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Wills and estate planning

Settling a complex estate: Luigi's story Add to ...

At the time of his death, Luigi was a widower with three grown sons. The last time he looked at his will was two years before he died. At that time, Luigi had no debts.

He owned:

  • A home
  • A condo in Florida
  • Some mutual funds
  • A family business, which he ran with his son Eduardo.

Luigi did not want to divide up the business or sell it after his death. He wanted Eduardo to be able to carry it on. Here’s what he did in his will:

More Related to this Story

Son’s name

What Luigi leaves him in his will:

What it was worth when Luigi made his will:

Eduardo

Family business

$300,000

Alberto

Family home AND

Florida condo

  210,000

 + 90,000

Paolo

Mutual funds

  300,000

 

It sounds fair. Each son would get $300,000 worth of assets. Now, two years later, it’s anything but. Why? Here’s what the sons find out.

What they learn from the executor

The executor tells the sons that their father’s will is no longer up to date. Many things have changed. Real estate has gone up. The stock market has gone down and so has the business. This chart shows what everything is worth now.

Asset

Was worth:

Now worth:

Family business

$300,000

 $250,000

Family home

  210,000

   245,000

Florida condo

    90,000

   120,000

Mutual funds

   300,000

   245,000

 

That’s not all. The executor tells the sons that Luigi took out a $25,000 loan a year ago, and that debt is not paid off. Also, there are probate fees and taxes to pay. Luigi didn’t leave any extra money to cover those costs.

What should the sons do? They don’t want to go to court and dispute the will. They want to respect their father’s wishes. As things stand, they know they won’t all get an equal share.

The sons agree to find a way to pay their father’s final costs, and share the estate in a way that is fair. The executor suggests that they talk to a financial adviser. Since they all get along well with each other, there may be a way they can work things out.

What they learn from the financial adviser

The sons find out that there are different ways to take care of their father’s final tax bill. They also learn about the taxes and costs they’ll have to pay on what they inherit. This chart shows:

  •  What Luigi thought each asset was worth when he made his will
  •  What it was really worth two years later
  •  What taxes and other costs are due
  •  What each son will really get from his father once the estate is settled.

Son

What he gets

What Luigi thought it was worth

Now worth

Taxes and other costs

Worth after taxes and costs

Eduardo

Family business

$300,000

 $250,000

 $30,000

    $220,000

Alberto

Family home

 

Florida condo

  210,000

 + 90,000

 $245,000

+ 120,000

   15,000

+ 10,000

      230,000

   + 110,000

Paolo

Mutual funds

   300,000

   245,000

   15,000

      230,000

 

Note: These numbers are for illustrative purposes only and are not meant to represent actual values, costs, or taxes.

Alberto comes out with more money with this split. Eduardo gets the least. They all agree it’s not fair, but how can they solve this? The adviser proposes this solution:

  • To start, Alberto will sell the Florida condo. The money will go to pay off the final costs of their father’s estate. This includes their father’s final tax bill and the loan he took out before he died. It also covers the capital gains on the condo. That leaves about $10,000 for the estate.
  • Eduardo will get the $10,000 left over from the condo sale, bringing his total inheritance up in line with his other brothers.
  • After this is done, each son has assets worth about $230,00.

Everyone is happy with this arrangement. Before they go ahead, though, the adviser recommends that each son speak with an estate lawyer.

What they learn from their estate lawyers

The sons’ lawyers each review the proposed settlement. They agree that it upholds the spirit of Luigi’s will and represents a fair deal. The lawyers then draw up the necessary papers.

The moral of the story? Luigi is lucky that his sons were willing to treat each other fairly. Usually, though, it’s far better to work things out in advance. For instance, many people set their estates up so all their assets will be sold when they die. Then, after all the taxes and other costs are paid, their beneficiaries will share the money equally. This may or may not be the right solution for you. It depends partly on your financial situation and the taxes on your estate.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

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