How simple estate plans can create complications later

How simple estate plans can create complications later

How simple estate plans can create complications later

Though there’s no direct evidence in his writings, the phrase “everything should be as simple as possible, but not simpler” is widely attributed to Albert Einstein.

You don’t need a degree in theoretical physics to understand the principle. But drawing the line can be difficult in practice — especially when it comes to estate-planning concerns.

“Instead of being cost-efficient in the long term and allowing a streamlined estate administration process, oversimplicity can create more complications, increased taxes, disputes and, all too often, litigation than could have been avoided,” wrote Sussana B. Roth of O’Sullivan Estate Lawyers in a recent note. 

According to Roth, issues can arise from a too-simple approach to insurance and retirement plans. To spell out plans for insurance payouts and retirement plan proceeds, people often use the simple beneficiary designation forms issued by insurance companies or other financial institutions. But the forms don’t consider trust terms that may be provided in a will or for trusts for minor beneficiaries. They also offer limited options in naming contingent beneficiaries.

“Reliance on these forms can lead to a disconnect between a person's wishes and their existing will terms,” Roth said.

She also talked about tax aspects that people in simple financial situations may take for granted. An RRSP and RRIF that’s not rolled over to a surviving spouse will be taxed as income on the deceased’s final tax return; the residue of the RRSP/RRIF holder’s estate would have to shoulder the burden. And while leaving a house to one child and an RRSP of equal value to another sounds like a fair division of inheritance, income tax consequences could result in the one getting the house ending up with less.

“Some complexities arise because family dynamics are not dealt with appropriately,” Roth continued. Focusing on family cottages, she said that without special family planning, strained relationships can lead to disputes. Some children or other loved ones who want to keep the cottage could end up in a long battle unless they get the guidance and planning to avoid it. And children who may not wish to have ownership, despite their parents’ assumptions, could ignite tensions should their siblings refuse to buy them out or have a contention about the property’s valuation.

Finally, estate plans can go haywire if they fail to consider second marriages. If a plan does not ensure the surviving second spouse is provided for while ultimately passing on assets to children of the prior marriage, it can lead to frustration and frayed relationships; at worst, it can result in drawn-out litigation and massive emotional and financial costs for the family members involved.

“Certainly, over-complexity can lead to confusion, frustration and added expense,” Roth said. “[But] all too often, loved ones will have good reason to lament a lack of comprehensive planning, and end up wishing more thought and expense had been spent before death, saving needless expense, time and grief afterwards.”

 

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Related stories: 
Why advisors need to be proactive in estate-planning conversations
How to talk to clients before they tie the knot

 


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