How clients are safeguarding their wealth transfer

Whether through a 'lifetime gift' or as part of an estate, it's possible to protect their investment, says estate planning expert

How clients are safeguarding their wealth transfer

The biggest wealth transfer in history is under way and grandparents across the country are grappling with the most efficient way to leave their hard-earned savings to their children and grandchildren.

Carol Willes, director of estate planning, BMO Private Wealth, told WP there are often three main considerations affecting this important – and highly personal – financial planning decision: timing, purpose and safeguarding. The latter is a particularly recent trend as more clients come to her seeking estate planning advice.

Arguably, the most common usage of inheritance money is to help the grandkids get on the property ladder, which ties into the purpose aspect. Whether it’s a “lifetime gift”, which is handed down when the client is still alive, or part of an estate, the money is often swallowed up by a couple’s joint finances. While clients’ kids might be settled and happily married, the grandkids are often just starting out in their relationships.

Willes recommended careful conversations with grandkids around safeguarding things like mortgages, so that if there is a divorce or separation, the money stays in the family. For example, one of her clients inserted a requirement in their grandchild’s trust that the final payment – when they were 35 years old – could only be fulfilled if they have a marriage contract. No contract means no pay out and the trust continues indefinitely.

“Grandparents see their own kids and know they can make their decisions and know whether [their marriage] is solid or not,” she said. “But grandkids are still at that stage in life where they're settling down and the grandparents don't know. [A marriage contract] is just a precaution because they may not be there to see and control [the wealth] the way they can with a lifetime gift.”

She added: “The contract shows that it was actually an intra-family gift and should not be part of a division of property or a breakdown of a marriage. That’s also important for tax purposes - we don't want grandkids getting dinged for tax on something that was in fact a gift.”

Willes believes advisors must include specialists in fields like tax, estate and business succession by pulling together internal expertise first and then helping the client get any external advice where needed.

In addition, she warned that clients must understand the long-term implications of wealth transfers, so that each member of the family is treated fairly. Failure to do so runs the risk of creating a family dynamic that no one wants.

She said: “The biggest mistake is forgetting that there's a long-term implication to transferring down to the grandkids without thinking through what that means at the end of your runway.

“That’s where the planning can really kick in to make sure that clients are thinking long term about this, and not just about helping Johnny or Susie next month. Make sure their estate documents have accounted for the fact that gifts have already been made, or somebody already got their share in the family business or their share of the family trust.”

She encouraged clients to think about the proportion of the estate they want to leave to each person, rather than getting caught up in exact amounts. The value of real estate or an RRSP are subject to change, of course. If clients think about their wealth as a “great big ball of pebbles” and try to visualize the various beneficiaries down the road, they can then decide how many pebbles to "throw" in the grandkids’ bowl.

Timing, of course, is fundamental to a wealth transfer, with an increasing number of older clients opting to release some, or all, of their estate early to help out a family member. This might be for a down payment for a house, an early entry into the family business, or help with a career change brought on by the pandemic, for example.

The benefits of doing it are clear. You get to see the joy it brings – and you also have more control and the ability to supervise and protect that investment.

Willes said: “If you feel you need to secure or safeguard it, you have more options if you do it now than if you wait and do it through the estate. We’re working with clients who are putting the kids on the title and they’ll lend the money, but they'll actually register a mortgage on the property so that if something goes south, their investment is still protected so the spouse doesn't walk off with it or creditors don't attach to it.”