video, said Kerr, “in which the legator explains the rationale behind their decisions. It can help avoid misunderstandings.”
After all, she said, one of the biggest negative consequences of miscommunication is not necessarily financial but disintegrating family relationships.
“You don’t have to say it upfront,” she said, “but at least if you leave a letter you can explain why you’re making the decisions you’re making.”