Eight simple steps to an effective estate plan

How to avoid estate failure and ensure that your assets go to the people and causes that you want them to

Here’s a shocking statistic to ponder: according to U.S. researchers, as many as 70% of estate plans “fail” after passing to the next generation. By “failure,” researchers mean that the estate ends up reducing family assets unnecessarily, or heirs unexpectedly lose control of transferred assets, or the estate is the cause of unnecessary legal hassles, delays or family arguments.

Here’s the good news: it doesn’t have to be this way. The fact is, avoiding such estate failures can be as simple as following a few simple steps. With that in mind, here they are: eight simple steps to ensure that your estate plan is as effective as it can be.

Step 1: Think about it. (No, really think about it.)

First things first: it’s difficult to craft an effective estate plan if you haven’t spent any time considering your legacy, or if you keep putting off writing your will, or if you’re just a little too “uncomfortable” thinking about your eventual demise. To some extent, this is understandable. Like many areas of personal finance, estate planning can be time-consuming and complicated. But unlike, say, investing, it doesn’t really come with an immediate sense of reward or satisfaction.

Most professionals will tell you that the will is one of the things which people overlook the most when crafting their estate plan. Sure, most of us know that we have to write a will − but a good many of us haven’t really thought about what the purpose and meaning of that will really is. Is it simply to pass on assets with a minimum of fuss and hassles? Do you have an operating business, and you’d like to ensure its continued viability after you’re gone? Are you looking to make a significant impact on a cause about which you care deeply? Or are you simply looking to ensure that as little of your money goes to Ottawa as possible?

Whatever you’re looking to do, it makes sense to spend some time carefully considering what you actually want to accomplish (and why) before you show up at the lawyer’s office to write your will. Even if you have a relatively modest estate, investing the time up front to think about your goals is an investment that will reap significant rewards.

Step 2: Have an honest, frank discussion with heirs

While you’re doing all of that thinking, it’s a good idea to let your heirs in on your plans. That may be a little bit of a different approach from the one that many of us grew up with − it wasn’t all that long ago that talking about inheritances with children was a bit of a taboo topic. But communication can help ease potential complications (both legal and interpersonal), and can ensure that your wishes will actually be followed when the time comes.

Now, there’s nothing to say that such a conversation needs to be a two-way negotiation or joint strategy session − if you want to keep your discussion as a strict “for your information” basis, that can still be quite helpful for heirs. No, not everyone will like what you have to say, of course. But simply letting heirs know what they can expect long before it happens can allow them to get used to the idea, and can go a long way toward defusing family conflict and acrimony (and needless legal headaches).

If you own a business, you’ll want to make sure that you address succession issues with your family as well. Is it your assumption that the next generation will take over the business? If so, who do you have in mind? Will everyone else be OK with the decision? How do you plan to address that issue − if at all? Again, there’s no rule which says that you have to come to complete consensus with your family about your succession plan. But without prior knowledge, family members could feel left out of the family business, or initiate legal challenges to your will. Probably not what you want.

Step 3: Prepare your will and other important documents

After you talk things over with your family members and heirs, you’re ready to prepare the formal legal documents that will be the foundation of your estate. Your will is the obvious first priority here, but there’s also your power of attorney document, your statement of wishes regarding personal effects, perhaps a representation agreement or similar document that provides clarity to family and health-care workers regarding your health wishes, and so on.

To be honest, this stuff is dull, unexciting, technical work that puts most people to sleep. But it’s important to get it all done. If you die without a will, for example, your assets will be divided according to a strict government schedule that may or may not reflect your current family situation. Without a power of attorney document, your spouse or family members will be powerless to act on your behalf if you become mentally incapacitated. Without guidance about your personal effects, your family will be left to guess what you wanted. And without an understanding about your health wishes, the doctors will decide things for you.

How much will all of these documents cost? Budget for several hundred dollars to consult with an experienced, veteran estate-planning lawyer, and potentially more if you have business assets, if your estate plan involves the creation of trusts, if you have cross-border real estate or if you have particularly complex financial affairs. That’s probably more than what you’d spend if you used some kind of “will kit” which you picked up at a bookstore, or a note that you scribbled down on a scratchpad, or a bare-basics will done by a lawyer who’s an expert in an entirely different area of the law. But it’s an investment that will pay off for your heirs in fewer hassles, a minimum of ambiguities and a generally easier time managing and distributing your assets after you’re gone.

Keep in mind that writing a will isn’t a “one and done” kind of activity. Because finances and family situations change (to say nothing of taxes and other government legislation), it’s important to keep your will and other estate documents up to date. Budget about 30 minutes every couple of years just to make sure that all of your i’s are dotted and your t’s are crossed. Of course, if your individual circumstances change dramatically sooner than that (divorce, death in the family, significant change regarding your finances, etc.), it’s a good idea to invest a little more time.

Step 4: Clearly outline roles and responsibilities

No doubt about it: crafting an effective estate plan is a lot of work. But being an executor and managing all the “to-dos” of an estate is often a lot more work. Even the most basic estate requires heirs to spend a good deal of time and effort securing legal certification, filing documents and keeping interested parties informed of what’s going on with the estate. In short, it’s not the kind of work you want to spring on someone as a surprise after the fact.

That’s why it makes sense to let executors and heirs know about their respective responsibilities well in advance. Want a close family member to be your executor? Make sure that they know exactly what’s required before they sign on – often, it can take as much time as a part-time job to do it right. Want your executor to work with a co-executor? Make sure that both parties know that they’re expected to work closely together, and come to a joint agreement regarding important decisions. If you’d like close family to divvy up your personal effects (clothes, jewellery, art and personal mementos), give them some advance notice about that task before you lay the job at their feet. If your estate is large and involves a family trust or a charitable foundation, make sure that all stakeholders know how things will work.

Not only is this kind of advance notice common courtesy, it can go a long way toward helping smooth out the transfer of wealth from you to your heirs. If everyone knows what they have to do before they have to do it, they can hold each other accountable for doing the job right. That way, you stand a much greater chance of actually getting the job done the way you want it.

Step 5: Investigate tax liabilities (and solutions)

Pardon the pun, but your death will likely be an expensive…“undertaking.” And, while we Canadians are fortunate not to have a true “estate tax” on our assets at death (unlike our American cousins), there are still plenty of taxes, fees, payments and other costs associated with winding up an estate and passing on the proceeds to heirs. Which makes tax planning a vitally important part of an effective estate plan.

Fair warning: this is one of the most complex areas of estate planning. There are a lot of strategies, tactics and options available, some of which will be appropriate to your personal situation, and others that won’t be. Making the job even more difficult is the fact that some of the “strategies” you might read about on the internet aren’t really effective (or even legal). So it makes sense to consult closely with a qualified tax professional before taking any action to minimize estate taxes.

This is especially important for those snowbirds who have assets in another jurisdiction − a vacation home in the Sunbelt, for example. The tax implications of cross-border estates can be very complex, and can take a long time to sort out if you’re a grieving family member who has no idea who to call or who to speak with; consult with a qualified cross-border accountant or tax lawyer and get things figured out before your passing.

One final point about taxes: you should absolutely do your best to minimize the taxes, fees and other costs associated with your estate. But taxes and fees should never be the driving force behind your estate decisions, or stand in the way of accomplishing your estate goals. Sure, making your estate tax efficient might save a few bucks for your heirs. But if it comes at a cost of compromising or derailing your goals or intentions, is it really worth it? Maybe it will be to some people. But, for most of us, it won’t.

Step 6: Identify causes you care about. Then, investigate them.

It’s the second part of this point that tends to trip people up. Most of us have a list of causes and charities we care about − from helping sick kids, to helping animals find a better home, to helping the world get a little greener. And giving a little money to help the cause can be a noble and worthy goal. But always remember: there can often be a significant difference between the cause we wish to contribute to and the organization we contribute to.

The simple fact of the matter is, not all charitable organizations are good choices when it comes to giving money. Some are bloated with bureaucracy − most of our donation will go to office costs, salaries and other “overhead” expenses. Others have big goals, but a poor record of actually executing those goals. And yes a handful of so-called charities are actually frauds.

For all of those reasons, you should invest some time investigating whether the organization and the people you intend to leave money to are worthy of your donation. What is the organization saying about itself? What are other people saying about the organization? What kind of impact are they actually making “on the ground”? Is it possible to visit the organization in person, or one of their charitable projects? If you’re planning on leaving a substantial amount of money, an interview with the CEO might be a good idea.

Maybe all of this effort isn’t exactly necessary if you plan on leaving money to a long-established, well-known organization such as the United Way, the SPCA, or the local food bank. But for pretty much anyone else, it makes sense to take an “investment” approach to your charitable efforts: do your homework, ask questions, and make sure that the management is competent before you write the cheque.

Step 7: Complex estate? History of family tension? Think about a resolution process.

Despite our best efforts to the contrary, it’s possible that some family members will end up disagreeing about the distribution of our wealth. Those disagreements might arise from the way in which the estate has been structured: if your estate has complicated trust provisions or other stipulations that are difficult for non-financial people to understand. Other times, the disagreement is really an argument about family relationships: who deserves what, and who doesn’t.

If either of these situations applies to you, it might be a good idea to provide some guidance regarding how to resolve those conflicts, so that heirs don’t have to challenge the estate in court − an expensive and time-consuming process that often ends up exacerbating disagreements, rather than resolving them.

There are many different strategies for accomplishing this. One of the simplest solutions is to pay a professional executor to be the manager of your estate − this can alleviate any suspicions of favouritism or “unfair dealing” between family-member beneficiaries. Another possibility is to use trusts to distribute assets before you pass. Or authorize your estate to hire and pay for a professional mediator in the event of a serious dispute.

No, not everyone will need to go to such lengths to resolve estate-related conflict − proper planning and ongoing communication can go a long way toward resolving potential arguments before they occur. But for those families who do need such formal procedures, outlining those procedures now can go a long way toward cutting off acrimony at the pass.

Step 8: Get professional help

Some estates are simple: a house, a bank account, maybe a car. The value of said assets is modest, and they all go to a single beneficiary − a spouse, or a single adult child − who is also named as the executor of the estate. In such cases, it’s possible to take a “do-it-yourself” approach to estate planning by writing a simple will, getting it notarized by a generalist lawyer or a notary public (if your jurisdiction allows it), and forgetting about it until it’s time.

But let’s be honest: most estates are more complex than that. If you’re like most snowbirds, chances are that you have a home, an investment account, perhaps a vacation property (possibly in a different province, or in the states) and a handful of other assets. You probably also have a spouse, one or more children and likely some grandchildren. You’d like to leave something to all of them, and perhaps a cause or charity or two as well.

If your estate falls into the latter category − as most snowbird estates do − then you’ll likely need some level of professional help with writing your estate plan. And the reason is simple: there is simply too much that could go wrong if you try to do it yourself. Wills require careful attention and proper wording − without professional oversight, your will could be legally challenged and your wishes thwarted. If your estate plan is vague, imprecise, or ambiguous, it can leave your family bitterly divided, as children and other heirs argue about what mom or dad really meant. And if you neglect to minimize obvious taxes, other estate costs and fees, your heirs could wind up paying thousands more in tax than they have to. If you’ve got an operating business, or foreign assets, or some other complicated arrangement in your estate − well, all of those risks increase exponentially.

Yes, professional guidance and estate-planning advice will cost you considerably more than a $29 software kit or a stack of pre-fab forms. But remember that old lesson your mom and dad taught you about getting what you pay for? Call it a cliché but, when it comes to estate planning, it really is the truth.

Some final thoughts…

Most of the time, with investing and other financial matters, the consequences of inaction are minor − indeed, sometimes inaction can be exactly the right thing to do. But that’s not the case with estate planning. The consequences of not taking responsibility and crafting an effective estate plan will be absolutely zero − for you, that is. For your heirs, the consequences will be enormous.

If you remember nothing else from this article, remember this: preparing an effective estate plan takes time. It’s not something that you throw together on a rainy weekend, or jot down on a notepad on the way to the lawyer’s office. If you haven’t yet put a lot of thought into it, or if you’ve been avoiding thinking about it altogether, make it a priority to invest time in it. You’ll be thankful that you did. And so will your heirs.

by James Dolan