'Discovery, discovery, discovery' is critical but so are tools like life insurance, according to high-net-worth wealth planning expert
Are you wondering how to pick your way through the landmine of generational wealth transfer for blended families?
“My key thing is discovery, discovery, discovery,” Cesare Salerno, the Vice-President & Regional Director of High Net Worth Wealth Planning for BMO Private Wealth told Wealth Professional.
It can be particularly challenging if there’s a family business with some children, from either or both sides, involved.
“Sometimes what’s fair is not equal and what’s equal is not fair,” said Salerno. “So, the key thing is to understand what your clients desire. Sometimes you may have to have some difficult conversations with them, but you really must try to have them open up and have those because the more you can get your clients to open up, the better service you can provide.”
Having those conversations with clients and encouraging them to have them with their children can also help them express their wishes and resolve their concerns while everyone can still participate in that discussion.
“Some families decide to have the conversations with their children. Some others don’t, and no way is the right or wrong way,” said Salerno. “But, sometimes it can be beneficial, so there aren’t any arguments when they split all the assets later.”
The key to a successful discovery is to find out what the family’s leaders want and what the family’s needs are.
“It’s like peeling back an onion to understand who they are, what their needs are, and what their desire are,” he said. “Once you do that, then it’s easier to start building out the plan itself.”
It is also important to find out what the children’s wants and needs are, especially if they’re involved in a family business.
“We have children who want to be part of the business. We have children who don’t. You even have children from your second partner’s family who are in the business, and where’s the equalization if they’re going to continue the business?”
Once the discovery is done, the advisor can build the plan, flag any current or future gaps, and make recommendations.
“Every situation is different. There are multiple combinations of how things could actually work out,” said Salerno. One child may have inherited some family property, for instance, which would need to be considered if the parent wants everything distributed equally. “That’s where you keep going back to the deep discovery. Understanding all the moving parts is so critical in developing a really detailed fluid financial plan since things are changing all the time.”
Getting an insurance policy is one popular solution to ensure that both the new spouse and offspring achieve equalization.
“When one partner passes away, you can roll over the majority of assets to the surviving partner in a tax-efficient manner. If that doesn’t equalize the estate, you can use life insurance to have a very tax-efficient way of equalizing the estate,” he said, so most of the assets can go to the surviving spouse to maintain the lifestyle and the insurance policy to the children, so both parties are happy. RRSPs may be taxed in the deceased’s final tax bill.
"So, if you roll those assets to a surviving spouse, the taxes could be differed. If you have an insurance policy with a death benefit equal to the RRSP, those funds will go to the beneficiaries on a tax-efficient basis. That way, all parties can potentially receive the full amount of the asset tax-efficiently," said Salerno.