There’s a scene in the 1963 movie McLintock! in which the title character, played by John Wayne, tells his daughter she’ll get none of his great piles of money when he dies.
The Duke wasn’t mad at his on-screen child – she still gets 500 acres of prime land. He just wanted her to make her own way in the world. In the meantime, the town he helped build would get the bulk of his money.
Only in Hollywood? Not at all – some real people have similar plans for their money.
While many parents want their kids to inherit whatever is left behind after they die, there are those who don’t think it’s a good idea to pass on all their wealth to the next generation. In a 2012 survey of wealthy Americans by U.S. Trust, part of Charlotte-based Bank of America Corp., close to 50 per cent of middle- and senior-aged respondents said they didn’t think it was important to leave a financial inheritance to their children.
Among this group, about 60 per cent said they believe each generation should earn its own wealth. Close to 55 per cent also said they think it’s more important to invest in their children’s success while the kids are growing up, and more than 25 per cent said they’d rather give the money to charity.
“This is not necessarily about being vindictive,” explains Mark Goodfield, a tax accountant and managing partner with Cunningham LLP in Toronto. “Some people are choosing to leave less to their kids and more to charity because they hold certain values that they also want to instil in their children, such as the importance of leaving a legacy and not thinking they have a right to money by virtue of birthright.”
Andrew Guilfoyle, a financial adviser at Guilfoyle Financial in Toronto, says this line of thinking has typically been more common among Canadians with assets of $10-million or more. But after Warren Buffett and Bill Gates launched their Giving Pledge campaign in 2010, urging the world’s wealthiest to give at least half their fortunes to charity, more people have started to rethink their estate plan to focus more on philanthropic legacy and less on trickling down their assets to the next generation.
Whether the legacy in question is in the millions of dollars or just a few thousand, it’s important for Canadians to have a solid financial plan and will to avoid conflict or, worse, litigation over their estate after they pass away, says Mr. Guilfoyle.
“Determine how much is appropriate for you in your lifetime, how much you want to give away while you’re living, and then how you’re going to divide your estate between your heirs and your charities,” he says. “Then you can get into strategies for how you can do this in a most tax effective way and in a way that maintains family relations.”
Katy Basi, a Toronto estate lawyer, says Canadians looking to limit their kids’ inheritance so they can give more to charity should decide whether they’re going to allocate a certain dollar amount per child and give the remaining assets to charity or, conversely, designate a set amount to charity and give the kids whatever is left in the estate.
“Usually, for clients who want to leave a legacy, we recommend a guaranteed amount to charity,” says Ms. Basi. “Then they can do more effective tax planning to optimize the donation and minimize the tax impact on the estate.”
Setting a precise amount to give to charity also ensures the beneficiary organizations get every dollar they’re entitled to under the will and spares them the hassle of monitoring the administration of the estate, says Ms. Basi.
“If, for example, the charity gets one-quarter of the residue of an estate, then that charity will be on its toes to make sure the executor does everything properly to preserve the value of the estate,” says Ms. Basi. “But if you specified that $1-million goes to charity, then when you die the charity gets a cheque for $1-million and doesn’t have to be involved in administration of the estate.”
Ms. Basi acknowledges that a big cheque to charity can cause hard feelings among the surviving. To reduce the likelihood of litigation, Ms. Basi suggests getting a capacity assessment done at the same time a will is written.
“Basically you get a capacity assessor to come in and ask a client a whole bunch of questions, and if the assessor is satisfied, he or she will produce a report saying the client is capable and there is nobody exerting undue influence,” says Ms. Basi. “Often when that report is shown, the disgruntled beneficiary just walks away from litigation.”
Ms. Basi says letting the kids know upfront how much they stand to inherit – and how much they stand to lose to charity – can also save them a lot of financial headaches later on.
“There are many cases where people are reliant on an inheritance, rack up debt and then learn after their parents die that much of the money they counted on is actually going to charity,” she says. “Parents aren’t doing their kids any favours by not talking to them about their plans for their estate.”
But it’s a conversation many people are reluctant to get into, notes Mr. Goodfield at Cunningham LLP. He points to a 2012 Investors Group survey that found more than 60 per cent of Canadians whose deceased parents had a will never had “the talk” with their parents. Among those whose living parents have a will, close to 40 per cent said their parents have never discussed the terms of their will.
“People are so guarded about their will,” says Mr. Goodfield, who writes a tax blog called The Blunt Bean Counter. “Some of my clients don’t even tell their executors that they’ve been appointed as executors.”
John Nicola, chairman and chief executive officer of Nicola Wealth Management in Vancouver, says Canadians who want to leave a philanthropic legacy but are concerned about their children contesting their wills should consider giving some of their money now to charity. They can do this by setting up a private foundation or a donor-advised fund. In both cases, a chunk of money is endowed and earmarked for charity, but a donor-advised fund is easier and cheaper to set up and run than a private foundation.
Another approach would be to purchase a charitable insurance policy that names one or more organizations as beneficiary.
“With a charitable insurance policy, the premiums are tax deductible and it can’t be challenged by your heirs because the policy is owned by the charitable organization,” says Mr. Nicola, adding that this strategy also shrinks the estate – depending on the size of the policy, premiums can add up to thousands of dollars a year – and reduces posthumous tax liabilities.
Getting the kids involved in picking the beneficiary charities or the charitable foundation can go a long way toward avoiding hurt feelings and litigious thoughts when the conditions of your will are read later on, says Mr. Nicola.
Mr. Nicola says he understands some parents’ desire to see their kids create their own wealth – a point of view that seems more popular among those who rose to riches from a lower-income background.
“But you can’t recreate that background for your kids – you can’t alter the fact that you’re rich and that’s the background that your kids are starting from,” he says. “So maybe the goal should be not for them to learn your values after you’re dead, but instead to teach them, while you’re still alive, the values that made you so successful today.”