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Winnipeg Free Press - PRINT EDITION
How to prevent inheritance from slipping through fingers
Bill and Sandra are worried about their sons. They are 25 and 32 years old. Neither has shown any ability to deal with money. They spend it as fast as they earn it. One son has a history of creditor trouble that has forced his parents to bail him out more than once.
When it came time to see a lawyer and make their wills, they were in a quandary. If the two of them were to die tomorrow in a car crash, each of the boys would inherit north of $800,000. That is a lot of money to squander.
What options do they have?
First, they can sign a will that pays out the inheritances in stages. Each son might get 10 per cent immediately after mom and dad have passed away. Each son might then receive an additional 20 per cent of whatever stands to their credit in the estate five years later. The rest of each son's share might be paid out 10 years after mom and dad passed away. This is a good solution if mom and dad think their children will gain wisdom over time.
That option also gives their sons the chance to learn from the school of hard knocks. The first payment would be $80,000. The parents believe their sons will blow that money. Five years later, each son would stand to receive roughly $160,000. The second payment might be squandered as well. The parents hope, however, that by the time the third and final payment arrives the sons will have smartened up. Perhaps they will top up their RRSPs and TFSAs. Perhaps they will buy land, and invest the balance. Having blown their first two instalments, they hope their sons will understand how easy it is to make mistakes with money.
What if Bill and Sandra believe that one or both of their sons will never gain the wisdom to deal responsibly with money? They could shrug their shoulders. After all, it is their sons' lives and Bill and Sandra will not be around to watch. On the other hand, it irks some people to carefully build up a fortune and then hand it over to someone who will squander it. Bill and Sandra can choose a second option that builds stronger protection. It involves drafting their wills to provide that half, or even all, of their sons' inheritances be employed to purchase a lifetime annuity for each of them. The annuity is put in place through a financial services company and guarantees a monthly income for their sons. It cannot be squandered. No matter how stupid they are with the cheque each gets for this month, there is always a cheque coming next month.
As a third option, Bill and Sandra can sign wills that put a pair of long-term trusts into operation. Each son's inheritance would be held in a separate trust, one for each son.
This third option can be very tax efficient. It can save each of the sons several thousand dollars a year in income taxes. Each inheritance would be invested inside the trust, and income generated by the investments could be taxed under a fresh set of marginal rates. That gives the them the chance to have more income taxed in the bottom tax brackets at lower rates.
Bill and Sandra considered all of their options, looking at the taxes and other factors, but mostly taking out their crystal ball and trying to predict how their sons would mature and fare over the next decade. Ever hopeful, they opted to put the first option in place and stage the inheritances over time. It is the right solution for them. There is a lot of flexibility in this kind of planning. There are other options, not discussed here. Each family has to pick the option that works for them.
Bill and Sandra are real. Names and details have been changed to obscure their identities.
John Poyser, a lawyer with the Wealth and Succession Practice Group, can be contacted at 947-6801 or: jpoyser@inksterchristie.ca
Republished from the Winnipeg Free Press print edition June 15, 2011 B5
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