Michael Ford (post until Oct. 31/19)
Estates & Wills & Trusts

Fill-in-the-blanks approach not suited to estate planning

Information is key to sensible and tax-efficient estate planning, Toronto wills and estates lawyer Mary Wahbi tells AdvocateDaily.com.

“Sometimes clients are surprised that I need to know a fair bit about them to be effective,” says Wahbi, partner with Fogler Rubinoff LLP.

“Estate planning involves a variety of family, tax and asset implications and requires an understanding of who you are and what you have. And also the big picture of how those factors will unfold.”

Wahbi often finds herself explaining that a will deals with the distribution of assets and in order to do it properly, she needs to know what the individual owns, how they own it and where it will go.

But nobody's life is simple so individual details, such as the family situation, will dictate how that will is ultimately put together. In addition to assets, Wahbi needs to know what kind of relationship the individual is in, if there are children and whether there are any issues or concerns.

Previous marriages and children from those unions also come into play. That includes what obligations the individual has, such as supporting a former spouse and/or children.  There may also be assets pledged as security for such obligations, including insurance policies.

Beneficiaries are usually already named on certain assets such as RRSPs, life insurance, pensions and tax-free savings accounts, which therefore fall outside of the will. But they need to be acknowledged and accounted for with all the other assets, such as the house, in order to balance the estate, says Wahbi. This may also result in a change in beneficiary designations on other assets to make the estate plan workable.

“How those assets are dealt with is important. It’s also key to understand what the client wants to happen. That dictates what we do with the will and how certain assets outside the will are dealt with.”

Gaps, she adds, can cause problems down the road.

Wahbi points to a case of hers involving a 15-year-old boy whose mother died suddenly during an operation. Her will instructed that everything was to be held in trust until the child turned 30.

But it didn’t account for the RRSPs and life insurance, which named the child, still a teenager, as beneficiary. So his uncle, the executor who was to be in charge of all the assets, had no role to play regarding those assets. Instead, that money was paid into court and then held until the child reached the age of majority.

“When the child is 18 he’s entitled to all the money, which was not the mother’s plan at all,” says Wahbi.

There was another complication: the mother was in the middle of a divorce when she died and her lawyer continued with the proceedings, sending the bill to the estate. The situation was finally resolved when Wahbi made it clear that a dead person cannot divorce. 

“The story turned out fine because the boy was quite sensible, and when he turned 18 he said to his uncles, ‘Just keep investing the money for me. I know that’s what mom wanted,’” says Wahbi.

But, “it could have been a disaster.

“It’s about the process and that’s why a fill-in-the-blanks approach does not produce good results,” she says.

There are also many moving parts. Someone entering into a second relationship might start with a cohabitation agreement outlining that the couple remains independent of each other and are not liable.

But under Canadian tax law inherited RRSPs are taxed at as much as 50 per cent unless it falls to the spouse.

And then the relationship evolves, the children are grown and there might be a desire to give part of the estate to the spouse, such as the house in which the couple is living.

“It’s tricky because people want to benefit the children of the first marriage, and at the same time, take care of their new spouse, which can be a very long-term relationship,” says Wahbi.

“Many times with those complex cases, we need to consider all the factors in order to make this work.”

The bottom line, she says, is that the lawyer needs to learn your background for you to achieve your goal.

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