Financial advisors are good at reminding clients when it’s time to top up their tax-free-saving accounts or contribute to a child’s registered education savings plan, but how about flagging missing information in an estate plan?
Advisors tend to leave the more detailed estate-planning conversations to the lawyers that draw up wills and power of attorney documents. However, those advisors who are looking to add value should also ensure their client’s estate plans are up to date.
Advisors are particularly well-positioned to pick up on changes that should be made to an estate plan – or the potential gaps within one – given their financial oversight role. For example, if clients say they’re going through a divorce or having a baby, advisors could remind them that changes may be required in their wills. Some clients may not even have a will, which an advisor could suss out in the conversation.
“Every advisor has a responsibility to be an educator and pick up on some of those [red] flags in conversations with clients,” says Karen Tzupa, a financial planning specialist in Saskatoon. “Too often, people fail to update their documents when there are those significant changes in their financial situations. It’s really about listening and picking up on those cues.”
Here are five often overlooked items in an estate plan of which advisors should be aware:
1. Personal loans
It’s not unusual for parents to lend their adult children money without expecting it to be paid back. The loan could become an issue, though, when the last surviving parent passes away and the executor uncovers the liability in the estate. The question is whether the loan is to be forgiven or comes out of that child’s share of the estate, Ms. Tzupa says.
The answer depends on the family, but needs to be clarified in the will, which doesn’t happen often, creating unnecessary friction when it comes time to distribute the assets. “It’s a matter of open dialogue and being clear in discussion with family or even in a will,” Ms. Tzupa says.
2. Taxes on registered investments
When someone dies, his or her estate is responsible for paying the taxes on registered plans such as a registered retirement savings plan (RRSP) or a registered retirement income fund.
Too often, people don’t consider the tax implications of registered investments when aiming to distribute their assets among beneficiaries evenly, says Elizabeth Dorsch, chief executive of BMO Trust Co. and head of estate and trust services at BMO Private Banking in Toronto. That’s because the beneficiary who is given the registered plans may receive more than those who receive a distribution from the estate as taxes for a registered plan are paid by the estate and are not deducted from the RRSP.
“All of a sudden, you have an unequal distribution, which wasn’t the original intent,” Ms. Dorsch says. “People think they’re doing the right thing, but it’s actually hurting [someone].”
To avoid this scenario, she recommends that any registered plans should be distributed equally in the will, separate from other assets.
3. Shipping costs for inherited physical assets
When leaving physical items such as furniture or art to beneficiaries, who pays for the cost to ship it to the new owners? If the will doesn’t make reference to it, the beneficiary is responsible for the fees, says Ms. Dorsch. Those costs can really add up if the beneficiary lives in another province or country. The issue can be solved by putting instructions in the will to say the shipping costs will be covered by the estate.
“It comes up all the time,” says Ms. Dorsch. “When we do our will plans, we put in a statement that says, ‘To be delivered’ which removes the ambiguity.”
Wills can also be specific about covering other costs, such as travel fees for children to attend the funeral, especially if they live in another county.
“If it’s silent, then it’s up to the person to cover [the costs],” Ms. Dorsch says. “Sometimes, those costs can be quite substantial.”
4. Outdated or uninformed executor
Most people name an executor, such as a spouse or family member, in their wills to handle the estate when they die. In some cases, people forget to update their executor when their circumstances change. For example, someone who names his or her spouse as an executor may forget to change that after a divorce.
It’s important to update an estate plan to ensure the executor is still the best person for the job, says David Lee, a financial advisor with BlueShore Financial in North Vancouver.
People should also check to see if the person they designate wants to be the executor. Mr. Lee says he’s come across many people who find out after someone has died that they’ve been named the executor of the deceased’s estate.
“Being an executor comes with a lot of responsibility,” Mr. Lee says. “Leaving that to someone could require them to spend a lot of time settling the estate. Is the individual the right person to take care of that task?”
He recommends clients review their estate plans every three to five years to ensure the information is still accurate and as desired, including the named executor.
5. Digital assets
More of our lives have moved online, which means a growing list of digital assets to keep track of. When we pass away, executors will need to access many of these online assets, which includes everything from cryptocurrencies to accounts on eBay, PayPal, loyalty reward programs and social media websites.
Although most people don’t see these online items as assets, overlooking digital assets in estate planning can be a hassle for executors, power of attorneys and beneficiaries.
“Your executor needs to be able to access those accounts,” Ms. Tzupa says. And if they can’t, “it can slow things down when it comes to the administration of the estate.”
Advisors should nudge clients to make a list of online assets that can be accessed in their wills, Ms. Tzupa says. “If everything is there, the executor can get things done in a more efficient manner.”