When it comes to estate planning, what is deemed to be “fair” may not necessarily result in distributing assets into “equal” shares. At the same time, what is deemed to be "equal" may not feel "fair". As a result, the outcomes may not align with the expectations of all beneficiaries; And this can lead to resentment, family conflict and court challenges in the future.
Every family has its own unique dynamic. The givers’ assessment of what is “fair” may be influenced by a wide range of personal and cultural beliefs. Other considerations may also include the financial needs of specific beneficiaries and the varying degrees of personal connections between the beneficiaries and giver. Below are some factors that an estate plan should consider when determining how a distribution of assets can affect beneficiaries.
Fairness may not be the same as equal
Taxable Vs. non-taxable assets: In some instances, the inheritance received from an RSP/RIF account will be decreased by the tax liability owed to the CRA. Hence, specifically designating RSP/RIF accounts to one beneficiary and not another, may result in a smaller inheritance for the named beneficiary than intended. Other assets, like the Tax Free Savings Account or a principal residence have preferential tax treatment as there are no tax liabilities attached. Hence, specifically designating these assets to one beneficiary over another will also lead to an unequal distribution.
Types of Assets: Each asset has its own unique characteristics, including growth potential, degrees of risk, cash flow generation and liquidity. Carving out specific accounts or assets for one beneficiary and not the others can potentially lead to future conflict. Even if the initial market value of the gifts are equal, the perceived benefit may vary. For example, valuable art & jewelry may be difficult to sell and could be less favorable for a beneficiary that needs liquidity. In the realm of stocks, these can be perceived to have more growth potential when inherited during rising markets, but may be perceived as a disadvantage if inherited during a bear market. Ultimately, when beneficiaries are not receiving the same asset, the perception of being disadvantaged can change over time depending on the relative performance of each asset . For some families, this can perpetuate the ongoing comparison of which beneficiary was favored.
Blended families: Deciding the proportion of income and capital to distribute is a common consideration for blended families. The giver may want to pass wealth on to their children from a previous relationship while continuing to provide financial support to their surviving spouse and family. Consulting a qualified professional may assist in achieving their objectives for certain children, or beneficiaries.
Disabled dependent: A disabled child or spouse may require additional financial resources than other beneficiaries. The priority of the giver may be focused on the well-being of the disabled dependent, rather than the equalization of estate assets.
Lifetime gifts versus inheritances: Parents may opt to assist their children financially while they are alive and consider this as an early gift that comes out of their inheritance. Conflict may arise if a beneficiary did not realize their inheritance would be reduced by taking the gift early. Resentment could also occur if the final estate value is smaller than expected and the beneficiary that did not receive an early gift only receives a small residue of the estate. Preemptive and clear communication between the giver and all beneficiaries can reduce potential misunderstandings.
Financial needs for each beneficiary: One beneficiary may be less financially secure than another. For some givers, there may be a desire to provide more financial assistance to help boost the financial independence of that beneficiary. The givers have to make subjective decisions on what is considered to be “fair”, while understanding that the financial circumstances of the beneficiaries may change from the time the estate plan is drafted. Periodic reviews may offer an opportunity to adjust the estate distribution strategies if and when needed.
Proactive communication with all beneficiaries
One of the great opportunities of doing a detailed will and estate review is to draft a plan that will promote family unity and harmony. Open and proactive communication can reduce surprises and misunderstanding. It also allows one to address any concerns from specific beneficiaries before finalizing one’s plan. Working with wealth and investment professionals can help you navigate the myriad of scenarios that you may have not considered. Within our team, the specialized Will & Estate Consultants can offer planning consultation for qualified clients. Please contact your investment advisor for more details.