Wealth transfer checklist for individuals and families

In what has been coined as “the greatest wealth transfer in history” taking place over the coming decades, it is anticipated that upwards of US$4 trillion in wealth will change hands from one generation to the next throughout North America and the UK — among Canadians this translates to approximately C$400 billion. With a shift in wealth that carries such an incredible scope and magnitude of impact, now more than ever it is crucial individuals and families turn an active focus to wealth transfer planning and detailed conversations about it. While many individuals have the best of intentions when it comes to passing down their wealth, the reality is that only approximately one-quarter of individuals actually have a full strategy in place.¹

To help bridge the gap between intentions and successful planning, it is important to recognize that the most effective approaches are ones that are holistic in nature — beyond the scope of formal structures and strategies, promoting a lasting legacy also strongly hinges on open dialogue, ongoing communication within the family and education. With that in mind, this checklist provides key tips and aspects that span both the technical and softer sides of planning, including practical information for both the giving and receiving generations.

1. Using a comprehensive financial plan as a starting point

For many individuals, looking ahead to the future often brings with it a number of questions relating to retirement, passing down wealth and their estate. Some common concerns include:

• Will I be able to maintain my desired lifestyle in retirement?
• How can I ensure I don’t outlive my money?
• What might my unexpected costs be and how will I be able to handle them?
• If I pass away unexpectedly, will my family be taken care of?

These are all important questions to ask and address, and a comprehensive financial plan may be very effective in this regard. While the scope of these plans is much broader than just estate and wealth transfer, the development of a comprehensive plan provides a clearer direction to strategically plan for certain scenarios, which in turn better equips individuals to make informed and strategic decisions about timing, appropriate amounts and the best methods for passing down wealth.

2. Developing and maintaining an up-to-date Will, and recognizing that estate planning is not static

When it comes to wealth transfer, having a valid Will is central, as it functions as the guiding document in the administration of the estate as well as a tool for the transfer of assets and funds. If an individual passes away without a valid Will in place (which is called dying “intestate”), the reality is that provincial laws will determine how the estate will be settled. Simply put, this means an individual loses all control over fundamental choices like who will administer the estate and who the beneficiaries will be.

In addition to creating a properly documented Will, it is equally important to regularly review decisions and details within the Will to ensure they remain current. This is because throughout an individual’s lifetime, there are countless changes and events, including marriage, re-marriage, a relationship breakdown, birth of a child or grandchild, significant health issue, death of a family member, change in an heir’s personal situation or relationship status, changes in wealth status or legislative changes, that may have a large impact on overall plans. Outside of significant life events, a good rule of thumb is to revisit your Will every three to five years to ensure it accurately reflects your circumstances, wishes and intentions. Further to keeping it up to date, it is also crucial to ensure your spouse or partner, children and other individuals who will be the recipients of an inheritance or assets, and executor are kept informed of changes to your Will, the creation of a new Will, and where your Will and other key documents are stored.

3. Understanding that a range of strategies and options exist to meet varying situations and needs

When it comes to wealth transfer planning, uncertainty around handling unique needs or complex family dynamics may be perceived as a large roadblock among some. To overcome these worries, it is important to recognize there are a vast array of approaches and strategies which can help to navigate every specific circumstance.

Part of comprehensive planning should include a thorough examination of the pros and cons of passing down wealth during your lifetime versus upon death, and then within that, what specific approaches will be most beneficial, whether that’s simpler methods such as outright gifts and inheritances, beneficiary designations or joint tenancy with right of survivorship, or more complex ones including inter vivos and testamentary trusts. Regardless of the challenges or situations from a family or individual standpoint, there are structures that can be customized and aligned to suit needs and goals.

4. Appropriately weighing personal preference with potential tax strategies

It is understandable that for many individuals, personal preference and strong feelings about helping younger family members now often carries a fair amount of weight in the decision-making process. While these personal aspects are very important to address as part of wealth planning, the main focus should be on striking the right balance of acknowledging those preferences while at the same time considering potential tax benefits or implications. For example, there may be tax advantages to changing the ownership of investible assets to a child if they are in a lower tax bracket, as the investment income will be taxed at their lower rate. (Note: Tax savings will vary based on an individual’s province of residence.) For strategies such as this, it’s important to work with a qualified tax professional, as the regulations regarding the types of assets and whether the child is a minor or adult are often complex to navigate.

5. Discussing and defining family values

The centrality of this aspect in planning is unfortunately one that many individuals underestimate. When looking at wealth transfer as a whole, main underlying purposes include creating a lasting legacy (either family or business), ensuring family is taken care of, and providing financial health for younger generations to succeed and pursue endeavours. Taking the time to discuss and identify key values within the family, whether that is education, professional life, community, athletics, philanthropy or otherwise, often serves as a very powerful uniting factor for families. For the receiving generation, it also helps to clarify reasoning behind the decision-making process, and provides inheritors with a greater sense of direction and purpose for how their received wealth is meant to be used.

6. Promoting open dialogue and ongoing communication

Regardless of family circumstances and dynamics, building an environment that supports conversation around wealth planning is so beneficial for both the giving and receiving generations. Understandably, this area of planning is often an emotionally challenging one, but the upside to open communication is that it removes any element of surprise or shock down the road, which can be incredibly negative and detrimental to the wealth transfer process, not to mention family harmony. One of the most effective approaches to consider is annual or semi-annual family meetings (in person or via phone or video conferencing), as these meetings present a productive forum for givers to share their intentions, reasoning behind decisions, and the structures that are being put in place, as well as gain perspective from other family members. For the receiving generation, the meetings may provide a better understanding of the methods and approaches used, offer context as to why certain decisions are being made, ensure they remain updated, and provide the opportunity for them to share their own interests, questions or concerns. Through these focused discussions, the idea is for each generation to gain better insight and input to help facilitate decision making and promote ongoing family harmony.

In addition to family members, another critical individual who requires a full understanding and awareness of your objectives and decisions through ongoing information is the executor of the Will. Executors play an active role in the wealth transfer process, as they are tasked with preparing an inventory of assets and liabilities, paying off liabilities, and distributing remaining assets as required under the terms of the Will. Given the breadth and complexity of this role, individuals should strongly weigh the willingness, capability and knowledge of the person they are choosing and may want to consider the potential benefits of using third-party services.

7. Finding the right balance with information sharing

Much like every individual is different, so too are comfort levels with transparency in planning. Many individuals in the giving generation are often concerned about sharing too much information with the next generation too early. Specifically, the worries often centre around whether disclosing amounts may have a negative impact on intended heirs, potentially creating a sense of entitlement or decrease in motivation to achieve their own goals. On the flipside, however, sharing details offers heirs the ability to proactively and accurately plan ahead for the wealth they are intended to receive. In weighing this decision, individuals should factor in both the potential benefits and risks, taking into account individual circumstances and family dynamics.

8. Separating the concepts of fair and equal, and recognizing various methods for equalization

When determining what is fair and what is equal in wealth transfer, issues may arise because definitions will vary among individuals. For example, what’s interpreted as being fair by the giver may not be aligned with the children’s or other beneficiaries’ point of view or expectations. As such, it’s important to differentiate between fair and equal as it relates to your particular situation, and then structure decisions in a fashion that promotes equality to limit the likelihood of any future resentment among heirs. Some key factors of potential inequality to account for include non-taxable assets, blended family situation, lifetime gifts versus inheritances, and varying financial situations among children.

9. Using financial literacy education as a supplement/support

The concept of financial literacy extends well beyond just wealth transfer, but its application is so vital for any individual who will be inheriting wealth or assets. Those in the giving generation may play a key role as educators in this sense, and this is another reason that involving family members in wealth transfer discussions is so imperative, as it builds exposure to aspects of the processes and approaches that are used. From an age standpoint, it’s never too early to start educating younger family members and have discussions around the basics of financial management. In fact, there’s a variety of research indicating that the earlier youth gain strong financial literacy skills, the more confident they are with financial management and decisions as they gain financial independence. Beyond family support or formal educational programs, including inheritors in introductory meetings with your team of qualified advisors may be another beneficial means to boost financial literacy.

10. Considering the value of philanthropic giving

For many individuals and families, having a focused philanthropic plan is a central component in wealth planning. Its purpose and benefits are twofold in that it offers distinct tax advantages by redirecting funds that would otherwise be subject to taxation. At the same time, from a family perspective, establishing a philanthropic plan or even a charitable foundation may be a strong unifier for family members and functions as a means to uphold family values for generations to come.

For a more in-depth look at some of the key aspects of and questions about wealth transfer planning, please view the recent RBC Wealth Management Services Special Report: “Five key questions in estate planning and wealth transfer.”