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The idea of smart estate planning in wealthy families is not to give heirs too much, too soon, experts say.


With great wealth comes a conundrum: How do you pass down money to the next generation without them squandering it?

Some of the best strategies to ensure an inheritance doesn't spoil your children or grandchildren may not show up in textbook estate-planning sessions, experts say.

One method is "wealth sprinkling." The idea is not to give heirs too much, too fast, says Heera Singh, senior financial advisor with Legacy Wealth Advisors in Brampton, Ont.

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Giving money in small amounts allows parents and grandparents to evaluate how responsible the recipients are. "The last thing most of these people want to do is provide their 22-year-old grandchild or child, who doesn't have much financial education or discipline, with millions of dollars in one shot," he says.

The parent or grandparent can tie the distribution to certain age dates or milestone events such as college, a wedding, or paying for a first house, says Chris Catliff, president and chief executive officer of BlueShore Financial in North Vancouver.

"Nobody gets a full inheritance at 21 or 18 or 19. Many of the distributions are a third, a third, and a third, so that someone young is not just seeing a lot of money all at once."

Another strategy that can encourage the younger generation to be careful with money is the "hotchpot clause," Mr. Singh says. It ensures an equal division of wealth among children upon one's death by taking into account the value of gifts already given to them during an individual's lifetime.

Say an individual has three children and an estate worth $1.5-million. The first child already received $100,000 to start a new business, the second got $80,000 for postsecondary education and the third received $120,000 for the down payment of a home.

If a hotchpot clause was part of the will, those gifts would be added to the estate, bringing its total value to $1.8-million. Each child's share would be $600,000, but this amount would be offset by what they had already received. (The first child, for example, would receive $500,000.)

The benefit of a hotchpot clause is that it can "help to set expectations for the beneficiaries that the gifts they receive now should be used wisely," Mr. Singh says.

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"It also provides the [parent or grandparent] an opportunity to see how gifts are used during their lifetime to assess whether they want to continue giving more, or even if they want their beneficiaries to receive anything at all at the time of death," he says.

Annuities are another option. Although generally used to provide retirement income, they can serve a purpose within estate planning by allowing for regular payments instead of a lump-sum inheritance.

Some high-net-worth Canadians are turning to incentive trusts, says Mr. Catliff. They establish specific conditions that a beneficiary must satisfy to acquire money, and they commonly feature matching funds.

"If Susan makes $75,000 a year, the trust will match $75,000 each year, and if John is spending his time in the basement playing Xbox and not working much and making $22,000 a year, he only gets $22,000 matched," Mr. Catliff says. "Incentive trusts can discourage or encourage certain behaviours.

"If you set up [standard] trusts for these kids, the will to work can get zapped," he says.

Another inheritance method is making a communal inheritance out of assets such as vacation properties. This allows parents or grandparents to maintain some control over these assets by setting up rules for upkeep and maintenance costs, Mr. Catliff says.

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If interpersonal conflicts arise over the use of, say, a lakefront cottage or ski cabin while the parents are still alive, they can rethink what to do with the asset.

Some wealthy people set up a capital pool for the next generation. It's an investment club of sorts, designed to help heirs meet their own goals, such as education, and gain practical experience rather than financial gain, says Kieran Young, national director, private family office, at Richardson GMP.

Parents, grandparents, or a trustee could fund the pool with, say, $500,000. The children or grandchildren decide how to invest it, learning about the investment process in the meantime. Then they can put the returns toward an education, a home or perhaps philanthropic efforts. But everyone would have to live with the possibility that poor investment choices could result in losses.

The establishment of such an account could be a learning opportunity in itself, says Mr. Young. The family needs to answer questions such as:

  • Who has ownership of the money?
  • What investment policies will be used? Will there be limits on geographic or sector concentration or the type of investment to be considered?
  • Is there a hurdle rate that investments need to achieve before capital can be disbursed?
  • How often will the group meet, who will chair the meetings and how will decisions be made?

Preparing inheritors well in advance is key to establishing a healthy relationship with money, Mr. Young says.

"A modernized view of estate planning is one which focuses on the process of preparing inheritors for wealth," he says, "rather than just the technical aspects of putting a structure such as a trust into place and then trying to solve the ripple effects of that structure post-transaction."

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Mr. Young points to an apt quote from John Sedgwick's book Rich Kids: America's Young Heirs and Heiresses, How They Love and Hate Their Money: "Earned money is clearly one's own, an affirmation of talent, energy, self. An inheritance is none of these things."

It wasn’t long ago that investing in private companies was the domain of venture capital firms and the wealthiest of investors. Now, average high net-worth individuals are buying in as well.
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