Home-made estate planning can be dangerous

Last week I met with a widowed woman to talk about estate planning. Let's call her Mrs. Jones. She was anxious to tell me that what she really cares about is making provision for her disabled son. He is in his 50s, lives with his mother, and is unable to handle finances without help. Mrs. Jones is worrying about what all parents of disabled children worry about - what will happen to the child when the parent is no longer here to look after him. Her primary goal in doing her estate planning was to make sure that he was cared for.

This was a good start. Mrs. Jones told me that she owned her home and some non-registered savings, enough to set up a trust for her son's lifetime and still give an equal share to her other child, her daughter.

Then I discovered the problem that would make Mrs. Jones' plans impossible.

She had already given all of her assets to her daughter years ago. Her home had been transferred, though she still lived in it. Her non-registered investments had all been transferred. This wasn't even a transfer into joint ownership; it was an outright gift. Mrs. Jones owned nothing but her personal possessions and her RRIF (only because a RRIF can't be owned by anyone else), which names her daughter as her beneficiary.

Mrs. Jones said she wants to make a will and set up a trust for her son. She wants him to be able to live in their house as long as he wants. I replied that she doesn't own a house anymore, nor any money to leave for the upkeep and running of a house. It took me a while to make her understand that with her current legal and banking arrangements, she has not a penny to leave to her son.

She was so aghast at this news that I admit I at first suspected coercion on behalf of the daughter, but Mrs. Jones assured me that she had willingly signed over the assets. She just figured they were still "really" hers and that she could still do what she wanted with them. She hadn't realized she'd transferred ownership. She couldn't really explain why she had taken these steps, other than it felt pro-active to do "something" with the house and she wanted her daughter to be able to help her. Had she simply left it all alone and not transferred it to her daughter, Mrs. Jones could have made the will she wanted.

This is an extreme example of the kind of home-made estate planning moves that people make without legal advice. Without meaning to, Mrs. Jones had set things up so that her primary goal - looking after her disabled son - could not be reached. It was the opposite of what she meant to do. The worst case scenario is that the daughter will sell the house and spend the investment money, leaving no assets at all to support her brother. The best case scenario would involve the daughter voluntarily agreeing to transfer assets back to her mother (we'll have to see what tax implications are involved) or to put assets into a trust for her brother.

If the assets are not in Mrs. Jones' name, she cannot give them away in her will. She can't put them into a trust for her son, nor can she name the trustee to look after the funds. She'll have to rely on her daughter to do the right thing in supporting her mother if RRIF funds are not enough, and to look after her brother.

Call me cynical, but I'd prefer to see Mrs. Jones' son looked after by his mother's will than his sister's good intentions. After all, she could run into financial difficulties, or be sued, or get divorced, any of which could leave her elderly mom and her disabled brother in dire straits.

Home-made estate plans are commonplace of course, but they are dangerous. Many Canadians transfer important assets like their homes, cottages and bank accounts to family members because they intend to avoid probate or get help with the banking. In a dismaying number of cases, they don't think far enough ahead. Before taking major steps such as transferring your home or your life savings to someone else, see a lawyer. Find out what the long-term implications are for you and your family.