As boomers prepare to transfer billions of dollars into the hands of younger generations, estate planning is becoming more important than ever – yet industry experts continue to see a number of common oversights from clients when preparing to pass along their assets.
Here are five common mistakes to avoid.
Leaving the family cottage to the kids
A family cottage or vacation home is often linked with years of family memories, and while many children and grandchildren appreciate those times growing up, it doesn’t necessarily mean they want to go into business together as co-owners.
“There seems to be an assumption that all the children want to own the cottage, but that is not always the case – especially if the children live in different geographic locations or they can’t afford the upkeep of that property going forward,” says Jamie Golombek, managing director of tax and estate planning for CIBC Wealth Advisory Services. “Dividing everything equally with everything you own is not necessarily the best estate plan. You may think it’s fair, but it may not be what the kids want.”
Both Mr. Golombek and Sybil Verch, senior vice-president and financial adviser at Raymond James Ltd., suggest sitting down with family members to discuss expectations involving the family cottage.
“In most cases when we are meeting with families, we find that not all the children in the family want to participate in the ownership of the cottage,” Ms. Verch says.
The discussion should include an agreement around ownership of the cottage or vacation home, and the responsibility of maintenance fees, property taxes and capital gains.
Putting assets in joint name with beneficiaries
As people get older, setting up a joint account with one of their children can be seen as an easy administrative solution, when in fact this could lead to an expensive legal battle upon death, says Stacie Glazman, a family lawyer and chartered business valuator in Toronto.
“When people put money into a joint account with someone else, they need to make sure it is consistent with what they are doing in their will,” Ms. Glazman says.
“This is an issue that the courts are constantly grappling with and it can become a family battle.”
If the parent does not specify in their will that all funds in the account should return to the estate upon death, the joint account holder may be entitled to the remaining funds in the account.
Setting up joint accounts with adult children is not a solution Mr. Golombek commonly recommends.
Rather, he suggests that parents who are looking for the help of their children with investment decisions or to pay monthly bills should set up a power of attorney for property.
Forgetting to review beneficiary designations on registered accounts, pensions and insurance policies
While many individuals remember to update a will or life insurance beneficiary upon a major life event – such as divorce – investments tend to get overlooked.
“I’ve seen clients who forget to change their beneficiary on their pension and they are divorced and now in a new relationship, and that can get really ugly,” Ms. Verch says. The new partner will be left having to contest and challenge the legal standing.
While there is no magic number on when you should review, Ms. Verch recommends every two to three years.
Assuming the will is up-to-date
Second marriages are becoming more common among the boomer generation, but as soon as they walk down the aisle, their existing wills are void. “If a new will is not prepared, then it will be treated as having died intestate,” Ms. Glazman says. (This varies by province and should be confirmed with a local lawyer.)
Leaving too much money for charity at death
Individuals who allocate large amounts for charity without planning can lose out on major tax benefits, Ms. Verch says.
Donating to a charity provides you with a donation receipt – but it can only be used if you have taxable income.
Instead, Ms. Verch suggests taking advantage of the benefit while you are still alive and recommends to clients that they set up a charitable giving fund, which is similar to having your own charitable foundation, she says. Donors can instruct their financial adviser on how to distribute the funds to the registered Canadian charity of their choice.
“While they are alive, they get the tax benefits and they get to see the charities enjoy the funds,“ Ms. Verch says. “Then upon death, they can leave the remaining funds to the charitable giving fund – which will get a final tax receipt and can leave more money towards charity.”Report Typo/Error