The death of a loved one is an emotional and painful time for a family. Even an expected loss can be very difficult to bear. It is in this difficult context that the family must sort through the will and intentions of the departed. Even in a healthy family the process of dividing the legacy can trigger bitterness, anger, jealousy and resentment, as arguments over the inheritance erupt âÆ' or are suppressed.
These concerns highlight the fact that planning properly for one's legacy can significantly reduce family feuds and flareups, even if contemplating one's own death can be difficult.
An individual's intention may seem simple - for example, to divide the assets in their estate equally among their children. However, closer inspection can reveal an array of problems and issues to sift through. It can quickly become evident that "equal" does not always mean "fair." To distribute an asset fairly one must look to more than the value of the property. Other things to evaluate include income tax implications, liquidity considerations, emotional attachments and heirs' differing needs and life stages.
Consider Mrs. Smith, who has two children. Agnes, a highly paid 46-yearold executive, is married mother of two. Bradley, 40, suffers from a learning disability and has significant recurring medical expenses, but is able to work as a janitor for a modest salary.
Mrs. Smith has:
- a house worth $500,000;
- a cottage worth $350,000;
- an investment portfolio worth $150,000; and
- other personal property worth about $10,000.
This looks like it could work out nicely: if Mrs. Smith were to give one of the children the house and the other child the cottage and investment portfolio, they would come out even, based on value. However, from an economic perspective the child with the house likely would be in a stronger financial situation, primarily because no tax would be paid on the house on Mrs. Smith's death, because of the use of the principal residence exemption. In contrast, capital gains taxes could be owing on any gains in the cottage and investment portfolio. Most likely, part of the portfolio would have to be liquidated to pay them.
Beyond the immediate financial situation, Mrs. Smith might want to consider the financial security of each child. She may be less concerned for Agnes' well-being and financial security. On the other hand, Bradley must deal with medical expenses, and has much less opportunity for career success than his sister. This could lead Mrs. Smith to structure her legacy to ensure that Bradley is looked after.
A cottage can be particularly problematic within a family. Equal division of the cottage is rarely feasible and never simple. In the Smith family, it may be that Agnes already has a cottage and is not interested in owning a second. On the other hand, Bradley would love to have his own cottage, but would not be in a financial position to purchase Agnes' share.
Other issues that can arise include determining when each child will use a cottage, differing expectations in terms of renovations, repairs or maintenance, or one of the heirs being unable to fund the ongoing costs.
The cottage probably will have to be sold. Another potential for complication in estate planning arises when a child dies before a parent. The parent will have to decide what will happen to the child's inheritance. Should grandchildren receive the inheritance or will it be divided among the remaining siblings?
If grandchildren will receive some of the inheritance the parent will have to determine the method of allocating the inheritance.
Two common methods are known by their Latin descriptions: per capita ("by the head") and per stirpes ("by the roots"). Let's say that Mrs. Smith decides not to leave anything to Agnes, but instead will make Bradley and Agnes' two children beneficiaries. If she uses the per capita approach, Bradley and the two grandchildren will each receive one-third of the inheritance. On the other hand, a per stirpes division would give Bradley half and the two grandchildren will split the other half, each receiving a one-quarter share.
Another issue to consider is the integration of step families. Biological children may feel that step-children have no entitlement to the inheritance. As emphasized above, fairness âÆ' whatever it entails in the particular circumstances âÆ' must be factored into the treatment of step-children.
In wading through the challenges of distributing the estate, there is no substitute for upfront, healthy dialogue.
Frank and honest communication pave the way for understanding specific decisions and can reduce future family conflict. Parents should communicate clearly, discussing their intentions and objectives with their children. And children should be given an opportunity to express their opinions and ideas. Depending on the family dynamics, it may be preferable to talk initially to each family member individually rather than in a group setting. The one-on-one conversation could help the generations understand each other's expectations and desires, rather than presuming to know.
For example, some children may have strong emotional attachment to particular heirlooms or property of comparatively little value. The conversation will help to draw out these emotional attachments.
Another solution is to involve the children in the division of the property.
Empowering the children by giving them a voice in the process can result in a fair and equitable arrangement. One practical way to involve the children is by creating a draft plan. The parent may allow the children to go through the house and select one item at a time (by marking the item or writing it down in a notebook). However, it would not be advisable to include all items in the will, because as every time there is a change the will would have to be revised. A better approach is to include major items in the will and list the remaining items in a letter of wishes to which the will refers.
Although the letter of wishes is not legally binding on the trustees and executors, by stating the intentions of the deceased it makes the desired outcome more likely. The assistance of a professional adviser can be a great help in sorting through the various concerns and positions, as well as in finalizing the inheritance. Professional advisers can ensure that parents have clear, accurate information and take the steps that will achieve their goals.
Healthy and upfront communication is critical to successful estate and will planning, and for maintenance of family relationships during the difficult process of dividing the estate. By working through and communicating one's objectives and intentions for the family, incorporating the family's desires and expectations, and involving professional advisers along the way, an individual can leave not only a financial legacy but one that contributes to
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.