We’ve all heard that settling an estate can be financially costly, “but the emotional burdens a family faces while settling an estate can often be as ‘costly’ as the financial burdens,” says Michael Banham, Vice-President Wealth Distribution, Sun Life Financial. “With an estate plan in place — including key financial products — advisors can help more clients reduce these costs, and set their business up for more successful intergenerational wealth transfers.”
Settling an estate can be costly, both financially and emotionally
When settling an estate, clients need to consider the emotional burdens their family may face when they’re gone.
So, what are the emotional costs during estate settlement?
- Stress – Families need to go through the grieving process and mourn their loss. This is not a good time to sift through their loved ones’ financial statements or worry about the logistics of how they’re going to pay for the funeral arrangements or other financial obligations.
- Irrational decisions – Loved ones could make poor decisions while grieving. Research now shows that it takes longer for your brain to recover from a stressful situation, like the death of a loved one, than once thought.
- Quarrels – Disputes over how assets are distributed are possible.
- Invasion of privacy – If the estate is probated, anyone can access the court file to view the will.
- Delays – The process of settling an estate can take an average of 12-18 months.1
The privacy issue
Probate —the legal process where a will is proved in a court and accepted as a valid document—is an open and public process, meaning anyone can gain access to a will. Many Canadians, especially wealthy ones, want to protect their families and keep their financial affairs private. For some, the open probate process is an invasion of privacy.
“While we can all agree that the emotional burdens are taxing enough – when you couple in the financial burdens, beneficiaries and loved ones can become overwhelmed with too many costs to handle at once,” says Jennifer Poon, Director of Tax and Estate Planning, Wealth, Sun Life Financial.
What are the financial costs during estate settlement?
- Time – The process of settling an estate can take an average of 12-18 months, and time is money for everyone involved.
- Probate fees – Vary from province to province and are based on the value of the estate, from as low as $525 in Alberta to as high as $16,258 in Nova Scotia, to settle a one million dollar estate.2
- Executor fees – Typically between 2.5% and 5.0% of the estate value.
- Legal and accounting fees – Can significantly reduce the estate value, with hourly charges ranging from $200 to $250, but sometimes much more.
- Dealing with creditors – Creditors make the first claim on an estate’s assets; only then are the remainder of the assets distributed.
Estate planning can reduce costs
The list of emotional and financial costs is long and daunting. “But, as a financial advisor, you have a role to play in helping your clients’ loved ones avoid — or lessen — these burdens. The best way to reduce these costs is by helping your clients put an estate plan in place,” says Poon.
If you start by asking the right questions, a plan can help eliminate many costs, such as:
- Irrational decisions – Since the decision-making is handled ahead of time, an estate plan can help your clients’ families avoid making any major decisions while grieving.
- Quarrels – Loved ones may not be happy about how the client chose to distribute their estate, but with a plan in place, they can be confident that their loved one’s wishes are being respected.
- Stress – Including the family during the planning process will help establish connections, transparency and trust in the process and the people.
- Tax and fees – Certain financial products won’t be affected by probate, which can help beneficiaries avoid paying costly fees associated with settling an estate.
- Invasion of privacy – The probate process doesn’t always affect investments within products like segregated fund contracts, which can give families and beneficiaries more privacy during the probate process.
An important factor in ensuring a client’s wishes come to fruition is sharing the plan with family members. For example, to ensure a portion of an estate goes to a favourite charity, the executor (child, spouse, etc.) needs to know these wishes and carry out the terms of the will.
Intergenerational wealth transfers – did you know?
- 85% of wealth transfers that fail do so because of breakdowns in communication and trust, and a lack of preparedness on the part of the heirs3
- 65% of clients’ children have never met their advisor4
- 72% of advisors are very concerned about retaining assets of clients who’ve passed away5
Ultimately, a plan increases the likelihood that your client’s estate or legacy wishes actually happen; the plan ensures nothing is left to chance. Professional advice is key to the success of a plan and reducing unnecessary costs.
Who needs to be involved in the estate planning process?
- Tax and estate planning experts
° Advice from tax and estate planning experts can create a more tax efficient estate settlement.
- Financial advisor
- Family, spouse, partner
Read: How to be the leader of an advisory team for your client
Tax-efficient financial products
“From a cost and tax reduction perspective, there are two financial products that are well suited to be included in an estate plan: segregated funds and permanent life insurance,” says Poon.
Segregated fund products can alleviate some of the financial and emotional burden through the features of an insurance contract, which include efficient estate settlement.6 As insurance contracts, segregated fund products can help protect loved ones with the following benefits:
- Named beneficiaries – Sets up the estate settling process for success, removing the guesswork and ensuring assets will be distributed efficiently and according to your clients’ wishes. This option is available for both registered and non-registered insurance contracts.
- Clients have flexibility with the legacy settlement option. Within a single contract, they can name multiple beneficiaries and choose to have some amounts in cash and some paid as an annuity.
- Bypass probate and other fees – Ability to bypass the estate, so that proceeds can pass quickly and privately to your clients’ beneficiaries without legal, estate administration, and probate fees.
- Death benefit guarantee – Protection for your clients’ assets, with their beneficiary receiving the guaranteed amount or the market value, whichever is greater.
And, permanent life insurance proceeds can be paid directly to a beneficiary, tax-free.
Read: Probate fee minimization: important facts, tips and traps – part 1
The value of estate planning
Ultimately, the overall value of planning, developing an estate plan, and including family in the process is the fact that your clients’ wishes are respected and their money gets to the intended people without creating unnecessary stress and conflict.
By setting up an estate plan — including some key financial products — you can help clients reduce the emotional and financial costs when it comes time for their families to settle their estate. These types of plans can also set your business up for more successful intergenerational wealth transfers. To learn more, contact the Sun Life Financial Wealth team by email, firstname.lastname@example.org.
1 Simple estates can be settled in less time; more complicated estates may take more time.
2 In Quebec, the process is different.
3 Preisser, Vic and Roy Williams. “The Future Of Estate Planning,” Trusts and Estates, June 2010.
4 MFS Investing Sentiment Survey, (US) April 2013.
5 MFS Investing Sentiment Survey, (US) April 2013.
6This advantage applies in the case of registered funds across Canada. In Quebec, beneficiary designations can be made only for insurance products such as segregated fund contracts and accumulation annuities, both registered and non-registered. Beneficiary designations in Quebec for non-insurance products, both registered and non-registered, can be made only in a will.