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After his wife died, Bobby inherited her family’s multimillion-dollar legacy. Now, his daughter, Jenna, thinks his lavish spending is threatening her birthright—and she wants to protect what’s left.

*This is a hypothetical scenario. Any resemblance to real persons is coincidental.

The situation

Bobby Blay* isn’t ashamed to admit he married money. His wife, Claudia, was the sole heiress of a beverage empire with a net worth close to $200 million. Claudia’s father, Charles Brandywine, sold his Halifax-based brewery to an international conglomerate shortly before his death in 1987, leaving then 20-year-old Claudia with lots of cash. Bobby and Claudia married a year later.

Claudia’s mother left the family in 1977 in exasperation over her husband’s serial adultery. She returned to her native England in 1978 and has not been heard from since.

Much of the Brandywine legacy was sheltered in trusts, and there was sufficient insurance to cover the tax burden on the family’s real estate, including a palatial home overlooking the Bedford Basin in Nova Scotia, where Bobby still lives. The trusts provided a substantial income to Claudia, and she got the principal on her 25th birthday.

With no responsibilities to tie them down, their seven-year marriage was one long, luxurious party, interrupted only by the arrival of daughter Jenna in 1990. Parenthood, though, merely slowed the frequency of the partying. Jenna, now 26, doesn’t remember much about the night her mother died of a heroin overdose in 1995.

But Jenna does blame her father for fostering the decadent lifestyle. Her father inherited every penny thanks to a $50 will kit that named him as sole heir to Claudia’s fortune, as well as the Brandywine family home (no one suggested Jenna contest it, and the statute of limitations has expired). And, since her mother’s death, she’s watched him continue to party and befriend drug dealers. He’s also carried on with a string of girlfriends, all of whom have lived in her home.

The longest of those unions produced a son, Andre, who at five years old has depended on Bobby since Andre’s mother left three years ago. Like Claudia’s mother, the woman has not been heard from since.

Bobby never adapted to family life. But he did use his late wife’s wealth to hire top-flight caregivers for Jenna, including tutors and private schools. That money also sent Jenna to Yale.

Since graduation, she’s worked for a security-consulting firm that serves the shipping industry in Halifax. For now, she lives rent-free in her family home. She uses one of the spare kitchens (the house has three), cooks her own meals and pays for all her groceries. The rest of her salary goes into a TFSA and a non-registered portfolio with a combined value of $193,000. Jenna receives no allowance or other monies from her father.

He’s now spending lavishly on Andre, and this is making Jenna uncomfortable. Bobby calls Andre her half-brother. But Jenna, who strongly dislikes her father, does not share his view of the familial relationship. She views the residue of her mother’s wealth as her rightful legacy; and sees her father, Andre, and the rotating entourage of hangers-on who populate her grandparents’ 20-bedroom home as interlopers.

Jenna’s repeatedly confronted her father about how much of the family money is left. He’s rebuffed her, saying it’s his money, and that she and her half-brother will divide what’s left when he dies. Bobby claims to have a will, but Jenna has never seen it.

Terrified the multimillion-dollar Brandywine legacy will be burned through before she gets access, she wants to know  her options.

A voluntary discussion

RN: I always favour communication and agreement, where possible, over litigation. So, provided it’s properly presented, I think Jenna has a reasonable chance of getting her father to do something voluntary. Absent that, there are some legal claims she may be able to assert, but none are particularly good or easy (see “Involuntary options,” this page). Ultimately, whatever happens has to be distilled  into writing.

PGH: You know, she certainly has an attitude of entitlement. But I’m not sure there is anything for her to feel entitled to. The money was left to Bobby—it’s his money to do with as he wishes.

Still, if you point out to him the dangers of allowing his estate to pass the way it was passed on to  him, he may have an interest in protecting [it] for Jenna and Andre. If something happened to him now, Andre could end up in the same position that Jenna’s in today. That might be a way to get him to take some action.

RN: And position that to him as protection of his own lifestyle. So if his goal is simply to maintain his lifestyle now, and whatever’s left over can go to the two children, then tell him to consider a trust with a corporate trustee. It can achieve exactly that goal. Say, “You’re always going to have money in your bank account when you need it. But in the meantime, we’ve protected the capital so it’s always going to be there as an income-producing asset for your lifetime.” And then we outline in the trust what happens.

There are various options for the trust. It could be that some part of the money is in separate trusts for Jenna and Andre. But it could be that the whole amount is for Bobby as the income beneficiary. But we’ve locked down that the ultimate capital beneficiaries on his death are the children, and we preserve the capital by having the professional trustee services in place.

Also part of that discussion is to make sure that what he says is in place is in place—that he has a will, a PoA and a personal directive to deal with his decision-making in the event of his incompetence.

The other piece of voluntary planning is probate. It appears these assets are held indirectly by Bobby. So on his death, there would be some very significant probate tax that would be payable on those presumably investable assets, plus the house. If the assets are in fact north of $100 million, then you’re looking at about $17,000 for every million dollars of value. That’s a couple million dollars of probate tax, which can easily be avoided. An inter vivos trust, for instance, serves to protect the assets he puts in from probate tax.

Protect capital

Inter vivos trust

KK: From a tax perspective, he’d have to look at what kind of tax liability may be generated from the transfer of those assets into a trust, and look at the accrued gains on those investments.

The tax liability that would occur would be equal to 27% of the accrued gains on the investments prior to transferring them to the trust. But avoiding probate definitely is a good reason to look at an inter vivos trust, even if we have to trigger some gains on the way in. The terms of the trust would be that all of the income would still be allocated and paid out to him as a beneficiary and taxed in his hands. Otherwise, income within the trust would be taxed at the highest marginal tax rates.

In Nova Scotia, the highest tax rate is 54% on interest income, 27% on capital gains, 41.6% on eligible dividends, and 47% on non-eligible dividends. He’ll be in the highest marginal tax rate no matter what, and the trust doesn’t get access to graduated rates. Unfortunately, based on the current tax laws, there’s no mechanism to defer or split the investment income to reduce the overall tax bill.

PGH: Using a trust for creditor protection would also be an added benefit. The way he’s living opens him up to a whole lot of financial risk; Andre’s mother might also have a claim on his estate. A trust would protect against that.

RN: Yes, since she and Bobby were never married (or even common law), she wouldn’t have a claim over Bobby’s assets if they were in a properly created trust.

Holding company

KK: He may also look at transferring the assets into an investment holding company. The biggest benefit would be that, if the investments were going to grow in value significantly between now and his death, he could freeze off his tax liability on death.

If the assets were inside a corporation, he could create multiple classes of shares that he could provide to his children on his passing. Essentially, he’d be putting any future gains on those assets into the next generation.He would have a new entity, a corporation, that would be a separate taxpayer from himself. So then it’s simply about managing the company, filing corporate tax returns, and making sure the company is up to date from the registry perspective. We talked about having a trust company in place to manage the trust. That trust company could then manage the corporate assets, since all shares of the corporation would be inside the trust.

Jenna’s planning

PGH: I’d recommend she max out her RRSP contribution limit to reduce the tax on her employment income. So reduce some of her non-registered savings and put it in a registered environment.

She should think about how she can live within her means and save for her future. One thing she can count on is herself and her own financial independence. She may at some point come into a large amount of wealth, so she’s going to need to educate herself in terms of how to deal with wealth.

Of course she should have her own estate plan. What does she want to happen to her savings when she dies? She doesn’t want to fall in the same trap that her mother and grandparents fell into by not planning properly.

KK: She doesn’t have debt, and doesn’t have significant living expenses, as she’s living at the house rent-free (see “Jenna’s claim on the house”). So she’s in a good position.

Jenna’s claim on the house

Bobby owns the Brandywine family home outright.

So if discussions between Bobby and Jenna got nasty, he could legally kick her out, explains Richard Niedermayer, an estate and tax lawyer from Stewart McKelvey.

So Jenna should calmly discuss her wishes with Bobby. Because she’s a direct descendent of the Brandywine legacy and Andre is not, “she would likely have more of an interest in that particular asset, even if Bobby’s goal is to have the estate split 50/50 on his death.”

She should keep the conversation amicable and request “the asset be put in joint ownership, or give her a right to occupy during her lifetime, with gift over on his death,” suggests Niedermayer.

If he refuses, she could take legal action. However, if that fails—which appears likely because she isn’t a tenant or a dependant of Bobby’s—she may lose her ability to live there rent-free, he says. So she should consider alternate living arrangements as a worst-case scenario.

Originally published in Advisor's Edge Report

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