According to economists, Baby Boomer inheritances are predicted to be the largest intergenerational transfer of wealth in Canadian history. With an estimated 1 trillion dollars expected to change hands, the question that arises is how will the recipients choose to manage this windfall? Some may choose to preserve this wealth in order to pass on a significant inheritance to their own children. However, many others claim they may prefer to indulge themselves or leave more to charity instead.
One of the reasons more people are choosing to either forego or limit the passing of these inheritances is that Canadians are placing a greater emphasis on each generation earning its own wealth. This generation is also less likely to feel that they have a moral obligation to preserve the value of their estate in order to pass on as much as possible. This may mean more personal indulgences as they age. As this article points out, this is not necessarily about being selfish. More often, it is about instilling certain values. These can include motivating adult children to develop a strong work ethic, emphasizing the importance of leaving a legacy, or ensuring that an inheritance is not expected as some form of a birthright. In other cases, parents feel that their children have already received a large portion of their inheritance through the investment they have made in that child’s education.
Unlike some countries, Canada does not have a system of forced heirship. This means that provided the will is valid and does not violate any public policy provisions, a testator is generally free to give their money to whomever they please. This testamentary freedom provides Canadians with no shortage of choices regarding potential beneficiaries of their estate. As a result, Family Law and Dependent’s Relief legislation is sometimes required to step in to ensure that obligations have been met. However, with disappointed beneficiaries being a regular occurrence, distinguishing between obligations and entitlement is not always as clear as we would like.
The source of this dissatisfaction often begins with unrealistic expectations. In many cases, parents have not conveyed their estate plans to their children. When the parent passes and the children discover that the estate has not been divided as they had anticipated or it is significantly less than what was expected, they are often shocked and dismayed. Unfortunately, this disappointment all too often leads to litigation, the result of which is typically that the estate is even further depleted. This is why it is important to inform loved ones of your intentions and the motivations behind them as early on as possible. An open and transparent discussion regarding your estate plan can often assist in managing expectations and avoiding costly litigation down the road.
Thank you for reading.
An article published last week asks the question “Are You Related to This Violinist? If So, You Could Be a Millionaire“. We are all too familiar with spam emails alleging that we are the long-lost relatives of individuals of whom we have never heard. Such emails are generally accompanied by the promise of fortune in exchange for a small initial payment or upon providing detailed personal information. But how often do individuals actually benefit from the estate of a long-lost relative?
The Succession Law Reform Act refers to “degrees of consanguinity”. The table of consanguinity outlines who will become the beneficiary of an Ontario resident’s estate in the event that he or she is not survived by a married spouse and/or immediate family. The table begins with the closest degrees of kinship and usually expands to third cousins, three times removed, indicating which relatives rank above others with respect to the potential to benefit from the intestacy of a family member (whether close or distantly related). The Succession Law Reform Act, however, does not limit the rights of a very distantly-related family member from seeking to collect as a beneficiary on intestacy – it merely indicates that when a person dies without a will and is not survived by a spouse, issue, parent, sibling, nephew, or niece, the closest degree of next of kin who do survive the intestate will share the estate equally (if more than one of equal degrees of consanguinity survive) or absolutely (if only one next of kin survives the deceased). Although it may be rare, in theory, a third cousin, three times removed could become the sole beneficiary of an estate of a relative whom he or she never knew existed. Only in situations where there is no next of kin will estate assets become the property of the Crown.
Thursday’s blog post will explore the challenges associated with asserting one’s position as a very distantly-related next of kin.
Thank you for reading.
A recent New York Post article discusses the estate of the late Maurice Laboz of Manhattan, who left $20 million to his two daughters, Marlena and Victoria, 21 and 17 respectively, to inherit when they turn 35. However, Mr. Laboz has also provided a number of ways in which the girls can gain access to some money in the meantime.
For example, if Marlena graduates from “an accredited university” and writes a short essay, to be approved by the trustees, she will receive $750,000. The Testator also included a provision which will triple their salary each year, providing an incentive for them to work hard and earn a good salary, and not just to rely on their inheritance.
There are also restrictions for Mr. Laboz’s daughters. He has included a term of the trust such that, if they decide to have children and not to work outside the home, they will receive 3% of the value of their trust every year. But, if they have a child born out of wedlock, they will not receive any of the money allotted for this purpose.
I recently tweeted this post from Elder Law Answers, which discusses incentive trusts. As illustrated by Mr. Laboz’s trust for his daughters, an incentive trust is a way to provide for your loved ones, while retaining some control over the way the money is spent. Such trusts may have very specific instructions to ensure that the trust funds support positive behavior, and discourage unproductive or harmful behavior. Some of the types of incentives can include rewards for degrees, or matching employment earnings, as discussed above. An incentive trust might also include funds to match the down payment on a house, or to reward doing charitable or volunteer work. An incentive trust may also try to deter harmful behavior, such as drug use, by providing a reward for undergoing treatment for addiction.
As noted by BMO Nesbitt Burns, incentive trusts have seldom been used in Canada and can be difficult to design and administer. In particular, selection of Trustees for an incentive trust is critical, due to the great deal of discretionary powers they can exercise over distribution of trust funds. But if you have good advice on setting up a Trust, it may be a way to ensure that your loved ones’ inheritance will be well spent.
Thanks for reading.
A young girl from China is eagerly awaiting test results of genetic testing that could mean that she is entitled to inherit her biological father’s $50 million fortune.
Gang Yuan, whom the child’s mother states is her biological father, was recently murdered in the Vancouver area. The mother of his alleged biological daughter had a short-term romantic relationship with Gang, who was apparently aware that a baby girl had resulted.
Under the BC Wills, Estates and Succession Act, as the only child of Gang, the young girl in China would be the sole beneficiary of Gang’s estate, as he did not leave a valid Last Will and Testament and was unmarried at the time of his death. In Ontario, the Succession Law Reform Act similarly provides that, if a parent dies intestate and is survived by no married spouse and only one child, that child will inherit the parent’s entire estate.
There has been some resistance to the genetic testing by Gang’s other family members, who wanted to have his body cremated. However, just over two weeks ago, the British Columbia Supreme Court ordered DNA testing of Gang’s remains, which were chopped into more than 100 pieces.
Last year, Ian Hull and I co-authored a paper about fertility law from an estates perspective. An interesting point that we considered was whether the same conclusion as may be reached in Vancouver could be drawn when a sperm or egg donor becomes a biological parent of a child with whom he/she either may or may not maintain a relationship, in the instances of intestacy or class gifts. The law remains unclear on this point, but will likely develop with increasing rates of infertility and use of donor genetic materials.
The results of the genetic testing with respect to the beneficiary of Gang Yan’s estate are scheduled to be released within the month.
Have a great long weekend!
This week on Hull on Estates, David M. Smith and Stuart Clark discuss the recent Macleans cover story “The Inheritance Wars”, and the general trends in estate litigation.
Should you have any questions, please email us at email@example.com, or leave a comment on our blog below.
When a father of five died after falling thirty feet from construction scaffolding in 2011, the two half-sisters of Sasha and her younger siblings took advantage of the situation to deprive their younger siblings (who were teenagers at the time) of their respective shares in their father’s life insurance proceeds. Sasha’s father did not leave behind a will or many assets, but did hold a life insurance policy with a payout of approximately 120 thousand pounds, of which his five daughters were named as equal beneficiaries. The two eldest sisters were appointed as administrators of the life insurance policy and received its proceeds in full. However, the policy administrators failed to distribute the 1/5 shares to which each of their half-sisters were entitled. When Sasha followed up with the insurance company much later to inquire why the funds had not yet been released, she was surprised to discover that her older sisters had already obtained the payout on behalf of her and her younger siblings.
Sasha has consulted a lawyer who has written to her half-sisters, demanding payout of the funds that they hold in trust for their younger siblings. The eldest sisters have stated, however, that they were not aware of their obligations as administrators of the life insurance policy and, in addition to covering funeral costs, they have already spent a significant portion of the funds on alcohol and vacations.
This situation demonstrates the importance of carefully selecting individuals to administer an estate (or even select estate assets) who can be trusted to act in accordance with obligations pursuant to testamentary documents, whether a last will and testament or a beneficiary designation form. The story may also serve as a reminder to individuals who are appointed as trustees or administrators that, when uncertain about the role and/or obligations, legal advice should be obtained.
Currently, Sasha is reportedly saving money for legal fees to take her older sisters to court.
Thank you for reading.
Ontario`s Family Law Act has a profound impact on a couple`s financial situation on dissolution of a marriage. For instance, under Part I of the Act, “Property, other than a matrimonial home, that was acquired by gift or inheritance from a third person after the date of marriage” is excluded from an individual’s net family property (“NFP”). However, if the inheritance is invested into the matrimonial home, it ceases to be excluded from NFP.
With rising house prices in cities across the country, a large part of a young couple`s income tends to go into down payments, mortgage payments and improving the residence. It can take years for couples making modest incomes, many with some student or consumer debt, to save enough for a down payment on a starter home in a sought-after neighbourhood. When inheritance comes into the picture, the task becomes much less onerous.
With a fear of losing the sole right to one`s inheritance, however, young couples may think twice before investing the money in their family home.
The story of a couple encountering this scenario was recently illustrated in a MoneySense article here. It also outlines the possible options for the money in this type of situation.
One option is to keep the inheritance separate from a matrimonial home and invest the money for future use. This can be a good option if you are financially savvy and/or hire professionals to assist with management of portfolios. However, real estate is generally a solid way to invest, and means a couple can stop paying rent and start putting money into their future.
Another, more balanced, option would involve putting a portion of the money into the family home, while keeping the rest in other, individually-owned, investments. Although putting some money into the family home is a risk if divorce takes hold down the road, it is also a smart investment for the family’s future and for diversification of assets. One comfort in the compromise is that the young couples may eventually have children, thereby causing the couple to remain in each other`s lives, regardless of separation or divorce.
Thank you for reading.
An article that appeared in the Wall Street Journal this past weekend highlights an important issue that is often overlooked when individuals plan for the distribution of their wealth after death.
The article suggests that 70% of wealth inherited by a younger generation is lost, and that, by the time that the inherited wealth makes it to a subsequent generation, only 10% of its original value typically remains.
In Canada, where 40% of individuals rely on a family inheritance to fund their retirement, such poor rates of intergenerational wealth preservation could present a serious problem.
In addition to obtaining formal lawyer assistance in creating a formal estate plan, the article refers to a new approach to preserving wealth called “heritage design”.
Heritage design uses “pre-inheritance” intergenerational experiences to foster the preservation of family wealth. This approach, which supplements estate planning, involves annual meetings with the testator and his or her beneficiaries, at which time family values and traditions are reinforced and younger generations learn how to manage funds which they can expect to eventually inherit.
Family meetings during which an estate plan is discussed and explained to beneficiaries has the potential not only to assist in the preservation of family wealth from generation to generation, but also can help prevent disputes over the intended distribution of an estate after death.
Thank you for reading.
Celia Imrie is an English actress known to North American audiences for her work in Bridget Jones’ Diary, Calendar Girls and The Best Exotic Marigold Hotel. Imrie has supplemented her extensive film, television and stage career with a 2011 memoir entitled The Happy Hoofer and a second book, Not Quite Nice, which was released this year.
Not Quite Nice deals with the pressure children put on their parents to care for themselves and their children (the older generation’s grandchildren). Expectations include but are not limited to: free childcare and inherited money for education and otherwise.
In Not Quite Nice, Imrie discusses her observation of the apparent trend of children nowadays to ask about their inheritance. In an article published here, Imrie is quoted as describing the open talk about inheritance as “revolting”. (I touched on the subject of adult children awaiting inheritance in my blog post of March 18, 2015).
On the other hand, Michele Hanson, in her review of Not Quite Nice (published here), makes comments that suggest understanding, in certain cases, the necessity of inheritance discussions among parents and their children.
Hanson takes a straightforward and concise approach when describing such conversations among family members. In fact, the following quote is indicative of her article’s tone:
“Money is everything. It rules, and the less you have the more important it is. You have to talk about it and plan how to survive. Not many people can afford etiquette any more.”
I have often blogged about the importance of having a discussion with family members regarding testamentary wishes and expectations. As an estate litigator, it is my experience that refraining from engaging in such discussions can result in devastating consequences. Outlining goals and wishes during one’s lifetime allows family an opportunity to question, and hopefully, understand why decisions are made. It also allows for an opportunity to explain the reasons behind any decisions.
Thank you for reading.
A client (or friend, or my mother: I can’t quite remember who) once referred to her children as “waiters”, as in “They’re waiting for me to die”.
To this point, a recent article on the Globe and Mail online by Rob Carrick warns against children relying on an inheritance to bail them out.
The article refers to an oft-quoted report from 2006 that suggested that $1-trillion ($1,000,000,000,000) will be inherited in the next twenty years. The article suggests that this number might be less today, due to increased debt-load, falling property values, weak investment returns and longer lifespans. However, whatever the number may be today, it is still a significant one.
The article cautions children from relying on these numbers and a potential inheritance to bail them out of trouble. Carrick says “As for people counting on an inheritance, that’s only one step away, in financial planning terms, from waiting for a lottery win.”
As ill-advised as it may be, 53 per cent of Canadians are expecting an inheritance, and 57% of those who think they know what they are getting expect it to be in the six-figure range.
However, those expecting a big inheritance may be disappointed. Second (or third, or fourth…) relationships may eat into their inheritance. Further, seniors are living longer, and the costs of senior care can take up a large portion of a senior’s savings. Coupled with this is the fact that government pensions may not be able to provide significant assistance.
The message seems to be to live within your means, and plan for your own future needs and well-being. Don’t spend your inheritance before it comes in.
Have a great long weekend.