Fair and equal giving among multiple beneficiaries

Within certain situations and scenarios in life, the words “fair” and “equal” may sometimes be used interchangeably. For example, it may be accurate to say two hockey teams that tied were fairly and equally matched; giving an apple for an apple is a fair and equal trade. Even the very basic definitions of fair and equal suggest an element of overlap in the two terms, with the former being defined as “just, unbiased and equitable,” and the latter defined as “identical in amount, size, number, value, or intensity, or evenly proportioned or balanced.”⁸ When it comes to estate planning, however, the definitions become more distinct, where fairness often falls into more of a subjective or situational realm, and equal is qualified more objectively and concretely. Potential challenges in focusing on fairness as the priority in estate planning may rest in the fact that what is deemed to be fair by an individual may not necessarily translate to equal, and the giver’s interpretation of what’s fair may not be in sync with the children’s or other beneficiaries’ point of view or expectations. These inconsistencies may be the source of significant issues down the road, ranging from resentment and family conflict to challenges to a Will if an individual feels they have been slighted or have not been adequately provided for.

Trends seem to be indicating that claims against estates may be on the rise in Canada, given that some of the factors that often increase the proportion of challenged Wills include the increase of more complex family structures, changes in economic climate, and the simple fact that more estates are being passed down given the rise in the senior population.⁹ And while statistics on estate litigation haven’t been tracked historically, there are some unofficial records from Ontario approximately three years ago that seem to indicate approximately 1 in 9 estates are contested in court, as noted in the RBC Wealth Management informational article, “Until death do us part: then everything can change.”¹⁰ These aspects and statistics highlight the importance of looking at the complete spectrum of factors and placing the main focus on dividing assets equitably while at the same time being conscious of the fact that there may be certain situations where fair doesn’t have to mean equal. At the end of the day, it’s about finding the solutions to strike the right balance, depending on your individual circumstances, and ensuring family communication and understanding are consistent throughout the process.

Why fair may not always be equal

Decisions around dividing an estate and passing down wealth are often closely tied to what individuals perceive to be fair. Those perceptions may be based on a broad range of considerations and assumptions, such as the circumstances of their intended beneficiaries, family dynamics, current situations, financial needs of younger family members, relationships, and the list goes on. Any combination of these factors may push an individual to make certain decisions that they may justify as fair from their perspective, but the actual financial outcomes of those decisions may not translate to an equalization of assets and wealth among the beneficiaries.

Understandably, every individual and family situation is unique and there are certain instances when fair doesn’t necessarily have to mean equal (which will be discussed later in this section of the report). An underlying theme or driving force within estate planning, however, with the exception of the few special circumstances, should be on dividing assets in an equitable fashion to limit the likelihood of any future resentment among children or other heirs and to keep the family united.

Potential sources for inequality

Depending on individual circumstances, there may be the presence of certain inequality factors that should be taken into consideration as part of the planning. First and foremost, it’s important to differentiate between what’s fair and what’s equal as it relates to your unique situation, and then structure your decisions in a way that promotes equality. What follows are some key factors to assess and understand:

1. Taxable non-taxable assets. When dividing and directing assets during estate planning, it’s important to consider whether there are tax impacts that may create an unfair burden on one beneficiary over another. While some decisions may seem equitable on the surface, tax implications may throw off that intended balance. For example, if an individual opts to designate one child as the beneficiary of a registered plan and another child to inherit the after- tax residue of the estate, there are a range of things, such as the taxes on an RRSP/RRIF and capital gains on any non-registered assets, that could significantly decrease the after-tax residue. As such, it’s important to work with a qualified professional advisor to ensure the tax aspects of estate planning decisions are adequately accounted for.
2. Blended family situation. For those who are part of a blended or stepfamily, the lines are often blurred as to what is deemed to be either fair or equal, and there may be competing priorities within the family. Intentions to equalize certain family members may often be complex, as some individuals feel strongly about providing for their children from their previous relationship but not for their stepchildren, for example. In this situation, defining and discussing your intentions takes on a heightened level of importance, as does working with a qualified professional to find approaches to achieve those outcomes and ensure financial protection. As was discussed in Question 2 of this report, certain trust structures may be a very effective option to consider in this regard. There are also other planning structures well-suited for complex family situations to help equalize such as life insurance, a portfolio earmarked for a certain child, or beneficiary designations.
3. Disabled dependant. If an individual has a child who is disabled or who needs more assistance than others, this represents a situation where fair doesn’t have to mean equal. Again in this situation, communicating your decisions and reasoning in advance is so valuable to help the other child or children recognize that circumstances dictate and justify a deviation from an equal split. These discussions may also help to clearly define your idea of fairness, given the situation, and that providing more for the child who needs the additional support is actually an effort to better equalize in the end result.
4. Lifetime gifts versus inheritances. Depending on the individual and on family dynamics, it may be worthwhile to consider whether any lifetime gifts should be factored into the equation as part of an attempt to equalize beneficiaries in a Will. In other words, this would entail looking at whether there’s current inequality among your children from lifetime gifts or support and whether it’s something that may create resentment or conflict if those are overlooked in your plans. For some, this may come down to personal preference or viewpoint; regardless which stance is taken, however, discussing whether you will “count” these gifts as part of the overall equalization is crucial so children understand the reasoning behind the decision and have the knowledge in advance as to why there are potentially bigger inheritances for one child or certain children over another, or why lifetime gifts haven’t been included as part of the overall equalization. To better illustrate this point, let’s look at a basic example:

5. Varying financial situations among children. This is a common challenge often faced by those who are planning to give wealth. For example, one child may have a higher-paying job and already own a home, whereas the other may be completing a post-graduate degree or hasn’t found a career in their field or purchased a home. In these types of situations, it’s important to define what fair means to you, but at the same time recognizing that there’s no way of knowing what each child’s situation may be in the future. Despite the fact that their situations aren’t the same currently, adhering to an equitable approach to the division of assets may be the best option to avoid future resentment.

Being proactive with communication

When deciding what’s fair and what’s equal in estate planning, the reality is that feelings largely come into play, as well as potential assumptions about a loved one’s situation either now or in the future. Combine that with the fact that fairness is a term that may often be open for interpretation (and may not be in line from one generation to the next), and it becomes clear how issues and conflict may arise and escalate if family conversations and discussions don’t occur as part of the planning and decision process.

The role of documentation

Even when family meetings and discussions take place, a prudent approach is to document the reasoning behind the specific decisions. And for those who absolutely don’t feel comfortable discussing it with family up front, recording the reasons is crucial, as it will serve as the only explanation for loved ones as to your thinking process and perceptions as to what was fair and equitable from your perspective. Some individuals even choose to do videos or letters outlining what they’ve done if they don’t want to have those discussions ahead of time. Another option some individuals pursue is having a family advisor involved in the decision-making process to relay the information to beneficiaries.

Vacation property succession planning

This is an area many individuals don’t spend enough time thinking through and discussing with family members before a decision is made to pass down the property.

And oftentimes, an attempt to simply split the property equally among children is neither the best decision, nor the one the children are even hoping for. In fact, cottage properties are the source of many estate litigation cases, because individuals have overlooked individual family dynamics and circumstances and instead zeroed in on the black and white aspect of being equitable. Before opting for a straightforward equal split among children, some key questions to address include the following:

1. How many of the children are interested in owning the cottage?
2. Is co-ownership practical for each child and their own family?
3. What are the financial and time obligations for the property and who is able to, and wants to, take this on?¹¹

Family meetings may be very helpful in this regard and are the only way to clearly identify what each family member’s interests and personal position are. If a child isn’t interested, you can then look at other ways to equalize them outside of the property division and know that they will view the decision as fair and equitable.

Fair vs. equal for family businesses

The topic of family businesses is one that generates a great deal of questions around what’s fair and what’s equal in succession planning, and this represents a main situation where fair doesn’t necessarily have to mean equal. Challenges may often arise in a climate of meritocracy and when there are strong viewpoints that a certain child or children may have a bigger right to inherit a business over another or others. More specifically, there’s often one child who’s more involved than others and has put the sweat, time and hard work in. Or, there may be multiple children involved, but one stands out for making the business more profitable or for growing it and thus increasing family wealth.

Given the fact that approximately 80 percent of businesses in Canada are family owned, ranging in size from small all the way to large-scale corporations,¹² the importance of thorough and detailed succession planning cannot be understated. And though a commonly identified fear among family business owners is creating family disharmony in how the business is passed down, it’s important to recognize that there are strategies to handle every type of situation while preserving family values and goals.

Succession planning process

One of the first steps in family business succession planning is understanding your goals through inclusive intergenerational discussions. An effective medium to conduct these discussions is through family meetings. These meetings provide an environment and forum to talk about overall family values and provides an opportunity to gain better insight into the next generation’s interests and viewpoints regarding the business.

From there, the next step is to use clear and defined goals to act as your compass to what you (your family) hope to achieve with the family business. Goals start as general statements and evolve as you better understand your personal, family and business circumstances.

When it comes to the business, every member of the family may have his or her personal agenda depending on individual circumstances. For example, the person being involved in the family business creates very different needs than when that person was not involved. Likewise, having an ownership stake can change an individual’s view on what the business represents. This is where the three- circle model becomes a useful tool to map out differences in needs and views. The three circles represent the three groups family members (and non-family members) can fit into. The circles overlap to illustrate that individuals can be part of several groups. Once mapped, it should become clearer how different needs and views could exist depending on where a family member fits into the structure, as well as how and where individuals best fit into the structure. This information may then be used as a guiding principle for dividing the business in a way that promotes fairness and then seeking out alternate approaches to equalize where needed.

Options to consider to promote fairness

In accounting for all factors of a business, regardless of the situation or complex circumstances, there are succession planning tools and approaches that effectively address every potential need. These options help keep fairness at the forefront, and at the same time create an outcome where equality is still achieved through secondary means.

• Using non-business assets to equalize for other child(ren)
• Using life insurance as an equalizer for children not involved or sharing in the value of the business
• Leaving a child in the business, but without voting rights or shares
• If there are no other usable assets, establish that one sibling has to buy other siblings out

Much like with personal estate planning, succession planning for family businesses also hinges very strongly on open communication with all family members. This holds especially true when the business itself is not being passed in an equal manner. Children need to understand the decisions and the structures behind them, and even more so the context and reasoning. If children are not receiving an interest in the business but are being equalized in another way, it’s crucial to explain how fairness has been preserved through other means that were more appropriate for their situation.

Source: Succeeding in succession – a guide to keeping family harmony through your business transition. RBC Wealth Management Services.

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