Why it’s time to ‘stress test’ your estate plan

The coronavirus pandemic has prompted a great deal of reflection among Canadian pre- and post-retirees on many things, including estate planning.

With a little more time on your hands, now may be the ideal time to ‘stress test’ your estate plan to make sure its many components reflect your goals, as well as your financial and family realities.

“Managing the transition of wealth from one generation to the next is difficult,” explains Bob Clark, President of Newport Insurance. “People often think they know what’s in place from an estate planning perspective, but it’s not until they do a review that they realize things are out of date or plans aren’t comprehensive.”

It’s one thing to look at those component parts—which should include tax, legal, investment, liquidity and family considerations—on their own. But assessing how each piece fits together holistically is the key to building an effective roadmap that ensures the preservation of wealth across generations and sets your family up for long-term success.

Be proactive

We all live busy lives. It’s easy to push off estate planning and the sometimes tough conversations and complex decisions that come with it. But it’s only possible to stress-test an estate plan if you have one in the first place. This could be as simple as just having a will. If you do, it’s a beginning. If you don’t, intestacy laws will dictate the distribution of your estate and it may not be according to your wishes.

Clark’s advice is to assign responsibility to an advisor who can both drive the process and help you assemble a team of professionals to build the most comprehensive estate strategy possible. At Newport, for example, we work with our clients to coordinate those conversations and ensure your plan is not only completed, but is regularly updated.

That’s what we did for ‘Tom,’ who began working on a plan with his Newport portfolio manager about five years before he retired from his business.

He understood the benefits of being proactive with his planning, while also realizing that both of his adult children had their sights set on the family cottage. He and his wife re-wrote their wills to ensure that their wealth and property were passed on in such a way that would avoid conflict between the siblings.

“If you plan, it goes a lot smoother when you and your kids know what’s ahead of you,” Tom explains. “But you also need to know where you want to get to; we’re always changing our plans a bit with the help of our advisors.”

Clark stresses that a team approach should draw on the complete spectrum of advice including legal, accounting and wealth management—and potentially even a family advisor to work through the estate plan with family members.

It’s not just about a will—think tax, investments and liquidity, too

We blogged recently about the need to have updated wills and powers of attorney. Just as important is stress-testing the structure of these all-important legal documents.

Do they properly reflect the scope and nature of your assets—including properties, investments, business holdings, real estate and even art and other collectibles? Have they been recently updated to reflect your current wishes, while accounting for any change in your personal financial or business circumstances?

Then there’s the issue of tax.

“One of the main things that people are not aware of is their estate tax liability if they were to die now, and that number only increases over time as your assets grow in value,” Yasmeen Seddiq, Newport’s Director of Wealth Management, notes.

For wealthy investors in particular, a wide range of complex assets can create headaches for their heirs after they pass away. Seddiq recommends taking the time to carefully value your estate assets as you develop a comprehensive plan to cover capital gains, probate and other tax liabilities upon death.

That might include estate freezes, family trusts, dual wills, capital gains planning and life insurance, to name only a few strategies.

Some of the questions you (and your advisors) should be reflecting on as you consider your tax liabilities are: What is the most efficient method to pay the capital gains tax owing on your estate? Will your executors have to sell assets or borrow against estate assets to come up with the liquidity to fund the tax? Will they make the right decisions about which assets to sell? Will timing be right, or will values be low? Did you realize that your estate could pay a double tax if the capital required is in your company? Would life insurance help provide the required capital, when it is needed, at a lower cost than other options? Our process includes an analysis of the cost of borrowing, selling assets, and life insurance. We include the cost of potential double tax. It could be worth a look.

Using philanthropy as a tool to reduce tax liabilities by gifting money to charities is another effective tax-planning tool. Maybe, with thoughtful planning, you can leave a much larger legacy than you thought.

Make it work for your family

One of the most important aspects of estate planning is stress-testing how the strategy might impact your heirs.

Do the people who will inherit your wealth understand how to manage money? You may need to train and mentor them, perhaps by giving them the opportunity to manage a specific asset such as an income property, or a small investment portfolio. If you’re not there to maintain balance, have you given them access to a mentor or advisor who can provide financial guidance?

“People often install trusts, lawyers and accountants to govern an inheritance, but it’s painful to think about how money can make kids entitled, spoiled and take away their drive,” Clark says.

A series of facilitated discussions with family members can help outline your wealth-transfer vision, define your family’s shared values and highlight your heirs’ goals. Clark likens it to the corporate governance that helped drive the success of the business you owned or the organization where you worked—only applied to the estate planning process.

“If you aren’t going to spend all you have earned, you become a steward of wealth. As a steward,” Clark says, “you’ll want to transfer that thought process to generations to come to help give a positive meaning to the wealth you’ve created.”