Setting expectations on an inheritance

Whether a client wants to give a living gift to their grandchildren, distribute their heirs’ inheritance in a trust or start a charitable foundation, advisors say setting expectations early can prevent family drama later.

Tracey Lundell, a senior investment advisor with Harbourfront Wealth Management in Surrey, B.C. believes that advisors have a role to play in facilitating family dialogue. “People being able to talk about it ahead of time saves so much heartache later,” she said.

Distributing living gifts to their children can bring clients the joy of seeing the impact of their gift, said Carol Willes, director of estate planning at BMO Private Wealth in Ottawa. And those gifts are getting larger. A decade ago, living gifts were about $30,000 to $50,000. That’s risen to $100,000 to $200,000.

“Once [clients] know they have enough money to support themselves, they would rather see their heirs enjoy the money … while they are alive and can witness it,” said Terry-Lynn Adamson, a portfolio manager and senior wealth advisor at Adamson Wealth Group in Fonthill, Ont.

Deciding who gets what

As people live longer, their children may already be established financially, so some clients skip a generation and give a living gift to their adult grandchildren, Willes said.

The most common of these is paying for post-secondary education or contributions to their RESP, Lundell said. Other gifts include prepaying for a life insurance policy on their own life with the grandchildren as beneficiaries, or downpayments for homes.

When an inheritance goes toward grandchildren, the generation that is being skipped over should be consulted to avoid family conflict, Willes said. Rather than having the conversation at the kitchen table, doing it at an advisor’s office with a financial professional can make the discussion go smoother.

“[Do it] in territory that’s family neutral, so nobody’s house, nobody’s backyard or cottage,” Willes said. “I think that helps to tamp down dynamics to a certain degree and brings a level of civility to the conversation.”

The client should involve an accountant for tax planning and an estate planning lawyer in the process, especially if anyone is left out of a will, Lundell said.

While it’s important for heirs to understand how the assets will transfer, some clients don’t want their children to know how much they have and disincentivize their adult children from developing their own careers and build their own wealth, said Lydia Potocnik, vice-president and regional director of estate and trust services at BMO Private Wealth in Toronto.

These conversations should happen earlier rather than later. Adamson had an elderly client with Alzheimer’s disease who hadn’t set an estate plan. The client’s daughter, who was named as power of attorney, never discussed finances with her mother and was “horrified” at how much she would have to pay in probate fees and taxes.

If the children are listed in the will, around age 20 is a good time to let them know as they’ll have had a bit of life experience and education by that point, Willes said. Involving younger family members will help make the plan more tax and probate efficient.

How to give

Inheritances can come in different amounts, and different forms.

Potocnik had a client who gave each child living gifts of $100,000 to see if they would squander it. While financially responsible children may receive their inheritance in a lump sum, spendthrifts may get their funds in a trust.

Again, communication matters. Children might be disgruntled or question their parents’ intentions if they aren’t told ahead of time that their inheritance will come in a trust, while their siblings get a lump sum, Potocnik said.

Parents will also need to figure out a way to do it without embarrassing that child, Adamson said. “When it’s something severe like an addiction or a severe disability, everybody understands why it’s being done that way. But when it’s someone that’s just not financially savvy, it’s a little bit different.”

Some clients don’t want to leave everything to their children. They want to give back to the community with a private foundation or donor-advised fund, Potocnik said.

While philanthropy is a good way to involve their children in community giving, especially as the next generation may not have the means to do so themselves, parents should let their kids know why they chose to give to those specific charities, Lundell said.

“That communication is just as important as to who you’re including in your will,” Lundell said.