Estate planning centres on one main goal: preserving estate assets. While advisors offer planning advice and employ various strategies to reduce the tax liability of the deceased’s estate, even the best efforts can be fruitless if the estate faces claims that wind up in court.
Family dynamics, which can include sibling rivalry, favouritism, second marriages or blended families, tend to spark estate litigation. Often, estate litigation stems from disgruntled family members, friends or others who believe they’re entitled to some – if not all – of an estate, or that they didn’t receive their fair share.
The dangers of estate litigation go far beyond the threat of legal fees – thousands, and sometimes hundreds of thousands of dollars – that can deplete estate assets. Estate litigation also destroys families, straining relationships to the point where family members often end up estranged – all amidst great emotional stress and grief. At a time when family members need each other’s support the most, loss and estate litigation often separates them further.
High net worth = high risk estate
Every estate is susceptible to claims, but high-net-worth estates are at particular risk, since there is literally a lot more to fight over. Former Maple Leaf’s owner Harold Ballard’s estate, reportedly valued at $50 million, was subject to litigation in the 1980s by various individuals, including Ballard’s longtime companion, Yolanda Ballard.
Given the horrors estate litigation represents, what can a high-net-worth client do? No strategy can guarantee that an estate remain litigation-free, but advisors should share the following strategies with their clients to reduce the likelihood of litigation:
Make a will:
Studies show up to 50% of Canadians don’t have a will. A will documents how you wish to distribute your estate upon your death. Clients without a will open up the risk of claims against the estate, because without one, there is no evidence of testamentary intentions.
Include an in terrorem clause in your will:
An in terrorem clause states that any beneficiary who contests the will automatically forfeits their gift. This can be an effective deterrent to litigation, because the beneficiary challenging the will automatically loses their gift or inheritance. Keep in mind, for an in terrorem clause to be effective, the beneficiary’s gift must be valuable enough to merit serious consideration about pursuing litigation.
Have capacity test/notes by doctor and lawyer:
Capacity tests are used to certify that an individual has the requisite mental capacity. Anytime someone is making a will and their capacity or mental fitness is a concern, a capacity test – along with doctors’ notes on their mental condition – is essential. In addition, a request should be made to the lawyer drafting the will to make notes about the individual’s mental state and capacity. Dementia and Alzheimer’s disease affect seniors in greater numbers, so when an older client makes a will for the first time – or revises it significantly – either to include or disinherit a family member, or to substantially increase or decrease a gift, they should have a capacity test administered by a health care practitioner.
Communicate with your heirs and beneficiaries:
Often, family members proceed with litigation because they don’t believe the will reflects the true intentions of the testator. It’s essential the testator communicate with heirs and beneficiaries about intentions for distribution of the estate. This will clear up any misunderstanding or misinformation, and in the process, can help the individual find out what preferences beneficiaries and heirs may have.
Have a professionally mediated family meeting:
A professionally mediated meeting, sometimes called a family conference, between the testator, his beneficiaries and other estate planning professionals is one way to keep everyone informed. The meeting advises the beneficiaries of the testator’s intentions and seeks their input in developing the estate plan. At the end of the family conference, the beneficiaries and the testator are invited to sign an agreement not to contest the will. While the family conference may not work for all families, it can be very beneficial for some, especially if the testator is aware of litigious family members or strained family relationships.