Protecting the Inheritance you Leave Behind
It’s a common conundrum: you want to be generous and leave your kids a great inheritance, but you are fearful of the impact that the windfall will have on their lives if you die prematurely. Or perhaps you’re concerned about how your legacy will be treated if your child gets a divorce down the road.
While it is not possible to “rule from the grave”, many people, wishing to ensure that the legacy they have built up during their lifetime lasts, try all manner of things to ensure that the next generation does not foolishly spend it away.
While you cannot restrict completely what or how much a beneficiary will spend, there are a few basic tips to ensure that your inheritance is protected for future generations.
One of the first things to consider in ensuring that your estate is wound up properly is to give careful consideration to the choice of your executor. The executor of your estate is responsible for ensuring that numerous tasks are completed before a distribution can be made to your beneficiaries.
Some of the things they are responsible for range from submitting your Will to probate, gathering in and liquidating assets, ensuring that all taxes are properly remitted to the tax department, preparing an accounting to the beneficiaries of all monies received and disbursed, etc.
Ideally, your executor should be someone sophisticated enough to understand the legal proceedings, the tax implications on your estate, and the management of the ongoing investments. A knowledgeable and experienced executor can actually protect and/or increase the value of your estate through proper tax planning.
One of the most common mistakes made which could have an adverse effect on your intentions is the failure to provide for a gift to an alternate beneficiary in the event that the original beneficiary has predeceased you. The failure to do so will result in that gift failing such that the proceeds become part of your estate when your intent could have been to benefit someone else.
Even more catastrophic to your estate plan is the failure to name alternative beneficiaries to inherit the residue of your estate. In basic terms, the residue of your estate is the pool of funds gathered after all debts, taxes and legacies have been paid. For most people this is the bulk of their estate.
Another frequently mentioned concern is protecting a beneficiary’s inheritance from that person’s spouse in the event of separation and/or divorce. In some provinces, the gift you leave to your child or any beneficiary is protected by legislation from property division should that beneficiary later separate or divorce.
However, what is not protected is the income generated from that gift or the appreciation or growth in value of that gift. A simple way to avoid this is to include in your Will what lawyers often call a “Family Law Act clause”. This clause will ensure that the actual gift as well as the income and growth of that asset be protected from division should your beneficiary separate or divorce.
In attempting to ensure that your inheritance lasts, one should also give thought to providing for ongoing trusts in the Will. Whether your intended beneficiaries are spend thrifts, financially immature or whether they suffer from a disability, you want to ensure that the gift you leave not only lasts but does not have adverse affects for those disabled beneficiaries and their government benefits.
By leaving funds in trust, you can ensure that the inheritance will be staggered over time and even protected entirely by the proper structuring of trusts. You can set out whether only the income generated from the invested inheritance or whether capital will be paid out and if so, for what purposes
The most important tip is that you should seek professional help in structuring your estate plan and Will. Be wary of drafting your own Will or of using ready made kits. Seek the advice of your lawyer, accountant, financial advisor, and others to ensure that your plan will be carried out according to your wishes upon your passing.
We take great pride in being able to refer clients to appropriate legal professionals for their particular situation, so call any time you like to share your situation and concerns and we’ll be happy to point you in the right directions.
Heather Holden, PhD, CIM
Wealth Advisor, ScotiaMcLeod Heather_Holden@ScotiaMcLeod.com
