Alison Minard, associate and estate planning expert, Miller Thomson Inc., Toronto
Josef is a 90-year-old widower with three children, six grandchildren and two great-grandchildren. His estimated personal wealth is $10 million. He lives mortgage-free in the 2,500-square foot house he bought when he married, and needs $25,000 a year to cover expenses. His family doesn’t know his net worth and he’s a penny-pincher.
Josef never made a formal will—he has a holographic (hand-written) one to keep people from knowing his business. Josef realized his estate will be hit with a large tax bill when he dies, so he approached his advisor to address this.
- Josef’s estate is complex, requiring a formal, detailed will. He doesn’t get why he has to spend money on “a piece of paper.”
- He still lives in his home but has health concerns. He’ll likely need costly long-term care soon, but doesn’t want to prematurely deplete his estate.
- Josef says his children and grandchildren haven’t inherited his financial acumen. He wants to control how he distributes his wealth, and include stipulations unique to each recipient. Funds for tuition or a down payment on a home are fine; funds for a luxury cruise or new half-ton pickup aren’t. His youngest son has a gambling problem, so he’ll have a strict allowance. Meanwhile, Josef’s granddaughter is studying business and has potential; she might get immediate access to her full inheritance.
Degree of difficulty
6 out of 10. Josef is very private. His advisor doesn’t know the exact value of his assets because he has bank accounts at multiple institutions both locally and in Paris, Barcelona and Zurich. The advisor needs to partner with an estate planning expert.
Josef’s will can’t be boilerplate. He needs a comprehensive document and has to work with an estate lawyer.
“People want a deal so they go with a will in a box or the cheapest fees,” says Alison Minard, a tax and estate planning lawyer with Miller Thomson. She adds that failing to do a proper will can deplete an estate, likely costing more than what it does to create a will.
Minard continues, “It’s cheaper to do it upfront than straighten it out in court later. The lawyer has notes that outline the rationale behind the details. If there are challenges, the lawyer can pull the file and provide the background.”
Since Josef has no spouse, when he dies the full value of the estate will be deemed disposed and subject to the applicable marginal tax rate.
“The best way to reduce the income tax owing on the estate is through charitable donations,” says Minard.
Since Josef still needs money to live on, he could use a charitable remainder trust, which has the potential to distribute a steady income until death. Then, the rest is donated to charity. Taxation on these trusts is complicated, but it can still result in a significant credit without Josef having to sacrifice his current quality of life.
Minard adds, “Another option is to include a provision for charitable donations in the will, which will offset some of the estate taxes owing.”
If Josef wanted to reduce the value of his estate during his lifetime (see “Move assets out of estates before death”), he can give his children and grandchildren cash gifts, which aren’t considered taxable income.
Josef could provide down payments for his grandchildren to buy homes, or pay off their student loans. For his children, he could pay off their mortgages so their siblings wouldn’t know how much changed hands.
His advisor suggested he cash in failing investments to pay his grandsons’ tuition costs. He incurred a capital loss and used it to offset gains on other investments.
Minard says affluent clients commonly have multiple wills, which are identical except that one lists probated assets, and the other lists private assets, such as privately held shares or ownership interests. Since the current practice is to levy estate administration tax on the total value of assets, the private-asset will generally protects them from probate. (Bank accounts and public stocks must be probated because financial institutions require legal proof the owner has died.) While this is the currently accepted practice, Minard cautions future legislation may negate it.
When he drafts his will, Josef should also set up testamentary trusts for each of his progeny to minimize their tax burdens. He’ll also have to choose appropriate trustees—if they’re not family members or friends, they may charge administration fees.
Josef’s advisor also suggested he hire an accountant with expertise in trust administration, since the trusts need to file special tax returns each year. Each trust will specify the exact amount its beneficiary should receive at certain intervals; whether to withdraw that amount from income or capital; and whether the trustee has discretionary power to distribute income and capital.
Any trust income is taxed at the beneficiary’s marginal tax rate. “However, no trust can violate the rule against perpetuities,” says Minard.
While Josef still thought his handwritten will would suffice, he grudgingly agreed to draw up a proper will and power of attorney. But he balked at preparing more than one will. He also paid off each grandchild’s student loan with instructions saying they could tell only their respective parents, and no one else. That way, the grandchildren never found out they all received the same treatment. While drawing up his will, he opted for testamentary trusts and specified different trustees for each, adding unique stipulations for each of his children and grandchildren.
His advisor still doesn’t know Josef’s total net worth. Neither does Josef.
Originally published in Advisor's Edge
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