My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, September 26, 2011

Estate Planning for the Black Sheep Child

Think about ten families you know and there will most likely be at least one black sheep child in one of these families. What is a black sheep child? Melanie Marten in an article on black sheep children described the black sheep of the family as “the son or daughter who transgresses the acceptable behaviors and life paths.” 

Within each family, the transgressions can be small, where the child is simply considered irresponsible, to large transgressions which can divide families down religious or philosophical lines. In some families, a black sheep child may appear “normal” to the outside world, but because they do not follow their parent(s) "suggested path", they are considered the black sheep of that family despite their relative normality.

In my personal and professional life, I have observed four typical black sheep situations:

1. Marriage- The parent(s) disapprove of their child's choice of spouse for religious, ethnic, or family reasons and thus, that child becomes a black sheep of that family.

2. Substance abuse- In this case parents have often worked tirelessly to help the child. In some cases the child becomes estranged from the family, but in others, the child is still part of the family and when the will is considered, it becomes a complex issue as to how to protect the child from themselves.

3. Family business- This will seem strange to some, but in some families, there is such pride in the "family business" that when a child decides to embark on a path other than the family business, they can become a black sheep child.

4. Spendthrifts- In this situation, the child is often not disenfranchised from the family, but is considered irresponsible and often is singled out. This situation can become tricky for estate planning purposes as this child is often close with the other children whom the parent(s) are more trusting and proud of.

You may note I have used parentheses for parent(s) above. That is because the parents often do not agree on how to treat a black sheep child for estate planning purposes. This can cause extreme friction within a marriage and make estate planning problematic. For example: assume a typical marriage, where mom and dad's wills leave essentially everything to each other. If mom does not want to leave a black sheep child anything in her will, dad will have to have a specific inclusion/trust in his will in case he dies first; if not all the property will roll to his wife who will then not leave anything to the black sheep child.

So how does a parent deal with a black sheep child when constructing their will? Unfortunately, there is not a cookie cutter answer, since why a child is a black sheep will be potentially different from family to family and each child will have differing financial characteristics. In addition, some children are black sheep because they don’t have the same financial values as their parents and the child could care less whether they inherit money.

Where the black sheep child is close with other siblings, treating them different in the will may create animosity amongst the siblings when the estate is distributed, especially where the irresponsible child does not see themselves as such. Thus, parents must take care when constructing their wills in understanding the sibling dynamic, even if they have feelings otherwise. I have a fairly lengthy blog discussing estate planning in context of the family dynamic on Wednesday.

Where a child is financially irresponsible, has or has had substance abuse issues and/or is estranged to some extent from the family and the parent(s) still wants to leave them money in the will, then creating a separate testamentary trust (a trust established upon death) to be administered by an arm’s length party may make sense and avoid any sibling conflict post death of the parent. The benefit of a trust, especially for a financially irresponsible child is that it can have provisions to ensure their inheritance is not squandered and can last a number of years.

From a taxation point of view, a testamentary trust may result in income tax savings as result of the trust being subject to the same graduated income tax rates as individual taxpayers, unlike the high rate of income tax imposed upon inter-vivos trusts (trusts established while the settler is alive).

How a family treats a black sheep child will vary considerably amongst different families, however, where it is decided a black sheep child will be included in a parent’s will, consideration should be given to sibling dynamics and the utilization of a testamentary trust.

As noted last week, Roma Luciw has written an excellent column titled Baa baa black sheep, are you in the will? which expands on some of the concepts discussed in this blog.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

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