How To Really Screw Up Your Will (And What You Can Do If This Is Not Your Goal)

Introduction

It really isn’t too difficult to leave behind a legal, financial and logistical mess big enough to make your heirs shake their fists to the heavens; for many of us, life is complicated, as are our financial affairs. We may have creditor issues, blended families, squabbling relatives, businesses, cabins, assets earmarked for some but not all heirs, disabled heirs, and children with addictions and crappy marriages or those with a general inability to see a dollar without spending it. Accordingly, if any of these or the many other things that make life so befuddling apply, how realistic is it to rely upon a Will Kit bought at Staples or whatever professional charges the least to tie up all loose ends when you finally get the chance to find out whether there really is an afterlife? I’ll leave it to you to decide but do ask that you bear with me for a few more pages before making your decision.

The hardest part of writing this article is actually narrowing down the list of things that can go wrong. Admittedly, I’ve been trained to find the dark cloud inside every silver lining, no matter how faint and trivial. Moreover, some of the things that can go wrong won’t rain down legal or financial Armageddon on those left behind. It just might mean they don’t get quite as much because the legal, tax or probate bills are a bit higher than necessary. Or, perhaps it means that your executors and trustees have a harder time than necessary because they weren’t given the guidance and power to solve problems that could have been easily foreseen.

Admittedly, the financial planner side of me completely gets and sympathizes with the desire to save dollar or two by only paying for what you actually need. It may be the case that it simply doesn’t make sense to pay for prime rib when a quality burger will do just fine; although your Will and estate plan may not produce the best possible tax, legal and contingency planning possible, this might be perfectly acceptable if addresses most of the things that can go wrong and takes advantage of the easier ways of saving taxes, costs and fees when your time finally comes. Although you may not be solving every last problem or saving every last dollar, perhaps the extra effort simply isn’t worth it. As a friend of mine likes to say, sometimes the juice isn’t worth the squeeze. We all have our own budgets, goals and worries, so I will it to you to determine your own level of thirst.

Will Fiascos

To begin, the best thing you can do to increase the chances of things going horribly wrong at your death is filling out a Will Kit or, even better, sitting down with a pen, paper and glass of wine one evening and doing a Will on your own from scratch. Most people seem to think that their affairs are simple and straightforward. If you use a kit or a piece or two of foolscap to distribute your assets, you are depriving yourself of the chance of sitting down with a professional who can spot problems that you wouldn’t know how to find or identify easy steps to make things simpler, cheaper and easier. In some ways, it’s like going for a routine medical checkup despite feeling on top of the world; although you don’t anticipate any problems, you still go ahead with the poking and prodding because it might turn up problems you’re not trained to detect and, if any come up, hopefully providing you with treatment options before it is too late. If you are like me, there are a lot of things in this world that you don’t do particularly well. Sometimes I muddle through on my own (i.e. assembling Ikea products) but if it’s something important, I ask and pay for help. Since your Will is usually the key instrument for distributing all you’ve worked to acquire and to protect those you’ve left behind, this is definitely a time to bring in the hired guns.

As I have a lot of ground to cover and I suspect you’re probably growing tired of my general self-interested refrain of “hire a lawyer,” it’s time to get down to nuts and bolts. I originally included problems related to owning small businesses and farms, but this quickly took on a life of its own and I’ll publish that separately. With no further exhortations, and subject to the comments regarding small businesses and farms that I’ll save for another day, here are some of things that can you can do to cause legal and / or financial mayhem for those you’ve left behind and ways to avoid the mess if that is your real goal.

• Make sure that kids get large inheritances as soon as legally possible and ignore any health, marital, addiction or creditor issue on their horizon. I have met very few clients who think their kids are both mature and financially savvy enough to get the keys to the vault when turn 19. I certainly wouldn’t have trusted me at that age! Accordingly, it makes sense for the kids to inherit in a trust controlled by someone who has been around the block a few times until your kids grow up a bit and have had a chance to prepare for taking on this responsibility. Even better, I like distributing an inheritance to kids in stages so that any mistakes they make when they first take the reins are with 10 or 20% of their nest egg rather the whole thing. Unfortunately, Wills drafted by notaries (at least in B.C.) must pay out to kids when they reach majority. Also, if kids are named directly as beneficiaries to insurance and registered accounts using the basic forms provided by your agents and advisors, they will also be getting big cheques on the first day they are legally allowed to consume alcohol. As a result, I suggest putting trusts in your Wills and doing extra planning with your insurance and registered accounts inside or outside your Will to make sure that this money goes into trusts as well.

• Assume that you will always keep the same assets and that they will also increase in value at the same rate. Some people want to treat their kids equally but try to do this by leaving different assets to different kids, like leaving one child the family home and the other to inherit the family business, which are worth about the same thing at this point. If the business skyrockets and the home doesn’t keep pace, or the business gets sold along the way, you have very successfully created the basis of a good old-fashioned family pit brawl. If equality is your goal, I recommend stating in your Will that the kids get equal portions but stating that each child can take the specific assets you want them to receive as part of their share (and perhaps a way of valuing the assets so that this doesn’t become the basis of a new squabble). If an imbalance occurs, the have-not kid will either get equalization payments from the rest of your estate if there are extra funds or the kid getting the more valuable assets will need to arrange financing to make things right with her sibling. Either way, your assets go to the right person and the chances of things going wrong are dramatically reduced.

• Don’t investigate or understand the tax consequences of how different assets get taxed at death or how this may depend on who inherits them. Without investigating these issues, it is pretty easy to succeed if your secret goal is to pay unnecessary income tax or set up an unfair distribution of assets, even if all looks well on the surface. Good planning may take advantage of tax-free rollovers of registered assets or assets with deferred capital gains to spouse while gifting assets with no gains, such as crappy investments, life insurance and cash to heirs that don’t qualify for rollovers. On a similar note, it is important know that your estate pays the tax bill on most registered plans gifted through beneficiary designations. For example, assume that you want your second wife to get the family home owned just in your name and the adult kids from your first marriage to get your RRSPs and that both are worth $1,000,000. If you have no other assets and your goal was 50% to the wife and 50% to the kids, then this is exactly what you have not achieved; the kids would get to keep their $1,000,000 and the estate would need to pay the resulting tax bill that could exceed $450,000 in most provinces, which would ultimately come out of the equity in the home if the estate doesn’t have other assets it can use to cover this cost.

• Don’t bother to confirm whether you own assets jointly or individually or, even if this is clear, trying to understand the implications of each. Whether you own assets jointly or just in your own name (or if they’re owned only in your spouse’s) plays a huge roll in who actually gets them. If you own a home or investment account jointly with the new spouse, she will probably get them when you die even if your Will says that it goes to the kids! Here is one scenario I’ve seen. Dad gets remarried late in life and a few weeks later, the family home paid for by his deceased wife mysteriously gets transferred into a joint tenancy with the new girl in town. Even if dad’s Will called for the house to go to the kids, it’s probably going to be his new gal that is hosting dinner parties in the place if she survives him. In contrast, keeping an asset in your name can also cause a host of problems in some situations. Perhaps you want your new spouse to inherit the house as you’ve provided for your kids in other ways. Not only could keeping the house in your name alone mean triggering unnecessary probate fees and delays; it can expose the place to Will challenges and even claims from your creditors. If the kids are feeling hard done by, passing the home through the estate may present them with an opportunity to get a little more that is too hard to resist.

• Expect that your new spouse will leave what’s left to your children if he dies last. Unfortunately, I have seen this scenario go wrong in a number of ways. First, your new spouse may eventually change your Will after you’re gone, especially if he doesn’t stay in touch with your kids or remarries. If he does remarry, he might simply put most of your assets into joint name with your spouse and, despite what his Will actually says, your kids might be still living on Kraft Dinner beyond your spouse’s passing. Of course, that also assumes that there is actually anything left by that point. That might be okay if he needed the cash for reasonable expenses but maybe not so much if he was living large at the expense of dollars that you thought would pass on to your kids. Finally, this all assumes that your kids actually outlive your new man or that the money will actually be useful to your kids if they inherit too late in life. Sometimes, getting a smaller sum earlier in life, such as when paying down a mortgage or saving for their kids’ education, makes a far bigger difference than getting more later.

• Assume your kids will be delighted with you leaving everything to the new trophy wife / boy toy. Because of the scary scenarios just described (at least as seen from your kids’ perspective), they might challenge your Will. Throughout Canada, spouses and minor children can attack your Will if you don’t leave them enough. In B.C., you need to also include adult children of all ages and financial circumstances into the mix. In bottom line terms, you’ve probably already lost the war if your kids go nuclear and lawyer up; the combined legal costs for everyone concerned means that all parties will likely get a lot less than you would have like if a judge ultimately determines the issue. Moreover, the chances of the kids staying on the replacement wife’s Christmas card list and otherwise remaining on good terms have also been drastically reduced. You also need to factor in the reality that your kids might have your bitter ex-spouse from a first marriage whispering poison into their ears (or actually calling the shots) or their own spouses exhorting them to go after what they actually “deserve.”

What if you turn the tables and gift most of your estate to your kids? You could be facing the same problem in reverse, as your recently bereaved might be the one dialing 1-800 lets sue. If worried about either of the scenarios mentioned in this or the previous bullet, some extra planning can go a long way. Depending on your goals, finances and everyone else’s, potential solutions include:

o Dividing the pot between her and them at your death, particularly if you’ve sat down with everyone and they seem okay with your allocation. Getting tax advice on the best way of doing this can make the pot bigger for all concerned. Of course, while discussing your plans in advance and explaining where you’re coming from might head problems off at the pass, it might make for some tense moments if all your potential heirs still don’t accept your plan (although this may at least give you the warning you need that it’s time to take additional estate planning steps);

o Leaving some or all of your spouse’s share in a trust that leaves everything to your kids when he passes. Whether he has free rein to spend as he wishes, there are restrictions in place or if someone else calls the shots is up to you, although she could launch a Will challenge if he disagrees with the trust terms. I have seen some spouses allow try to balance these competing needs by giving the survivor the right to live in the family home or any replacement home for life, with the kids to get what’s left when he dies, or giving the spouse all the income from an investment portfolio or rental property but stipulate that the kids get the capital when the survivor eventually passes on.

o Getting life insurance to increase the size of the pot so that there is actually enough to go around rather than having to make hard decisions with a limited pool of assets. Like going for that routine medical checkup I mentioned earlier, the earlier you can get your expert advice, the better, as if you’re already in poor health or too old, it may be too late to use this tool to solve that problem;

o Owning assets jointly or separately as mentioned earlier. If you want to guarantee she gets the house, own it with her jointly. If you only want her to live in it for life, then keep it in your name and stick in one of those trusts that I have just described so that there is no chance that her future pool boy ends up on title;

o Get your spouse to sign a prenuptial contract, cohabitation agreement or marriage contract or something like them. Not only do these documents apply at divorce, they can limit her claims at death, although they are not iron clad;

• Don’t bother to update your Will when circumstances change. Just as life changes, so should your Will for some of the reasons I’ll lay out. To begin, as part of the package of legal changes just introduced in B.C., your Will is no longer revoked when you marry. Accordingly, s/he might be on the outside looking if you die first, which will probably make local lawyers happier than the man or woman you just promised to love, honour and cherish.

Likewise, some Wills don’t plan for you having additional children, which can mean the kids that most need financial support because they are furthest away from self-sufficiency are the ones that get the least (unless they lawyer up.) Moreover, as mentioned earlier, if you are leaving specific assets to specific people, your plans might go awry if you’ve already sold the asset, the size of your estate no longer justifies the gift or its value is a lot higher or lower than anticipated. For example, that $5,000 gift to the grandkids made in your Will 20 years ago may be less than you’d like at this point if the Will doesn’t index it to inflation or hadn’t expressed this gift as a percentage of your total estate rather than a fixed dollar amount. Next, if your kids have developed money, addiction, marital or health problems since your Will was executed, perhaps cutting them a big cheque at your passing will cause more problems than it solves. On another note, perhaps your choice of guardian is now a wing nut or your Trustee has now left the country. Perhaps if your kids are old enough, it makes more sense for them to get the job, especially if this means not having to pay an outsider to do the task. Finally, estate planning and tax laws change from time to time. They might create new problems, change how to get the best result tax-wise and provide new estate planning opportunities in general, so it makes sense to check in with your lawyer from time to time to see what’s changed and how it affects you.

• Make no inquiries or take no steps to divide your personal possessions amongst your family. Sometimes, the biggest fight is not over who gets the stock portfolio but over who gets the china and tacky paintings. Different people attack this problem in different ways. Some get the kids to pick in advance and actually label the bigger gifts with masking tape. Some gift during life. Some mention big gifts in the Wills (although that means having to update your Will if you sell items or your plans change.) Others attach a memorandum or letter they reference in their Will that they can update when necessary on their own that earmarks who gets what. As for me, I generally use the last approach but also include language in the Will setting up a way of dividing the remaining assets. In order to also hopefully eliminate the reality or perception that people are picking assets based on their cash rather than sentimental value, I also call for equalization payment if one kid chooses diamond earrings and the other picks mom’s sand dollar collection. As a final fallback, I like to state that if things are getting too tense that the Trustee should just sell everything off and add the cash to the estate; most parents’ biggest concern is maintaining family harmony and would rather see a family heirloom in outsider’s hands than children not on speaking terms after mom and dad’s death.

• Fail to get an inkling of your expected tax bill at death or wait until it’s too late to deal with the problem. Although you may wish to pass the family cabin to the next generation or ensure that you kids can continue the family business, the tax man may have another idea. Careful and timely planning can cap or even reduce your tax bill at death if done in a timely fashion (which may be decades earlier!) or you may decide to get life insurance to pay the tax (with or without contributions from your kids) towards premium payments. In some cases, if the tax bill is still going to interfere with your goal, you may need to consider other options, such as selling a business rather than passing it along or letting kids know that they have to plan on coming up with extra money to pay taxes or to fund equalization payments to their siblings in advance.

• Ignore assets in different jurisdictions so that it is a lot more expensive and complicated for your kids after your death. Generally, lawyers recommend that you get different Wills for assets owned in different jurisdictions, or that you at least get a lawyer in that other province, state or country to look over your Will to see if it will do the job for that locale. Ultimately, you might be better off selling or gifting the assets during your lifetime or changing how the assets are owned (i.e. perhaps so that the kids can inherit automatically if they own an asset in joint names without needing that extra Will) so that your kids don’t need to hire a new set of lawyers to probate your Will in a hard to pronounce place. It is also vital to make sure that any new Will executed for these assets doesn’t inadvertently revoke your main Will. Wills typically contain language that revokes all prior Wills, so this language will need to be changed for Wills that only deal with certain assets.

• Try to get clever by putting assets in joint names with different family members without getting legal advice or drafting the appropriate supporting documents. There are some real opportunities for minimizing probate fees in provinces like Ontario and British Columbia, saving on legal costs and speeding up the process of paying you’re your heirs by doing planning using joint ownership of your assets. Unfortunately, if this isn’t done correctly, you can end up creating a firestorm that makes things far worse than the problems you were trying to solve. I’ll need an entirely separate article to discuss how this all works, as I feel I’ve inflicted enough legalese on you for a single day. For now, I’ll just say that doing things incorrectly can increase your income tax bill more than any probate fee savings, expose the assets owned jointly to creditors, relinquish effective control over them to your kids and expose them to your kids’ divorcing spouses. If this isn’t enough, the assets might end up in the hands of the wrong heirs and the tax bill passed on to everyone else! Even worse, there can be a long, bitter and drawn out court battle to decide what you were really trying to do when you put your home into joint names with one of your sons (who was also your own executor) to the exclusion of everyone else; were you gifting it right away, at death or was he supposed to distribute it according to the terms of your Will rather than keeping it for his own benefit?

• Execute a simple Will that assumes everyone dies in the right order. It is a fine line between planning for every possible contingency until your eyes glaze over and your mental health is in jeopardy versus keeping things short, sweet and simple. I also understand how unpleasant it is contemplate and plan for kids or grandkids dying before them. As a trained pessimist, I stray towards planning for the worst on the grounds that the too much planning is better than not enough. My big worry (besides how long it will take the Canucks to rebuild or the Jays to contend) is that your health might change so that you’re still with us for another 10 to 15 years during which you are longer competent to execute a Will. Accordingly, planning for grandkids no currently in existence or what happens if both your first executor and second choice are longer around might be a lot more important than you expected.

• Don’t bother doing a Will at all since everything will work itself out in the end anyway. If you don’t do a Will or if your Will doesn’t fully distribute all of your estate assets, things can get expensive and messy. It can mean unnecessary taxes, having to sell off assets to pay the extra tax bill, the wrong people inheriting the wrong amounts and your heirs getting those big cheques at age 19 we talked about earlier. Someone will also need to apply to the court to manage these assets on behalf of your estate and they will get distributed according to the formula that applies in your province. This formula is seldom what you’d prefer. For example, until a few months ago, the spouse of a dead man without a Will would potentially receive less than if they divorced!

Also, especially if you don’t have a lot of surviving relatives, the money could go to people you’ve never met rather than the friends and charities you would have earmarked. It can also mean that government manages your minor children’s money until they turn adults, at which time your kids fend for themselves. It also may be the end of family businesses, both because this would trigger unnecessary taxes in many cases and because the government bodies managing assets for your kids will want to liquidate the kids’ shares. Moreover, unless you execute a Will that protects your trustee from the consequences of business losses, lawyers will tell him or her to shut the business down and sell it now. This usually means that the business gets sold for its assets rather than as a going concern at fire sale prices, which means a lot less for everyone.

Conclusion

Life is a complicated glorious mess. We often have complicated lives or lives that can quickly move in that direction. Added to the mix are the assets that we’ve spend a lifetime acquiring and safeguarding, complex and changing laws and probably a bunch of other things that none of us have contemplated quite yet. Although I will probably never meet nor know the vast majority of those of you who read this missive, I write articles like this because I want things to turn out right for you (or at least your heirs since this can’t happen for you in this instance.) Although I expect most of us do not like paying to getting Wills executed or mulling over the untimely demise of those we hold dear, life has its own rules, whether we like it or not. By making the effort and paying the price to get good legal advice and a proper Will, we dramatically increase the chances of creating a happy ending for our family and friends. In light of the relatively minimal cost of significantly bumping up the odds compared to the cost of things going wrong, I hope that most of you see things my way and, in a few months, have a shiny new Will to show all your friends.