A few years ago, Vancouver advisor Andrew Hoffman, a vice-president at Leith Wheeler Investment Counsel, had a client facing an unpleasant family problem.
The client had one living parent who was experiencing severe mental deterioration—so much so that B.C.’s public guardian had been brought in to oversee affairs because there was no power of attorney.
Eventually, the parent died, leaving no will. Under B.C. law, a court oversees the division of such estates according to a pre-set formula, which may not have been what the deceased parent wanted for the children—in this case, Hoffman’s client and a sibling.
And there was a hitch, recalls Hoffman. The sibling had borrowed “a sizable amount of money” from the parent in previous years, but there were no papers documenting those loans.
So when the public trustee divided the assets, the client was shortchanged by more than $100,000. “If that was me,” Hoffman adds, “the dollar figure is not as important as the equitableness of the situation.”
Considering the large numbers of Canadians who die intestate, Hoffman is surprised such situations don’t come up more often in wealth management practices like his. But when they do, advisors may find themselves drawn into the muck of family politics.
“Money corrupts families,” says Hoffman, adding advisors should make it a practice to not just push clients to draw up wills, but also ask if their aging parents have done their own estate planning.
To that end, Dave Lougheed, a Calgary-based investment advisor with Macquarie Private Wealth, encourages his clients to talk to their aging parents about a positive inheritance scenario—for example, bequeathing money to their favourite charities or having their cottage stay within the family—as a means of encouraging them to do their estate planning.
The goal, he says, is giving the parent “a vision of what life can look like afterwards.”
The alternative courts disaster. The financial problems associated with intestacy begin almost immediately: all accounts are frozen, so family members may have to pay bills or cover funeral expenses out of their own accounts until an administrator or executor is named.
Since provincial estate laws closely regulate the process of carving up the estate, advisors often say they’ll bring in lawyers early on to provide guidance.
A key step: knowing what you don’t know, and then ensuring the firm maintains a stable of strong referral partnerships with those who do. “The investment advisor has a limited role because a lot of it is happening outside our sphere of competence,” says Hoffman.
Advisor Ted Polci, a partner at First York Insurance in Toronto, agrees. “If a [difficult] situation comes up, I don’t want someone who does 10 to 20 wills a year. I want someone who specializes in wills and estates.”
The surviving spouse
Most wills transfer the estate to the surviving spouse. But in an intestacy, spouses and family members may be surprised to discover Canada’s various succession laws.
Typically, legislation divides the estate between the spouse and children according to formulas that vary from province to province.
Still, says Darren Lund, an associate with Borden Ladner Gervais LLP’s estate planning and administration group in Toronto, the spouse often needs the entire amount of the estate to maintain her lifestyle.
If there’s enough goodwill within the family, he points out, the adult children could choose to gift their portions to the spouse.
When there’s conflict, some jurisdictions allow for remedies, such as Ontario’s equalization formula. Relying on an approach used typically in divorce situations, the surviving spouse can apply to a probate court to allocate the portion of the wealth which accrued during the marriage.
So, if the spouse’s entitlement is less than half the estate’s value—which can happen when there’s more than one surviving child—he or she may be better served by this route, says Lund. But the route in each case will depend on several factors such as whether the spouses held property jointly or whether the surviving spouse is the beneficiary of life insurance, he adds.
Note these formulas don’t apply to common-law spouses, stepchildren or step-grandchildren. Adopted children, however, are legally equivalent to the deceased’s own offspring.
When someone dies without a will, the most immediate dilemma facing the family is usually who should administer the estate.
But appointing that person or group often causes simmering tensions among surviving family members to surface. “One of the most important things advisors can do is convene a family meeting,” says Melanie McDonald, a Calgary-based estates and wills partner at Borden Ladner Gervais.
First, brief all parties on the default laws governing intestacies. Then, encourage family members to appoint administrators or executors.
Hoffman warns the prospect of one sibling overseeing the estate can trigger animosities or suspicion among family members.
Conversely, if all siblings insist on having a say, it may lead to permanent gridlock. So getting them to buy in to the choice of who will oversee the estate can reduce future tensions.
Fortunately, all Canadian jurisdictions allow family members to use a mediator. In fact, Ontario mandates using mediation in the case of intestacy.
The mediation process
Documentation is important. For example, if one sibling had power of attorney (which is extinguished upon death), he will have to account for all his financial decisions.
Courts and mediators will also look for promissory notes or evidence that loans have been repaid. They’ll also want to see documentation showing any advances were gifts, not loans.
If one child is co-named on the parent’s bank account, the courts will automatically appoint her as the trustee of that account.
But she won’t have free rein: the onus is on her to show whether she was named specifically to have special access in the event of death, or merely for the parent’s convenience to assist with routine bill paying.
Advisors should take stock of the evidence and the family dynamic as they counsel clients, says Mary Louise Dickson, a partner with Dickson MacGregor Appell LLP in Toronto. If after consulting with a lawyer, your client finds out he’s been cheated, tell him “you might as well go to the mediator and fight it,” she says.
But if he’s in the wrong, you should “tell [him] there was a reason he was dealt with less favourably.”
This type of frankness is important. Feuding families can easily burn through inheritances by lawyering up and dragging things into the courts.
“I tell clients, ‘I don’t think your parents wanted me to get more of the estate than you would get,’ ” says McDonald. In some cases, the parties are intent on fighting. But Dickson says the rules around frivolous or vexatious litigation have changed in recent years.
Legal bills and court costs used to come out of the estate. Today, some courts across Canada will order troublemakers to pay both their own costs and those of the other family members.
The much more advisable course? To always have an up-to-date will—a message that will no doubt resonate with a client who’s been dragged through a wrenching legal battle because her parents didn’t draw one up.
Ensure any will is airtight
Some strategies to avoid estate litigation:
Include an in terrorem clause in the will. This states that any beneficiary who contests the will automatically forfeits his gift. For the clause to be effective, the beneficiary’s gift must be valuable enough to merit serious consideration about pursuing litigation.
Ask for capacity tests from doctors and lawyers. These certify that someone has the requisite mental capacity to draw up a will. In addition, ask the lawyer drafting the will to make notes about the testator’s mental state and capacity. This is particularly important when an older client makes a will for the first time or revises it to either include or disinherit a family member, or to substantially increase or decrease a gift.
Risks of a DIY will
The inheritance process is littered with landmines. “Even with a will in place, not everything goes smoothly,” says Calgary advisor Dave Lougheed, who recalls dealing with a client who had to replace an unsatisfactory lawyer after the client’s relative’s parent died.
Advisor Ted Polci had front-row seats to a dispute involving a badly drawn-up will: his family member’s. The document, which named the nine children as heirs, had been drafted by a small-town lawyer who made a wording mistake.
That error surfaced when one of the offspring died before the father passed away. When the family member died, the will as written appeared to divide up the $1-million estate among 27 descendants—both the children and the grandchildren, most of whom were not yet adults.
“It was just a mess,” says Polci. “It took almost two years to get it sorted out.”
Such anecdotes underscore the importance of ensuring clients have wills that won’t fall apart like wet paper bags.
There are lots of pitfalls, but several turn up regularly, say estate lawyers:
- As with Polci’s family member, the beneficiaries “don’t die in the right order,” and the will fails to include proper alternatives. Mary Louise Dickson, QC, a partner with Dickson MacGregor Appell in Toronto, cites the case of a parent whose will left an inheritance to a child who predeceased the parent. A will that hasn’t been updated by the time the parent dies can contain those kinds of logical flaws.
- The assets are not completely accounted for. If the will contains specific language about what happens to the deceased’s various holdings—a house, investment funds, vacation property, etc.—but isn’t comprehensive, some assets may end up in a legal black hole.
- There are no residue clauses to govern what happens to the amounts remaining in the estate after all bills have been paid and the gifts or bequests have been distributed.