Formalize your loans to your children

I'm attaching a link to an article from Jim Yih, a financial advisor and author of the www.retirehappy.ca  blog, that talks about why parents might want to formalize loans, financial gifts or advances on their children's inheritance. There are some good ideas here, so check it out by clicking here.

I was glad to see that Mr. Yih discussed parents giving instructions in their wills for dealing with these financial transactions. What the majority of parents fail to realize is that if they don't leave instructions for their executor, the law automatically characterizes loans and gifts as being advances on the child's inheritance. This means that without supporting paperwork, the executor will have no choice but to reduce the child's inheritance by the amount of the loans or gifts. Believe me, that causes no end of heartache when the child in question believed that it was a gift from his/her parents with no strings attached.

The best idea is to consider doing as Mr. Yih suggests and formalizing financial transactions between you and your children.

Parents, don't let your money spoil the kids

There is a good article in today's Globe and Mail that talks about how wealthy parents talk - or don't talk as the case may be - to their children about money. Click here to read the article.

I was particularly interested in the part of the article that covered the concept of making sure the children understand that any inheritance left to them is a gift and not an entitlement. I whole-heartedly agree that this is something the kids should be brought to realize, but I also know it's just not the norm in our society. The sense of entitlement that I see in families of every economic bracket is very strong.

In any event, the article was interesting and thought-provoking, and will make a great read if you are wondering what you should be telling your children about the family finances.

When my inheritance is reduced by the amount my parents gave me, where does the money go?

In this blog, you've seen a few posts from me talking about the fact that if you have had loans from your parents, your inheritance will likely be reduced by the amount you've received. This is the law, and an executor must carry it out unless the will specifically directs him to do otherwise. A reader has recently asked me about the next logical step in the process, and I'm sharing his question and my answer here.

"My dad passed away just before Christimas and left his estate to me, my brother and my sister. His will states that any money owed by us is to be taken off our share of the estate. My question is….where does this money go? Does it get put back into the estate and then split 3 ways?"

You have pretty much summarized exactly what happens.

When parents lend or give money to their adult children, it is considered by law to be an advance on the children's inheritance. For this reason, the loans or gifts have to be taken off the children's inheritance, which is often referred to as being "set off" against the inheritance. As I mentioned above, a parent who doesn't want the loans or gifts to be set off can specifically say so in his or her will. Parents should understand  that the executor doesn't have the legal authority to forgive the loans unless the will says so.

As always, the beneficiaries don't inherit their shares until all taxes, debts and liabilities of the estate have been paid. Once that has been done, the executor will calculate each beneficiary's share of what is left.

When the executor sends you his accounting of the estate, it should include a statement showing what he proposes to give each beneficiary. You should be able to see from this accounting how your loan affects the amount you and others will receive. Occasionally the math gets a bit complicated when there are loans to several beneficiaries to take into consideration, but this is an important part of the executor's accounting.

Mom's in a nursing home; can we sell her house and divide the money?

Do you believe that other people should be allowed to take your money away from you - and I'm talking hundreds of thousands of dollars - because you are old and they think you don't need it? Of course not! So why do so many people think they can help themselves to their parents' estates without permission before the parents even pass away?

Here is a note I recently received from a reader:

"My mother has just been panelled to a Nursing Home. We are 5 children and one is her POA, and executor. Her will says that the house is to be sold and divided between the 5 children. Is it not best to sell the house right away and divide the money between the children, rather than keep it in a seperate account till she passes?"

Would it be best to sell the house and divide the money right away? Best for whom? And why are you following the will of someone who isn't dead?

This is a subject that I've been asked about many times over the years, and I have to confess that it irritates me no end. Your mother's will says that the five of you are to inherit the proceeds of the sale of the house after she passes away.  That's what wills do; they talk about what happens to an estate after a person dies. She hasn't passed away. Therefore, no, you can't have the money.

The executor has zero power to do anything at all while your mother is alive. The will has no effect while your mother is alive. So nobody gets to act as her executor yet. Forget the executor and the will while your mother is still alive. I hope I've made this point clearly enough, not just for you but for all of the other readers who ask me this question repeatedly.

Now let's look at the attorney acting under the Power of Attorney (POA). Has the POA been brought into effect? Don't assume that because your mother is going to a nursing home that the POA is automatically in effect. Going into a home likely has no effect on it at all. The person named in the document should read it carefully to see what has to happen to spring it into effect. In many provinces that means having a doctor sign a declaration of incapacity.

Once the attorney under the POA has properly sprung the document into effect, the attorney has to do what is in the best interest of your mother. Maybe this means selling the house. If your mother is never going to be able to live there again, then perhaps that's the best thing to do financially. However - and this point is NOT to be overlooked - the sale proceeds of the house must be invested for your mother. The attorney under the POA does not have the legal right to distribute the funds to you five. He or she risks financial penalties, removal from the job of POA and perhaps even jail time for that, depending on the circumstances.

Rarely do posts move me to use quite as much underlining as I've used in this one, but this topic is so important. Over and over again, I see children with an over-inflated sense of entitlement taking money that doesn't belong to them on the philosophy that "one day it will be theirs". That day hasn't arrived yet.

Should my inheritance be reduced by what my daughter owed my parents?

The complexities involved in distributing an estate continue to challenge both executors and beneficiaries. Even a simple statement such as "divide my estate equally among my children" can end up being complicated by the very real circumstances of our lives.

Recently I blogged about the fact that beneficiaries are often dismayed to find out that the "help" they received from their parents over the years in fact decreases the amount they will inherit. The following note was received from a reader who is in that situation, but with an added wrinkle. Here is the question:

"My father recently passed away. His will states that his estate is divided between 5 children and his common in law wife. I have been told that I will not recieve my full inheritance because I had a loan back in 1995 which my Mom cosigned on and when I moved away she made the payments. She passed away in 1998 so my Dad had to pay off the loan and also that my daughter owed Mom some money so that comes out of my share. The grandchildren are not even in my Dad's will and I don't see why I have to pay for her."

Unfortunately, the money you received by way of that 1995 loan is considered by law to be an advance on your inheritance. This is the case unless the will specifically tells your executor to forgive the loan, or unless you've paid it  back. The executor doesn't have any choice, as he is bound by law to reduce your inheritance by the amount you have already received.

Now the loan to the grand-daughter is another matter. I'm not at all convinced that the loan has anything to do with you. For one thing, the money was owed to your mother and this is your father's estate. For another thing, you are not your daughter. The presumption of advancement which applies to children receiving a gift does not apply to grandchildren. To me, it sounds like a real stretch to try to apply that loan to you.

However, I haven't seen the will and I don't know anything about the terms of the loan to your daughter, so I suppose there could be facts that support this position. For example, the money could actually have been given to you, and you gave it to your daughter.

Unfortunately, families almost never document this kind of arrangement because they don't want to insult anyone. This often results in keeping the feelings intact at the time, but causing much greater hurt down the line.

Holographic will names only 1 of 4 kids - now what?

 Even though I try to answer only one question at a time, the reality is that most estates are not simple, and the questions overlap each other. An example of this is the note below that I received from a reader. His question is simply stated, but the answer is complicated. Here is the question:

 

"My brother died and his ex wife has stated she has a 'holographic' will which names only one of his four children as beneficiary. He has set beneficiaries for his RRSPs, pension and life insurance which include only two of his four children. There is no identified executor for his estate. Do his adult children not included in this will have any rights to his assets?"

 

There are several issues to look at here, but the main one is the validity (or otherwise) of the will. A holographic will, if properly made, is legally valid in most places in Canada. But I've always found it wise to withhold any judgment about whether any particular holographic will is valid until I've had a chance to examine it. This is because most people have no idea what it really means for a will to be "holographic" and refer to all kinds of invalid things as being holographic wills when they are no such thing legally.

 

You said that there is no executor named in the will. This means that nobody has the legal right to administer his estate. Not even the ex-wife who physically has possession of the will. When a deceased person dies without naming an executor, the court can appoint someone to act as administrator. When there is a will but no executor, which really isn't that unusual given that executors may renounce or pass away, the will is taken to the court. The judge then will appoint someone to administer the estate according to the will.

 

There is a hierarchy for who can apply. Assuming that "ex-wife" means they were divorced and not just living apart (lots of times I hear about an "ex" only to find out they are still actually married), she would not be the first in line. She or someone else in your family needs to take the will to an experienced wills and estates lawyer to find out a) if the will is valid and if so, b) who has the right to apply for probate.

 

Now, the reason I'm making such a fuss over the validity of the will is that if the will is valid, your brother's children not named in the will are probably out of luck. If the will is invalid, your brother's estate will be distributed according to the intestacy laws of your province. That usually includes all children, but that will depend on the status of any spouse and the size of the estate.

 

The general rule about adult children is that unless they are handicapped and financially dependent on the deceased, they are not entitled to anything from the estate and therefore have no grounds to contest a will just because they didn't get anything. An exception to this rule is British Columbia, where they  have the Wills Variation Act that allows children to contest a parent's estate on fairness grounds.

 

Keep in mind that since the RRSPs, pension and life insurance policy have named beneficiaries, they aren't included in the estate. They will flow directly to the named beneficiaries. Even if the will were to be contested and a different distribution set out by the court, it will only apply to the assets in the estate.

 

In this situation, you need advice from a lawyer who can look at the will itself, and who is thoroughly familiar with estate laws in your province.

 

 

What do you mean the gift I got from my parents was my inheritance?

Have you given or loaned money to your adult children? Or, if you're the adult child, have you received financial help from your parents? If so, have you thought about how this might affect the child inheriting from the parent?

Most adult children are shocked to find out that the down payment for a home given to them by their parents 20 years ago is going to reduce or eliminate what they receive from the parents' estate. Because everyone involved referred to the transaction as a "gift", it's optimistically assumed that we can all just ignore that it happened. However, that's not the case. I received a question from a reader that addresses this issue, and I'd like to share it with you here.

Here's the question:

"Both my parents have now passed and my sister is the executor of the estate. She is now saying that the gift money my parents gave my husband and myself when my husband lost his job is my inheritance and that now I do not get my portion of the estate which is set out in the will. She says that any gifts by law are held against one's inheritance and that this is what her lawyer told her and she only wants to do what is right by the law. Is this correct? When Mom and Dad were helping us it was with a monthly amount and there was never any written contract between us or anything specified in the will but my sister knew it was a gift and I think now her resentment is coming out. But if this is correct by the law then that's fine with me."

As a general rule, it is true that gifts like the one you describe from a parent to a child during the parent's lifetime are considered to be advances on the child's inheritance. Your sister is right.

You've already said that there was no written contract or other documentation of the gift, and in fact it would be relatively unusual for a transaction like this between a parent and a child to be properly documented. Nobody ever suggests documenting it because it seems like a suggestion that one doesn't trust the other. Even if there had been full documentation of the amount and its purpose, it would still be considered an advance on your inheritance.


There are a couple of things that might change the general rule I just mentioned so that you might still share in the estate.The first thing that would change the situation would be proof that you had repaid the amount you were given. This appears not to apply to you.

The second thing would be a mention in the will that loans or gifts to children are to be "forgiven". Sometimes this type of clause in a will is called a "hotchpot" clause because it directs the executor on what is to be brought into the general estate or hotchpot for distribution. Ideally, whenever a parent has given money to one or more of the kids, there is a clear statement in the will about whether the money is to be repaid or not. In this context, "repaid" means being taken out of your inheritance, as it is in your case. However, you've said that there was nothing in the will that addresses this. Most wills don't address it, though they should.

In the absence of these exeptions, the general rule will stand and the amount you received from your parents will be considered an early inheritance. It seems that your sister has consulted a knowledgeable lawyer who has explained the rule properly to her.

I recommend that any parent who has loaned or given money to their adult kids address the situation in their will.

A will that remembers friends, as well as family

I really enjoyed this article that was published recently in the New York Times. It was written by a journalist who described the process of deciding what to put into her will, and her thought process during that time. I saw in this article a lot of the things I hear at work, from "why do you care if you're fair? You'll be dead" to making sure every person on your list has at least one item. I thought she really captured what many people go through when making a will.

Click here to read the article. It's a good read, and you may even see something of yourself in it.

Joint accounts - will my daughter share with my son?

A reader has brought up a question about putting his daughter's name on his bank accounts as joint owners. This is always a hot topic at seminars and meetings, and I know that many of you want information on this as well, so I'm sharing my answer here.

Here is the question:

"I have added my daughter's name to the majority of my bank accounts and been told that they are marked 'with rights to survivorship'. We live in Ontario. I have asked my daughter to do whatever she sees fit with the money which includes sharing some with my son. My son is bad with money. Would I still need to put in my will that the money is her's to spend as she wants?"

There are a few things to consider here. First of all, if your daughter gets divorced or is sued or is influenced by her husband, or just wants to go on a spending spree, you can kiss your money goodbye. You have taken some steps to address things when you pass away, but you still have to live in the meantime. You have just placed your money at great risk.

Next, who is receiving the tax T-slips for the accounts? Have you just placed a tax increase on your daughter?

As for your daughter actually receiving the money as a joint owner after you pass away, yes, including a statement about it would help clarify your intentions. There is a question about inter-generational bank accounts such as yours being true joint ownership. The law changed in 2007, though banks have been very slow in coming to terms with the change. Currently the law states that when a parent owns an asset then adds a child's name to that asset, on the death of the parent the asset is frozen and held in trust for the parent's estate. This is to acknowledge that so many people put the kids' names on things during their home-made estate planning to avoid probate, or to allow the kids to help the parents with their banking.

Right now that new rule is being applied very unevenly across the country and it seems to me there is quite a bit of confusion in individual estates as to whether an inter-generational account is really meant to be joint. If you want it to be a true joint account so that your daughter inherits all of the money in the accounts for her own purposes, then mentioning it in your will is a good way to clear up that confusion.

That leads me to my next question. Are you sure that what you really want is for your daughter to inherit all of it? If so, why didn't you just give it to her outright and not leave it in joint accounts? You mention a son. Keep in mind that under your current arrangement, she doesn't have to give him a cent. He may be somewhat upset about this and even try to sue her over it, but legally the money will be hers if you confirm this in your will.

You mention that your son is bad with money. Are you thinking that your daughter will share with him and look after the money, in that way protecting him from blowing any money he might inherit? If so, you have chosen possibly the worst possible way to bring that about. You've created no legal right for him to inherit. Your will probably says to divide your estate between your kids, which will likely upset  your son when he realizes much of the estate is already in your sister's name and out of his reach. You've placed your daughter in the unpleasant role of having to be a parental figure to her brother, deciding whether he is fit to get an allowance and doling it out to him.

I don't know which role would be worse - the brother who has to beg for money, or the sister who has to decide what to give him.

Since you're making a will anyway, you might consider putting a share for your son into a simple trust using your will. You can prescribe the terms such as when he gets the money and in what amounts.

It doesn't really make sense to me that you'd make a will, but also make all of these accounts joint with your daughter unless you really do intend to cut your son out of those accounts and ensure that only your daughter gets them for her personal use. It feels as if you're using certain tools to achieve things they were never designed to achieve. My recommendation to you is that you find a really good wills lawyer and frankly discuss your goals with him or her.

Disinherited son gets 1 cent, court won't change the will

As readers who live in BC may already know, the law in BC is a little different from the rest of Canada when it comes to contesting a will. The bottom line is that BC's law allows a child who is disinherited or treated unequally to challenge a parent's will on moral grounds.

Recently a court in BC upheld a will in which a mother left her estate to her three daughters and left her son only 1 cent. The son challenged the will but the court did not decide in his favour. What made this case so different? Why did the court not allow this claim when it allowed many others?

The key was a 6-page letter from the mother outlining her reasons for disinheriting the son. And she was thorough, going back to the son's teenage years and describing all of the things he had done that had caused her legal and financial trouble, right up to him trying to declare her incompetent. The court decided not to interfere with the mother's intention to disinherit her son when she had such clearly communicated reasons for doing so.

I find this case interesting because I believe in a person's right to disinherit a grown, independent child if he or she wants to. This case gives some solid guidance on how to achieve that in BC.

If you'd like to read more about this case, Holvenstot v. Holvenstot, click here to read a very good article from www.canadianlawyermag.com.

7 reasons kids shouldn't be treated equally in your will

I found this article from www.businessinsider.com interesting because it talks about treating your children unequally in your will. Treating all the children strictly equally is so common in estate planning that many people think it's legally mandatory to do so. It isn't the law that all children be treated equally of course, and this article gives seven really good examples of when a parent might consider treating them unequally. Click here to read it.

I'd recommend this article to all parents. The advice in it is solid, and believe me the earth will not open up and swallow you if you consider leaving different amounts to your children in your will. Sometimes unequal actually means a more fair situation.

I'd also like to add an eighth reason to treat your children unequally. This one is specifically for business owners with a child who is going to follow you into the family business and one day take it over. You may be planning to leave an equal amount to all of your children, but consider this. If you own a business that is worth millions of dollars, and one of your children has already dedicated years to helping you build that business, is it really fair to leave that child only the same amount as the other children receive?

One child has actively contributed to the value of the business; the others have not. To me it's not unreasonable that the child who has helped increase the value for everyone through hard work and time invested should receive a larger share.

This article contains good food for thought.

The fine line between protecting and punishing

Today I spent two hours talking with a client about her estate plan. On our previous meeting, we spent almost four hours. This is exceptional in terms of the amount of time spent; usually things can be wrapped up in significantly less time when a client doesn't own a business or a farm. But this particular client is trying to find the line between protecting her daughter and punishing her.

Here's the situation. My client has two children, each of whom will inherit about half a million dollars when my client passes away. My client's two stated goals are to be scrupulously fair to both children and to prevent her daughter's husband and step-children from getting any of the money the daughter might inherit.

She has her reasons for wanting this. I'm not her conscience or her moral yardstick so it's not up to me to say whether that's a "good" goal or not. Plenty of parents don't want money going to sons-in-law or daughters-in-law, especially if there are step-children. It's her money and her will and my job is to help bring about the legal plans she wants and needs. I just make sure that all angles of the arrangements are talked through and understood before my client makes a decision.

My client has told me that her two kids will get exactly half of the estate. One of her children can have their inheritance straight up, no strings attached. The inheritance of the other, the one with the less-than-desirable husband, will be held in trust for the daughter's lifetime. The daughter will receive a monthly amount from the trust. This effectively protects the funds from being given in bulk to the husband.

Is this really fair? Are the children really being treated equally? One child receives half a million dollars which can be used in any way the child wants. It can be saved for retirement (the kids are already in their 50s) or can be used to buy vacations, a cottage or anything else. The funds can be shared with the child's spouse or given to their kids. On the other hand, the daughter will never actually receive the full amount of her share. She will be given a monthly stipend in an amount she did not determine. She can't change her lifestyle in any way. While the trust is being designed to prevent her husband from using the money, it is also having the effect of preventing the daughter from using the money. The argument can be made that the child receiving the money outright is getting a heck of a lot more than the one whose share is held in trust for her entire life.

She may well perceive this as being punished for making what her mother believes is a poor choice of husband. Is the daughter being protected, or is the money being protected? Or is that the same thing?

We will be putting this daughter's share into a trust. We are hammering out details and amounts, but there is no question that she will be prevented from ever receiving her full inheritance. This is the most effective tool we have for this particular client to ensure that her son-in-law doesn't scoop the inheritance money and disappear. But it seems to me that if my client wanted to punish her daughter for marrying someone the mother doesn't like, we'd take exactly the same steps. The line between protection and punishment can be pretty blurry sometimes.

Great soup or estate planning technique?

This post from our friends over at http://www.allaboutestates.ca/ talks about equalizing an estate among beneficiaries (usually the deceased's children) by bringing money into "hotchpot". Funny name, but an important legal concept if you've lent money to one or more of your kids. Click here to read the post.

Consider options realistically to ensure harmony among beneficiary children

Like anyone who advises individuals for a living, I need to understand my clients' situation, issues and goals before I can offer any useful advice. Frequently I'll ask individuals or couples to tell me in their own words what their ideas or thoughts are for their estate planning. Usually, even if they don't realize it, they reveal their primary goals to me in their first sentence. Sure, I sometimes have to dig deeper, but the primary concern is usually close to the surface.

Some start off by telling me that they want to hand on a family business or take care of a handicapped child or preserve a family cottage. But a huge proportion of clients express a desire to ensure that their children won't quarrel or feel slighted in any way once the parents have passed away. Harmony among the children is by far the most commonly mentioned goal.

In my view, doing everything possible to ensure harmony among the children means more than simply including everyone in everything. A so-called solution that I see often is a parent who appoints all of his or her children as executors, all of the children as powers of attorney, and leaves the estate equally to the children. On the face of it, this might seem to achieve the goal of not slighting anyone, but if you look more closely you will likely find that none of this is necessarily going to achieve harmony.

First of all, naming all of your children as executors, particularly if there are more than two of them, is almost guaranteed to cause daily friction and disputes. There are simply too many decisions and judgment calls to be made for a group of individuals to be effective. Simply put, parents need to be more realistic about their children and the role they are asking them to fill. How can they expect people with different personalities, with different time constraints or family issues to agree on so many things over such a long period of time? It just doesn't work.

Those of you who think "oh but my family is different" are pretty much always wrong.

Every decision that goes into your estate planning needs to be thought out carefully, not as an academic exercise or theory, but as as practically as possible. What will happen if John works in Dubai, when the estate can't move forward without his signature on papers? Will carrying the expenses of the estate be a problem when one daughter is quite prosperous but the other is not? Will the fact that two of your kids have hardly spoken in ten years be a problem? What if one wants to claim an executor's fee but the others don't want that?

If you're trying to ensure harmony, forcing them into this position is probably a bad idea.

Let's take a look at leaving the estate equally among the children. How could that be a bad thing? Again, be realistic. Have you loaned or given one child quite a bit of financial help that wasn't given to others? Should that money be repaid to the estate and if not, how will the others feel about it? Has one child continued to live close to the parents and done the lion's share of helping out with the house, garden and finances? Should that child expect to be rewarded for that help? Has one child worked in the family business for years, helping you to increase the value of the business, where the other kids have not helped build the family fortune? Is that child entitled to receive a greater share of the business than the others?

These and other questions should be raised and discussed with your estate planning lawyer. The lawyer's role is to advise on the law, and to offer solutions and ideas for planning. Your role as an individual (or couple) is to consider your options realistically and practically in order to further your own estate planning goals.

Kids are not necessarily equal in estate planning

You may have read my earlier posts in which I explained that there is a difference between having a will and having an estate plan. The value and effectiveness of a will are directly affected by the quality of the estate planning. I'm attaching an article from http://www.capitalmagazine.ca/ that gives a wonderful example of how a person with a will intending to treat all children equally can still end up with an unequal distribution among the children. It happens more frequently than you might think. Click here to read the article. The attached photo is also from that article.

Recipe for a nightmare: take one cottage and leave it equally among all your children

Not long ago I was giving a seminar about estate planning, and I told the group that it was not a great idea for the parents to leave their cottage to all of their children. As I talked about the reasons for my statement, a woman in the audience was nodding enthusiastically, so I asked her if she had some experience in this situation.

She replied that her father had left the cottage to her siblings and herself, and it had been "a nightmare". She said that all wanted to sell it except for one, and the one who didn't want to sell it had moved in and wouldn't budge, so that nobody else could use it.

This was a perfect illustration for the rest of the audience on exactly what can and does happen. Adult children aren't saints. Sometimes they get greedy or stubborn or carry on a childhood rivalry with a sibling. Sometimes they are financially strapped and make weak decisions because of that. It does happen, even in families where people usually get along. Parents who choose to ignore the facts may go blissfully on without realizing there is a problem, but the children are likely to pay the price after the parent passes away.

A parent owning a cottage has options other than leaving the title to the property to all of the children and letting them fight it out. Some of them are:

1. Direct that the cottage be sold with the money split equally among the children.

2.  Include an option for one child to buy the cottage within a set time after the parent's death (say, 60 days). The child can use his or her inheritance to help pay for it. If the child doesn't exercise the option within the time period, another child then gets the option to buy the cottage.

3.  Talk to the children to find out who is most interested in the cottage and leave the cottage to that child. The child would take the cottage as part of his or her equal share in the parent's estate.

If you are dealing with a cottage, make sure that you talk through the logistics of the above ideas - or others - with your estate planning lawyer. Keep in mind that your cottage is unlikely to be your principal residence, so it is subject to capital gains tax. If you leave the cottage to one child or give an option to purchase to one child, be mindful that the capital gains tax is payable by the estate, which will reduce the amount of money in the estate for the other children. Some cottage owners carry life insurance policies to pay those taxes.

The bottom line?  Be realistic and talk through ideas to see if they are really workable.

Avoid RRSP tax with a proper beneficiary

This article from the Globe and Mail does a particularly good job of explaining the error that many parents make when leaving their estates among their children. The mistake I'm referring to is forgetting or not understanding who is paying the tax on their RRSP or RRIF when they pass away. Click here to read the article.

Mom makes one child beneficiary, hoping he'll share, but...

A mother made a will, leaving her estate to her oldest child. She tells her children that she has done this with the intention that the oldest child will pay the bills then share the estate with his siblings. But what if he doesn't share? This is the situation one of my readers is dealing with right now.

Now, I don't know why the mother in this case made such a disastrous will. Perhaps she was ill and in a hurry to get something - anything - onto paper. Perhaps she was trying to save a few dollars on the cost of a professionally prepared will, not realizing she was putting her children into a situation where they might have to endure costly estate litigation. Perhaps she was just overly trusting of her oldest son. Very few parents are able to admit that one of their children would ever behave badly to his siblings.

I also don't know why the oldest child is refusing to share. Maybe the mother told him something about the distribution that she didn't tell the others and he feels he really is carrying out her wishes. Maybe he feels that since he's looked after her during her lifetime he's entitled to more. He certainly wouldn't be the first executor to start legal fireworks by re-writing the will he was supposed to be following. Or maybe he just feels that he is going to rely on the letter of the law that says the inheritance is his.

There are both legal responsibilities and moral responsibilities in play here.

The siblings say that their mother intended the estate to be shared among them. Let's take a purely legal look at this. What record exists of her intention? Her will actually says the opposite - that she is leaving the entire estate to one child. A will is supposed to record the last wishes of the testator, isn't it? So on the face of it, the will should stand as an accurate record of what she wanted. She didn't set up a trust and put the oldest child in charge. She didn't divide up the estate among the children herself. She simply left it all to one child. The only proof of her intention of splitting the estate comes from those people who would benefit financially from the split.

The other side of the equation is the moral obligation of the oldest child to carry out the mother's intention, if she did in fact tell him that she expected him to divide the estate. This is an area that is changing thanks to recent cases, many from British Columbia, in which a moral obligation is relied upon to change the division of the estate. The likelihood of success will rely in large part on the provincial or territorial laws of estates that are in place.

But if the other children take the oldest child to court to force him to divide the estate, haven't all of them  - the oldest child included - already lost? Just the fact that they are spending money of their own and are partially depleting the estate reduces the value of the prize they are fighting over. And this doesn't even take into account the damage to the family relationships that will likely never recover from a lengthy, costly, nasty court battle.

The initial mistake was made by the mother, who left a will that any lawyer worth his or her salt would have told her straight up was a disaster in the making. Your will should reflect your actual intentions. No parent should leave everything to one child, assuming or intending for the child to decide what is right. That's the job of the testator, not the executor. Why pit one of your children against the others?

If my name is on my Dad's account when he dies, do I own it?

I notice that in the majority of questions I'm asked about parents and adult children owning assets together, the question contains the words "my name is on it".  I'm not surprised that so many people are uncertain about the ownership and ultimate destination of assets when this is the full extent of the information available to them. Your name can be "on" an asset in more than one way, and even then, there are other circumstances that may affect whether or not you will own that asset after your parent passes away.

The first fact that you must clarify is whether an asset is held jointly with a right of survivorship, or whether it's held as tenants-in-common ("TIC"). You are likely to find the TIC situation only with real estate, including mines and minerals titles, and not on bank accounts. The fact that there are two names on a land title does not necessarily mean that the title is jointly held.

To know for sure whether land is held jointly or as TIC, you must read the title itself (or a search of title, which can be done through a lawyer's office or a registry). If the title is TIC, you will see wording such as "each as to an undivided one-half interest" or some variation on that.

If you are a TIC on a title, you will own only your share of the title when the other person dies. The other person can dispose of his share in his Will, or if there is no Will it will be divided on intestacy.

If an asset is jointly held, this usually gives rise to a right to survivorship. This means that when one of the owners dies, the other owner continues to own the whole asset. This is commonly seen in bank accounts and investment accounts, as well as real estate.

Once you have established whether you own something jointly or as TIC, you have taken the first step. As mentioned above, if you are a TIC, you have your answer. But if you are a joint owner, the question is not yet fully answered.

The complication arises whenever an asset is owned inter-generationally. The usual situation is between a parent and a child, though it could also be between an aging relative and his or her niece, nephew, grandchild, etc. In these situations, our highest court has said that when there is an account held intergenerationally, and the parent is the one who actually put the money in, on the death of the parent the money is deemed to be held in trust for the parent's estate. This is drastically different from what used to happen automatically with joint accounts.

What must happen next is that there must be some written record of whether the parent intended for the money to go to the child by right of ownership. The record must have been made around the time the child's name was put on the account. If no such record exists (and in the vast majority of cases, it doesn't) then the child has to give back the money into the parent's estate.

One of the ways parents are creating written records of their intentions is by making statements in their Wills. This could be a simple statement in the Will confirming that they do or do not want the account or investment or property to go to the child as a true joint owner.

Note that the question of joint owner with right of survivorship does NOT affect husband and wife ownership. The comments I've made in this post are restricted to inter-generational ownership that is usually set up by the parent who mistakenly thinks he or she is simplifying the estate, or just wants help with the banking.

You can see how this area of estate administration is rife with disputes, misunderstandings and hard feelings between siblings. I've said repeatedly that joint assets between parent and child are rarely a good idea, and that is largely because people almost always fail to confirm their full intentions. If a parent just wants help dealing with the banking, then he or she should use a Power of Attorney and leave the joint titles for those who truly want that child to inherit that full asset.

How does forgetting about tax upset an equal distribution?

Whenever you meet with an estate planning lawyer, part of your discussion should be about taxation. You need to have a pretty good idea of what tax liabilities are going to rear their ugly heads once you pass away. If you don't, your assets might not end up the distribution you hoped for.

One of the main reasons that problems arise when tax must be paid on death is that people don't understand where the tax payment is going to come from. As always, making assumptions about what you think the law might be is dangerous and you should consult an accountant or estate planning lawyer.

Taxes and expenses are paid from the residue of the estate. If you simply leave the residue of the estate to be divided equally, you may not have a tax issue. Taxes will be paid before the beneficiaries are paid, with the resulting effect that all of the beneficiaries are treated equally.

But many people who make their own wills tend to list individual assets that they want to leave to their children. This often leads to tax trouble. For example, let's say that George makes a will with the idea in mind that he will treat his three children equally. He has a cottage worth $350,000 that he leaves to his daughter, Eleanor. He has about $350,000 in his RRIF, which he leaves to his daughter, Fran. His cash, his home and the rest of his assets are worth about $350,000, so he leaves the residue to his son, Gavin.

George may think he has treated the kids equally but in reality, he has not.

The cottage that Eleanor inherited is subject to capital gains tax. For the sake of this example, let's say that the amount payable is $75,000. Since taxes are paid out of the residue, the $75,000 comes out of  Gavin's share.

The RRIF that Fran inherits cannot be rolled over to her as she is not George's spouse. Therefore the tax has to be paid on that when George dies. Let's say the tax owing is $125,000. Again, this comes out of Gavin's share of the estate.

This means that Gavin's share pays Eleanor's tax ($75,000), Fran's tax ($125,000), the cost of the funeral ($10,000), all of George's outstanding bills ($10,000) and all expenses relating to probate and administration of the estate ($10,000). He is left with $120,000. This is hardly the equal distribution George had intended.

This is only one example. There are several other scenarios in which the testator's plans could be disrupted.

This is not to say that wills made by lawyers don't include gifts of certain assets, because they often do. However, if a lawyer helped you make a will like this, he or she should be offering you ideas on how to avoid the disruption of the equal distribution (if an equal distribution is what you want).

One way of avoiding this lopsided distribution is to state in the will that taxes are to be paid from some other source than the residue, or that each beneficiary must pay the tax arising from his or her inheritance. Another idea is to buy life insurance that will top up the residue, making extra cash available for payment of the taxes. Your estate planning lawyer will work with you to discuss options.