The Best of The Blunt Bean Counter - Is Your Estate Planning Horizontally Challenged?

This summer I am re-posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am posting a February, 2017 blog on whether your estate planning is horizontally challenged. Essentially this means; have you considered your children's relationships and rivalries in your will, so that your will can be easily administered without creating dissension or in-fighting amongst your children.

Is Your Estate Planning Horizontally Challenged?

In November 2011, I wrote a blog titled “How your Family Dynamic can affect your Estate Planning”. In that post, I proposed that you must consider vertical and horizontal issues in respect of your estate planning.

Vertical issues are decisions made by parents that will affect their children and potentially the way in which their children view them after death. These decisions would include choices made in your will such as who is the executor and how you distribute your assets and issues outside your will, such as which child you will pass the reins to run the family business.

Horizontal issues relate to the interrelationship of your children, such as sibling rivalries and past jealousies and perceived parental favouritism. These issues may be exacerbated by vertical decisions made by parents and thus I suggested any parent who does not consider these horizontal relationships runs the risk of creating a divisive wedge amongst their children.

Since I wrote this post, I have seen these horizontal issues play out a couple of times where parents estate planning included unequal distributions in their wills. I won’t provide specifics, but you generally see unequal distributions for three main reasons:

1. One child essentially becomes the caregiver of a parent (or parents) while the other children are "no shows" and the parent in essence “rewards” that child.

2. One child’s financial position is weaker than the other children, so the parent assists them with a greater inheritance and/or help while alive.

3. One child was always the black sheep.

Everyone is entitled to deal with their estate as they wish and there is no law that says you have to leave your estate equally to all your children or even leave any of it to them, as opposed to say charity.

However, if you are like most people and you wish to keep your wealth and assets within the family, you need to understand that you can’t always have your cake and eat it too. By this I mean where your children have a good relationship, you cannot expect that you will not put a strain on this relationship if you provide unequal distributions. In most cases, human nature causes jealousy or envy of some kind and can ruin a good sibling relationship.

In cases where your children do not have a good relationship, some parents, as they are in failing health, request that the children try and improve their relationship; yet the parent adds to the strained relationship by favouring one child over the other in their will (not that equalizing is any guarantee you will change your children's relationship).

For most people, this is not an issue. But, if you have unequal distributions in your will or estate planning, you may have to decide what your greatest priority is: providing one child with more assets or keeping harmony among your children. Accomplishing both may not be possible. Regardless, there is no assurance that if you bite the bullet and equalize your estate, that some obscure or trivial issue will not cause friction amongst your children.

There is no right or wrong answer here and you may say, children be dammed, I am distributing my assets as I see fit. I am just pointing out that you must be realistic and if your prime objective is keeping peace among your children, consider both vertical and horizontal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Is Your Estate Planning Horizontally Challenged?

In November 2011, I wrote a blog titled “How your Family Dynamic can affect your Estate Planning”. In that post, I proposed that you must consider vertical and horizontal issues in respect of your estate planning.

Vertical issues are decisions made by parents that will affect their children and potentially the way in which their children view them after death. These decisions would include choices made in your will such as who is the executor and how you distribute your assets and issues outside your will, such as which child you will pass the reins to run the family business.

Horizontal issues relate to the interrelationship of your children, such as sibling rivalries and past jealousies and perceived parental favouritism. These issues may be exacerbated by vertical decisions made by parents and thus I suggested any parent who does not consider these horizontal relationships runs the risk of creating a divisive wedge amongst their children.

Since I wrote this post, I have seen these horizontal issues play out a couple of times where parents estate planning included unequal distributions in their wills. I won’t provide specifics, but you generally see unequal distributions for three main reasons:

1. One child essentially becomes the caregiver while the other children are "no shows" and the parent in essence “rewards” that child.

2. One child’s financial position is weaker than the other children, so the parent assists them with a greater inheritance and/or help while alive.

3. One child was always the black sheep.

Everyone is entitled to deal with their estate as they wish and there is no law that says you have to leave your estate equally to all your children or even leave any of it to them, as opposed to say charity.

However, if you are like most people and you wish to keep your wealth and assets within the family, you need to understand that you can’t always have your cake and eat it too. By this I mean where your children have a good relationship, you cannot expect that you will not put a strain on this relationship if you provide unequal distributions. In most cases, human nature causes jealousy or envy of some kind and can ruin a good sibling relationship.

In cases where your children do not have a good relationship, some parents, as they are in failing health, request that the children try and improve their relationship; yet the parent adds to the strained relationship by favouring one child over the other in their will (not that equalizing is any guarantee you will change your children's relationship).

For most people, this is not an issue. But, if you have unequal distributions in your will or estate planning, you may have to decide what your greatest priority is: providing one child with more assets or keeping harmony among your children. Accomplishing both may not be possible. Regardless, there is no assurance that if you bite the bullet and equalize your estate, that some obscure or trivial issue will not cause friction amongst your children.

There is no right or wrong answer here and you may say, children be dammed, I am distributing my assets as I see fit. I am just pointing out that you must be realistic and if your prime objective is keeping peace among your children, consider both vertical and horizontal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

The Best of The Blunt Bean Counter - How your Family Dynamic can affect your Estate Planning

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a September, 2011 blog post on how your family dynamic can affect your estate planning.

I have found many parents often ignore the interrelationship of their children in their estate planning, which can often be problematic when the parent dies. So ensure you consider these relationships when undertaking your estate planning.

How your Family Dynamic can Affect your Estate Planning

Estate planning is a complicated and delicate process. Where you have more than one child, the planning process is full of minefields, some are in clear sight, but many are hidden. Parents have to navigate these minefields with respect to the determination of executors, the distribution of family heirlooms and the distribution of hard assets. The above decisions may be impacted by the financial wherewithal of your children, your relationship with your children’s spouses, your grandchildren or lack thereof, and in some cases, favouritism of certain of your children.

The above are what I call vertical family hierarchy issues. These are issues resulting from parents making decisions that will affect their children and potentially, the way their children will view their parents after death.

What parents do not often consider is how these vertical decisions impact horizontally: i.e. how the interrelationship of your children must be considered in your estate planning. Any parent who does not consider these relationships runs the risk of creating a divisive wedge amongst their children as sibling rivalry and jealousies may rear their ugly heads.

In this blog, I will attempt to identify several estate planning issues that not only have vertical consequences, but also have horizontal consequences requiring parents to consider their children’s relationships in context of their planning.

The Family Business

Where there is a family business and the succession plan is to pass on the business to the next generation, several issues must be considered. The issues include the following:

How many children have an interest in the family business?

If you have more than one child, is one specific child best suited to the role of CEO or president? If so, based on your children’s current relationship(s), do you foresee them working together or will they butt heads or worse? If the eldest child is named president, have you reinforced a perception the younger child has held for years, that the eldest is favoured and always assumed the most capable?

How do you value the business?

This is not an issue if all the children are given equal shares of the business, since they will have an equal ownership no matter the actual value attributed to the company. But what if you decide to leave the business to one child and equalize a child or the other children with say cash or other assets? The value of the business can fluctuate wildly over the years, with the result being that the child who inherits the shares may in essence have inherited a significantly larger asset than the other child(ren). Alternatively, the shares of the company may prove to be worth substantially less than the assets distributed to the other child(ren) if business conditions cause the value of the business to diminish. As a parent, can you do anything to avoid potential disparities in value? I have seen situations where asset distributions were equal at the time of death, but the inherited business grew astronomically and the children who did not inherit the company shares felt wronged by their parents.

Finally, if you have undertaken an estate freeze while alive, (see my blog on introducing a family trust as a shareholder and the related discussion on estate freezes) which child will inherit the voting shares? You risk alienating the children who do not receive the voting shares, since they may feel that you did not think they had enough acumen to vote and run the company.

The Family Cottage

The family cottage is often a contentious asset. In some families all the children want to keep ownership of the cottage and in some families only one or two siblings want the cottage. As a parent, you must speak to your children and determine who wants the cottage. Where more than one child wants the cottage, you have to consider whether those children have a good relationship and if they will be able to share ownership of the cottage without starting a world war. If not, do you have to consider selling the cottage in your later years to avoid creating a divisive issue amongst your children?

Another important factor to consider is whether the children interested in keeping the cottage have the financial wherewithal to pay their share of the cottages expenses on a yearly basis? If not, how do you overcome this potential issue, especially if one child has the financial resources and another does not?

Also, where there is a large inherent gain on the cottage, you have to determine whether your estate will be able to pay the income taxes without forcing a sale of the cottage and causing the estate to unwind your original intention to keep the cottage in the family? In this case, you may be able to use life insurance to cover off this issue.

The Will

A will may be construed as a document that reflects a parent’s opinion of their children and confirms the children’s opinion of themselves. If you infer one child is more responsible than the others (by selecting a certain child(ren) as an executor and excluding others), you risk igniting the fire of past resentments amongst the children and potentially causing resentment of you even in death.

Assuming you can navigate the determination of the executor(s) amongst your children without creating jealousy or animosity (if not, a corporate executor may be required), how do you distribute your assets upon death in a manner that mitigates any damage that can occur to your children’s relationships?

The distribution of material items is fraught with danger. How does one ever balance sentimentality and value? If you provide one child a sentimental heirloom, you risk that child complaining the other children got more value, while the other children complain they were not left sentimental heirlooms. What if you have art? How do you balance the value of art that has significant value differentials?

What about the situation where one child has been financially successful and another has not. If your will provides for a greater distribution to the child with less money, how do you ensure you do not create resentment with the financially well-off child? The less well-off child, who should be ecstatic, may actually be insulted, as they interpret the larger inheritance as their parents saying they were "financial losers" as opposed to being grateful for the larger inheritance. In these cases, one must tread carefully, but an unequal allocation may be more readily accepted where you explain your reasoning to your children before your death.

Another issue is grandchildren. Where the number of grandchildren is different in each family or one child does not have any family, do you give equal amounts to each family or equal amounts per child? How about where one of your children may be incapable of providing for a grandchild’s education and you feel a trust would be appropriate? Will any consideration other than equal consideration be construed as favouritism by your children?

Finally, many parents have provided loans to their children to assist with university, purchasing a house or what have you. How do you deal with prior gifts or loans? If you forgive the loans, you may have an unequal distribution and cause an issue among your children? Thus, you may want to consider a reduction of any distributions in the will for any outstanding loans.

This whole blog may be construed as ludicrous on a certain level. Some may say this blog is evidence as to why they will not leave anything to their children. Others may say I will leave my children whatever I feel like and if the distribution is unequal, so be it. However, it has been my experience that the majority of parents truly do not want to create any dissension among their children and aim to provide for an equal distribution. Even though they will have passed on, many parents still don’t want to alienate any of their children or cause resentment upon their death.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

How your Family Dynamic can affect your Estate Planning

Estate planning is a complicated and delicate process. Where you have more than one child, the planning process is full of minefields, some are in clear sight, but many are hidden. Parents have to navigate these minefields with respect to the determination of executors, the distribution of family heirlooms and the distribution of hard assets. The above decisions may be impacted by the financial wherewithal of your children, your relationship with your children’s spouses, your grandchildren or lack thereof, and in some cases, favouritism of certain of your children.

The above are what I call vertical family hierarchy issues. These are issues resulting from parents making decisions that will affect their children and potentially, the way their children will view their parents after death.

What parents do not often consider is how these vertical decisions impact horizontally: i.e. how the interrelationship of your children must be considered in your estate planning. Any parent who does not consider these relationships runs the risk of creating a divisive wedge amongst their children as sibling rivalry and jealousies may rear their ugly heads.

In this blog, I will attempt to identify several estate planning issues that not only have vertical consequences, but also have horizontal consequences requiring parents to consider their children’s relationships in context of their planning.

The Family Business

Where there is a family business and the succession plan is to pass on the business to the next generation, several issues must be considered. The issues include the following:

How many children have an interest in the family business?

If you have more than one child, is one specific child best suited to the role of CEO or president? If so, based on your children’s current relationship(s), do you foresee them working together or will they butt heads or worse? If the eldest child is named president, have you reinforced a perception the younger child has held for years, that the eldest is favoured and always assumed the most capable?

How do you value the business?

This is not an issue if all the children are given equal shares of the business, since they will have an equal ownership no matter the actual value attributed to the company. But what if you decide to leave the business to one child and equalize a child or the other children with say cash or other assets? The value of the business can fluctuate wildly over the years, with the result being that the child who inherits the shares may in essence have inherited a significantly larger asset than the other child(ren). Alternatively, the shares of the company may prove to be worth substantially less than the assets distributed to the other child(ren) if business conditions cause the value of the business to diminish. As a parent, can you do anything to avoid potential disparities in value? I have seen situations where asset distributions were equal at the time of death, but the inherited business grew astronomically and the children who did not inherit the company shares felt wronged by their parents.

Finally, if you have undertaken an estate freeze while alive, (see my blog on introducing a family trust as a shareholder and the related discussion on estate freezes) which child will inherit the voting shares? You risk alienating the children who do not receive the voting shares, since they may feel that you did not think they had enough acumen to vote and run the company.

The Family Cottage

The family cottage is often a contentious asset. In some families all the children want to keep ownership of the cottage and in some families only one or two siblings want the cottage. As a parent, you must speak to your children and determine who wants the cottage. Where more than one child wants the cottage, you have to consider whether those children have a good relationship and if they will be able to share ownership of the cottage without starting a world war. If not, do you have to consider selling the cottage in your later years to avoid creating a divisive issue amongst your children?

Another important factor to consider is whether the children interested in keeping the cottage have the financial wherewithal to pay their share of the cottages expenses on a yearly basis? If not, how do you overcome this potential issue, especially if one child has the financial resources and another does not?

Also, where there is a large inherent gain on the cottage, you have to determine whether your estate will be able to pay the income taxes without forcing a sale of the cottage and causing the estate to unwind your original intention to keep the cottage in the family? In this case, you may be able to use life insurance to cover off this issue.

The Will

A will may be construed as a document that reflects a parent’s opinion of their children and confirms the children’s opinion of themselves. If you infer one child is more responsible than the others (by selecting a certain child(ren) as an executor and excluding others), you risk igniting the fire of past resentments amongst the children and potentially causing resentment of you even in death.

Assuming you can navigate the determination of the executor(s) amongst your children without creating jealousy or animosity (if not, a corporate executor may be required), how do you distribute your assets upon death in a manner that mitigates any damage that can occur to your children’s relationships?

The distribution of material items is fraught with danger. How does one ever balance sentimentality and value? If you provide one child a sentimental heirloom, you risk that child complaining the other children got more value, while the other children complain they were not left sentimental heirlooms. What if you have art? How do you balance the value of art that has significant value differentials?

What about the situation where one child has been financially successful and another has not. If your will provides for a greater distribution to the child with less money, how do you ensure you do not create resentment with the financially well-off child? The less well-off child, who should be ecstatic, may actually be insulted, as they interpret the larger inheritance as their parents saying they were "financial losers" as opposed to being grateful for the larger inheritance. In these cases, one must tread carefully, but an unequal allocation may be more readily accepted where you explain your reasoning to your children before your death.

Another issue is grandchildren. Where the number of grandchildren is different in each family or one child does not have any family, do you give equal amounts to each family or equal amounts per child? How about where one of your children may be incapable of providing for a grandchild’s education and you feel a trust would be appropriate? Will any consideration other than equal consideration be construed as favouritism by your children?

Finally, many parents have provided loans to their children to assist with university, purchasing a house or what have you. How do you deal with prior gifts or loans? If you forgive the loans, you may have an unequal distribution and cause an issue amongst your children? Thus, you may want to consider a reduction of any distributions in the will for any outstanding loans.

This whole blog may be construed as ludicrous on a certain level. Some may say this blog is evidence as to why they will not leave anything to their children. Others may say I will leave my children whatever I feel like and if the distribution is unequal, so be it. However, it has been my experience that the majority of parents truly do not want to create any dissension amongst their children and aim to provide for an equal distribution. Even though they will have passed on, many parents still don’t want to alienate any of their children or cause resentment upon their death.

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.

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.

Holy Black Sheep Batman

There are sheep all over the Globe and Mail today. Thanks to Roma Luciw for referencing me in her column today, Baa baa black sheep, are you in the will? Roma’s insightful column discusses estate planning for the Black Sheep child. This is often a very sensitive issue within families and requires one to navigate the family dynamic, estate and tax planning.

Roma the web editor of the Globe Investor personal finance site, also writes a weekly column on personal finance issues in the Globe and Mail. In addition, she is also one of the contributors to Home Cents which provides expert tips on how to make money and save money.

I will have a blogs on Estate Planning for the Black Sheep Child and How your Family Dynamic can affect your Estate Planning next week.

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.