My grandfather used to tell me that he'd feel better after visiting his doctor, because the doctor would always tell him, "Your health problems are normal for your age." I never understood why this would make Grandpa feel better because, eventually, dying would become normal for his age. Which is exactly what happened, eventually. It's inevitable. We're all leaving this Earth at some point.
A gentleman who lived not too far from us passed away a few months ago. His family has been struggling with winding up his estate. I spoke to his daughter last week and realized that the issues they're facing are all too common. We can all learn from their story (I've changed the names to protect the innocent).
William and Jane were married for many years. It was William's second marriage, and there are three adult children from his first marriage: Wayne, Wendy and Warren (who has a mild cognitive disability). William passed away four months ago. While Jane and the kids get along, there have been some tensions between the four of them over William's estate.
During his life, William was a successful small business owner, and at the time of his death, he owned the following assets: A residence worth $1-million (cost of $500,000), a cottage worth $800,000 (cost of $200,000), registered retirement savings plan assets of $500,000, non-registered investments worth $2-million (cost of $800,000) and a private business worth $5-million (cost of $1). So, his total estate was worth $9,300,000.
Under the will, Jane is to receive $1-million, Wayne is to receive the shares of the company (he's the only one working in the business), a favourite charity is to receive $500,000 and Wendy and Warren are to receive the rest of the estate – the residue – after the other bequests are made. Doing the math on this, you might expect Wendy and Warren to receive $1,400,000 each (there will be $2,800,000 left over, split between them, after the other bequests to Jane, Wayne and the charity). It's worth noting that the value of the business inherited by Wayne was increased by $2-million (to a total of $7-million) because of life-insurance proceeds paid to the company upon William's death, on a policy owned by it.
But wait: There are taxes to pay as well. In this case, absent any planning, the tax bill on William's final tax return will be about $1,800,000. Who's going to pay the taxes? These will be paid out of the residue of the estate, before Wendy and Warren receive anything. So, the $2,800,000 of residue is reduced to just $1-million ($2,800,000 less $1,800,000 in taxes), leaving just $500,000 for each of Wendy and Warren.
Wendy and Warren are not happy about how much they're due to receive. They see that Wayne is inheriting $7-million of value. They don't begrudge Wayne inheriting the business, since he's the only one working in the business and has been largely responsible for its success over the past 10 years. But there's discontent that he's inheriting the full value of the business for himself.
It's also worth noting that this family lives in Ontario, and under the Family Law Act, Jane is entitled to more of William's estate than the $1-million he left her. You see, a death is treated much like a marriage breakdown, which results in half of the net family property going to the spouse. If Jane elected to take the share of William's estate that she has a legal right to have, Wendy and Warren would receive even less (since the residue of the estate would be less). Jane has said she won't elect to take her full entitlement, but she's still feeling as though a $1-million bequest is not quite fair since it's not enough for her to survive on.
When Jane, Wendy and Warren see how much is being left to the charity, they have all questioned whether this is fair, given the amounts they're each due to receive. The charity may be in for a battle trying to get its share of William's estate.
All of this is quite a mess for Jane, the kids and the charity. They want to maintain good relationships with each other – but each wants to be treated fairly. They have talked about arriving at some agreement that could satisfy everyone. They're just not sure what that might look like.
Next time, I'll share some thoughts on how to solve this conundrum. The solutions may help as you think about your own estate planning.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.