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Fire Drills for Estate Planning

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5 min read
Those responsible for the safety of others - from lifeguards, to school teachers, to the military - all conduct regular safety drills to ensure their systems work, and to fine tune any changes needed as life or their surroundings change. There is tremendous merit in applying that same risk management approach to estate planning- both for ourselves and for our loved ones. It may seem initially uncomfortable to contemplate one’s incapacity or death in such a manner, but we are reminded that our lasting legacy, both human and financial, can be damaged considerably by avoidance or poor, outdated, inconsistent or unworkable planning.
The estate planning fire drill begins with a good list. Do we have the following: Wills, enduring powers of attorney, personal directives, beneficiary designations, any joint property, possibly a family trust, a shareholder’s agreement, a marriage contract, and/or gifts to children? It is a great list, but we need to test drive each document, on their own, and in concert with the others, to make sure they collectively achieve our desired results.

 

This test drive can focus on 4 key questions:
1. Does the plan work to accomplish your current wishes?
2. Do we have the right people in place to execute the plan?
3. Are there any inconsistencies between the various documents? and
4. Do the results work for the client and the client’s loved ones?

 

Let’s look at an example to illustrate how the fire drill might play out. First, test drive question #1, does the plan work to accomplish your current wishes? A is widowed with three adult, independent children. A had a successful business, and has generously shared their wealth with the three children, who are now financially set for life. A has remarried. A’s second spouse has one adult child, with whom A does not get along. A wishes to provide for their second spouse, but doesn’t see a need to share greatly, as they weren’t together when A made their wealth. Plus, A knows that anything shared with the second spouse will ultimately go to the spouse’s child. A believes their own children have plenty and don’t need more. A is concerned that the grandchildren won’t be as well off as their parents.

 

A does a will, leaving 20% of A’s estate to the second spouse, 20 percent to be divided equally among A’s children, and the remaining 60% for A’s grandchildren, to be held until each grandchild reaches the age of 25. A adds a clause in the will explicitly stating that A is leaving nothing to the second spouse’s child. A does not discuss or share A’s will with their
family. A dies. Second spouse is surprised and hurt that they are only getting 20%, and stung by the clause explicitly excluding their child. The children are hurt because although they don’t need the money, they see it as a slight against their parenting and their rightful place as successors who would in turn provide for their children, A’s grandchildren. Further, one of the children, B, has one child, and the other two have two each. B sees it as unfair
that B’s child gets the same as the other grandchildren, when in fact B’s child would get more if it flowed first through B. Lastly, through the probate process, the grandchildren will now have full knowledge of A’s wealth, and their higher financial ranking compared to their parents.

 

By test driving the will, and seeing its potential repercussions, particularly from the eyes of each affected family member, A might discover that his desire to provide for the spouse, and to empower A’s grandchildren, could be perceived in a much different, and more negative and damaging light than A intended.

Turning to the second question, has A appointed the right people? For A’s will, A appoints the eldest child, C as executor. C is an accountant and is orderly and objective. A appoints their second spouse under the power of attorney and the personal directive, since A and their spouse are together most times, and C is busy. A has a stroke and the power of attorney and personal directive are triggered. What impact will this have on the spouse’s relationship with A’s children? On the dissipation of A’s estate? On the involvement of the second spouse’s child?

If A is still involved in a business, will A’s spouse take over in any role as a director, and shareholder? Is there a unanimous shareholder agreement? How does it define incapacity, and what happens? Is there liquidity to pay A out?

If A has a family trust and is the trustee, who is the alternate trustee? How well will that new trustee work with the second spouse?

When A dies, how will the spouse and the other two children interpret the appointment of C as executor? Will it be seen as a final confirmation of A’s preference for C? Will C view it as an unwanted burden since C is aware that the second spouse is poor at handling money and now C must ask for an accounting? Will C want to be the trustee for the trusts for all the grandchildren? Will C’s siblings like that C is handling their children’s inheritances and making judgment on what funds should be used when and for what? Can or should C charge their professional rates for acting as executor?

Turning to the third question, are there any inconsistencies between the various documents? A owns the principal residence jointly with spouse 2, and has named the grandchildren as beneficiaries of their RRIF and TFSA. When A dies, the presumption will be that the principal residence, and likely most property in the home, goes outright to the spouse. It will not be calculated as part of their 20% interest in the estate. The full value of the RRIF will go to the grandchildren, and the tax burden will be borne by the estate, before the percentages are calculated. It is likely this is not consistent with A’s intentions, and it is also likely that it will cause tension amongst the family.

A might wish to give certain items, such as a car, or land, to a child, and therefore include the gift in the will. However, A may in fact own the car or the land through A’s corporation. So there will be no car or land in A’s estate to give.

The final question, do the results work for you and your loved ones, is about changing perspectives. Looking at the planning through the eyes of the spouse and the children, and walking through some specific examples of life events may enlighten us as to the unintended consequences of our planning. As our grandmothers were fond of saying, the road to hell is paved with good intentions. Viewing our family situation clearly, and honestly, and making decisions based on that, not on what we wish for it to be, is likely a better way to set the family up for success.

Lastly, this final question invites discussion with the family. Some level of transparency may be very helpful in test driving what we think is a splendid (but potentially misguided or unrealistic) plan. It will shed light on potential stressors, and be instructive as to what adjustment we may wish to make, or what further honest conversations we may want to have.

Estate planning is not a one time task. It is an ongoing process that deserves thoughtful review, practical testing, and honest conversation.

Before the unexpected forces decisions for you and your family, take the time to test drive your plan and ensure your documents truly reflect your wishes and work together the way you intend.

Contact our Wills, Estates + Trusts Group to schedule a consultation. Amie Heil and Ronda Johnson are here to help you review, stress test, and strengthen your estate plan with clarity and confidence.

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