Ease the inheritance experience for your heirs by sharing the objectives of your estate plan in advance.
Despite appearances to the contrary, receiving an inheritance can be a very challenging experience. Managing a transfer of assets at a time of bereavement is difficult emotionally, and that can be further amplified if an inheritor has never before received an inheritance or been well-informed about the process beforehand.
Inheritors in Canada are generally unprepared to receive a transfer of wealth, according to our survey of 1,054 high net worth individuals on their attitudes and intentions toward giving and inheriting wealth. (For highlights, please see the Wealth Transfer Report.) In part, it’s because “family inheritance is one of those conversation topics that is still strangely taboo,” says survey respondent Beth, a 50-something entrepreneur.
With an estimated $400 billion set to be passed down to inheritors in Canada over the next generation, more and more families are likely to experience this difficult transition. One of the critical success factors is making sure that inheritors have the information they need to take over the estate. Here are three simple ways that family members can help improve the inheritance experience for their heirs.
The process of planning an estate, and later executing it, is not always as smooth as a benefactor may have hoped. Often, that’s due to a lack of communication. “The older generation sometimes neglects to communicate their expectations and goals to their heirs,” says Abby Kassar, Vice-President of High Net Worth Planning Services at RBC Wealth Management in Toronto.
The first question an inheritor is likely to ask is ‘What am I getting?’ This is a question most benefactors anticipate: our research found that 75 percent of Canadians surveyed were informed of the dollar value of their inheritance in advance. However, an equally important question for an inheritor may be ‘What should I do with it?’ – yet considerably fewer respondents knew the answer. Only 32 percent of inheritors surveyed had been told in advance how their benefactors wanted them to use the assets.
Would-be inheritors may not think to ask this question, or they may be reluctant to ask it out of fear that it may be perceived as eagerness to take over the estate. This puts greater onus on the family elders to broach the subject well ahead of time, says Kassar.
“Inheritors probably don’t know the right questions to ask, and they may not feel comfortable asking them,” she says. But a lack of communication can lead to the money or other assets being used in ways that may not align with a benefactor’s wishes.
“Often we get calls from clients saying, ‘We think they wanted us to use it to fund our childrens’ education,’” says Ilana Lipkin, a Financial Advisory Consultant at RBC Wealth Management in Toronto. “But it hasn’t been clearly spelled out in the will.” A lack of clear communication increases the likelihood of disputes between heirs, particularly if the estate plan dictates an uneven dispersal of assets. Communicating such decisions ahead of time, and explaining the reasoning, can help minimize problems.
Failing to pass on key information can also hamper the next generation’s ability to build on their inheritance. Investment plans begun before death may not be well understood, and potentially abandoned. If there’s a family business involved, the older generation may have specific wishes or directives that must be articulated in advance.
“If there was planning that needed to be completed by the second generation, then the consequence of not bringing them up to speed may result in the plan not being executed successfully,” says Kassar.
Many beneficiaries find that the difficulties of receiving an inheritance are exacerbated by a lack of knowledge about how wealth transfer works. Only 28 percent of Canadians surveyed say they had been made aware of the different ways of transferring wealth.
There are different means of transferring wealth, depending on your objectives. For instance, instead of a direct transfer of cash, a benefactor may choose to put funds into a trust, which will disperse the assets over time. A benefactor may also fund a life insurance policy, and name a beneficiary to receive the death benefit. Some choose to use joint accounts with rights of survivorship to transfer assets to their intended beneficiaries.
Of course, there are many more options for transferring wealth in the form of real estate, securities, and registered products that can be passed on to the heir. In the case of a family business, assets can be handed down in the form of company shares. Whatever the case, special consideration needs to be given to the instruments being used to facilitate the transfer. A lack of familiarity with these instruments may lead to confusion or poor decision-making, which can negatively impact the estate.
“When you’re looking at tax planning that involves trusts and corporations – where steps have been taken to put that plan in place – there may be requirements to take action on further steps in the future to ensure that the plan is successful,” says Kassar. And a well-informed heir will be better positioned to carry out those steps.
Many benefactors don’t introduce their heirs to the professionals charged with handling the transfer of assets: only 14 percent of survey respondents say their parents introduced them to the team. This can lead to hasty, first-time meetings conducted during a time of bereavement, which can cause greater stress, possible misunderstandings, and logistical problems as heirs try to sort out whom they need to deal with.
“I think it’s a good idea for parents or other benefactors to have a family meeting to introduce their heirs to some of the professionals who have been involved in the estate planning process,” says Lipkin. These typically include lawyers, tax advisors, accountants, financial advisors, insurance agents and possibly business valuators. It’s important for heirs to understand their roles and responsibilities, and how they coordinate their efforts to execute the estate plan.
The support network should consist of internal and external advisors and professionals, as well as extended family members and trusted friends. The topic of death and inheritance can be daunting, to be sure, and the wealth transfer process can be stressful. But thorough preparation ahead of time can avoid a last-minute scramble to sort out family finances during a time of grief.
“Planning is essential,” emphasizes Kassar. “Sometimes where we can’t control behaviour and we can’t control circumstances, the one thing we can control is planning.”
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