Case study: a family’s financial plan

Liz and Phil Royal are a typical Canadian entrepreneurial couple: Close to retirement, oodles of retained earnings and no coherent plan for retirement. They are the prototypical case offered to the 100 registered financial planners who gathered for the sixth annual Institute of Advanced Financial Planners (IAFP) conference in September in Regina.

To understand some of the nuances in developing a financial plan for a successful business owner, the IAFP provided speakers and experts on a variety of topics, including: tax and estate issues, legal ramifications of business succession, insurance options and family dynamic coaching.

The result was a three-day analysis of the Royal family – affectionately known as “The Royal Pain.”

In PART 1 of AER’s coverage, we outline the case study and explore retirement planning solutions. Next month, in PART 2, we cover business succession planning and the options the Royals could choose for their legacy. In PART 3 we will publish the remaining facets of the Royal’s financial plan, along with your responses to the case study.

PART 1: THE WONDER PLOW CASE STUDY SET UP
Liz and Phil Royal, together, have built a successful manufacturing business based in Dog River, Saskatchewan. Over the years, these high-school sweethearts transformed a small backyard business, based on an invention by Liz’s father, “The Wonder Plow,” into a mid-sized farm machinery manufacturer with a 150-employee factory in Dog River and a U.S. distribution facility in Minot, North Dakota.

Close to retirement, the Royals approached their advisor in an effort to understand what plans they needed to make and implement to comfortably retire.

During the initial conversations, the advisor learned:

• They recently turned down an offer of $10 million for the business from the “Jack Moose Implement Co.,” a large multinational manufacturer of farm and industrial machinery.
• They have always concentrated on the business and have done little in the way of estate planning except for a will that leaves everything equally to their children.
• They wish to pass the company and their estate to their children and “natural” grandchildren.
• They wish to treat all of their beneficiaries equally.
• Their biggest fear is that the assets they have accumulated through a lifetime of hard work and frugality will end up in the hands of ungrateful in-laws. (This is an understandable concern as three of their four children are divorced.)
• They also want to leave a significant legacy to their community, ideally something that would pay homage to the early settlers and pioneers of the prairies.
• They want to minimize taxes, preserve assets and distribute wealth while protecting the estate.

Now, their advisor’s job is to develop a comprehensive financial plan that takes into consideration the wishes and desires of Phil and Liz, while accounting for the tax, legal and familial implications that may be involved.

FAMILY FLOWCHART – THE CONCERNS AND DESIRES
The first step is to develop a comprehensive picture of the family dynamics, which includes a list of goals and dreams, and a list of concerns, from Phil and Liz.

Through a few probing questions, the Royals’ planner ascertains the following:

• Liz is 80 and Phil is 82. Both are in generally good health although Phil has had a recent health scare. Liz has genetics on her side: her mother lived to 101.
• Chuck Royal, age 54, is the oldest son and runs the day-to-day operations of the family business, Britannia Ltd. Chuck has been a success as an executive but his personal life has been a disaster. He and his first wife, Deedee, had a very public and embarrassing divorce. Together they have two sons, Billy, age 30 and Hal, age 27.
• Billy is his grandparents’ favour ite, and is already working in a mid-management position in the family firm. Hal has been in and out of trouble and was always a bit of an outsider (and he bears a remarkable resemblance to his mother’s tennis pro).
• Chuck remarried a few years ago to Cammi who has two grown children of her own.
• Annie, 52, is the only daughter. She is divorced and has battled alcoholism all her adult life. She has not worked for years and her divorce settlement is fast depleting. Her son, Ted, 26, is a social worker and is married with one child. Her daughter, Mary, age 24, has Down Syndrome and lives in a group home.
• Andy, age 50, manages the family’s U.S. distribution centre in Minot, North Dakota, where he lives. He is divorced with two daughters, aged 10 and 12, who live with their mother, Sara, in Denver, Colorado.
• Eddie, age 42, is the youngest. He has pursued a career in theatre and lives in Vancouver with his partner, Steve.

Their advisor also learns about a few more family issues. For instance, Liz and Phil confess that their eldest son, Chuck, is under the assumption that he is entitled to the largest share of the family business. By working for less than market wage for years in the family business and dedicating 20 years of his professional life to the corporation, Chuck believes his retirement should be secured by his inheritance – the business. However, Liz and Phil are worried. Chuck still makes support payments to Deedee, his first wife, and she appears to be counting on Chuck’s inheritance as a way to make a claim for larger support payments if Chuck’s financial fortunes improve.

Liz and Phil also know that their second eldest son, Andy, believes himself entitled to the U.S. operations, at the very least. His argument is that he established the U.S. market for Britannia products and has recently become a U.S. citizen. While his parents acknowledge that Andy has also worked hard on the business, they know that he is also heavily involved in his own career and that his daughters attend a very expensive private school in Denver, making him financially strapped. They are worried that these financial pressures may prompt Andy to liquidate any portion of the business he may receive from his parents in order to capitalize on the retained earnings and pay off his bills.

When asked about their eldest daughter, both Phil and Liz let out a great big sigh. They are already quite aware of how much money they have provided Annie, and, over the years, have tried to help her battle her addictions. Yet, their daughter can only talk of “retiring” to Hawaii once she receives her inheritance. While Phil and Liz want to be able to provide for their daughter, they are worried that she will spend all the money too quickly and not leave enough to take care of her own children.

To balance out their concern for Annie’s lack of self-sufficiency is the delight the Royals have for their youngest son, Eddie. On his own since 21, Eddie is content with his life. He and his live-in partner, Steve, have a real talent for flipping real estate. Despite not making a great deal of money, their son and his partner own a condo in Vancouver and a 12-suite apartment in Surrey. The most notable difference, however, is that Eddie is the only child not vying for a piece of the family pie. Instead, he actively encourages his parents to give their fortune to charity (specifically recommending charities with an environmental focus).

THE NEXT GENERATION: LOOKING OUT FOR THE ROYAL GRANDCHILDREN
Aside from their children, Liz and Phil have expressed concern about whether their “favourite” grandson, Chuck’s eldest son Billy, will be adequately compensated for his contribution to the family business. Liz is also concerned for Mary, her granddaughter with Down Syndrome. Mary works in the local recycling facility and is happy in the group home, where she resides, but Liz knows that her granddaughter is not capable of handling money. Still, Liz would like her to be able to have “nice” things.

Finally, Liz is concerned about her husband. While both are close to retirement, Phil has been quite forgetful as of late, partly due to a series of mini strokes he suffered this winter while in Arizona. Since this medical mishap, Phil has been muttering about leaving his entire estate to the church and has been spending a significant part of every day at the local casino. Worried about his behaviour, Liz hopes that by concentrating on retirement planning, she and her husband will be able to comfortably move into the next phase of their life.

Part of the role of the advisors is to unpackage what aspects of their estate and their business will impact the Royals’ retirement.

RETIREMENT PLANNING
One key aspect of their retirement planning, however, is to determine how they will realize the retained earnings in their business. By their own admission, the Royals have little money invested in external sources; instead, most of their net worth resides in the business they patiently built upon over the years.

While their advisor was told that the Royals had declined a $10 million offer on their business, it is still unclear why this offer was declined.

For example: Did the Royals decline the offer because the business was worth more? If so, how much is the business worth and how do they know this? Did they decline the offer based on their desire to leave a legacy, rather than for financial reasons? Or were they concerned for their son Chuck, since he has spent so much time in the family business?

The easiest and probably most profitable solution, in the short term, would be to sell the family business, explains Jamie Golombek, managing director, CIBC Private Wealth Management.

However, if the advisor learns the Royals refused the proposed offer of $10 million because of their desire to pass on their legacy through the family business, Golombek suggests that the advisor construct the financial plan so that growth of the company, not the control of the company, is transferred to the heirs while Phil and Liz are still alive (and not yet retired). This can be done through the use of a family trust and an estate freeze. The trust holds the shares on behalf of the beneficiaries and can accommodate voting and non-voting shares – so that the future growth of the company can be divided up among those siblings involved with the business and those that are not.

“If you issue the shares directly, absent a shareholder’s agreement, the children can run off… sell them, whatever,” says Golombek. “If you use a trust they can’t do that and the Royals can retain control of the business until they choose to officially retire. It’s built-in protection,” while establishing a CRA-friendly transfer of wealth and business succession plan.

Also, the condominium in Arizona needs to be dealt with, says Golombek. Both the condo and the U.S. business assets will be subject to U.S. estate tax upon death, says Golombek. “This could result in a substancial U.S. estate tax liability. Add this to the potential capital gains tax and the Royal family could end up in a cash crunch. They need to plan their estate in order to avoid having to pay these expenses.”

CONSIDERING THE SOUTHERN SIDE OF THE ESTATE
Golombek explains that if they sold the condo in Phoenix, given the current glut of residential real estate in the U.S. market, the family could not claim the loss as the condo is considered a personal use property.

“While the family could take advantage of the U.S. estate tax exemption ($2 million in 2008 and $3.5 million in 2009), the exemption must be prorated by the U.S. situs assets divided by the worldwide estate. But considering that a family’s worldwide estate is usually so large, and the U.S. portion of an estate is usually so small, this prorated rate means little in terms of exemption from the estate tax. For the Royals, this means they will have substantial U.S. estate tax to pay and they need to address this while Liz and Phil are alive.”

Assuming that no one is a U.S. citizen, Golombek suggests that the Royals take one of a few approaches in order to mitigate estate and capital gains taxes.

The first is to purchase life insurance to cover the estate tax sum. The next option, which is generally not recommended, is to have the Canadian company purchase the U.S. real estate.

“If they opt to have the property purchased by Britannia, they need to be aware that the CRA will assess a shareholder benefit for equal to the fair market value of the rent that could be charged on that property,” explains Golombek.

Another option is for the Royals to establish a trust and have the trust purchase the U.S. property.

“Before selling and then purchasing [either another property or the same property] the Royals could consider creating a Canadian trust and ensure that a non- U.S. resident is established as the trustee,” says Golombek. “Since the trust owns the property upon death, the Royals could save a significant amount of estate tax.”

Golombek does forewarn, though, that the Royals would lose control of the property, as it would legally be owned and controlled by the trust. “Expert legal and U.S. tax advice here is, of course, a must,” quips Golombek.

ASSETS: LIZ AND PHIL, OWNED 50/50

THE “ROYAL” FAMILY

GENERATIONAL DIFFERENCES

GENERATIONAL DIFFERENCES

We encourage readers interested in commenting on any of the suggestions provided, or offering alternative solutions to the Royals’ financial plan dilemma to email their suggestions or comments to: editor@advisorsedgereport.com.

PART 2: ESTATE AND SUCCESSION PLANNING

BUSINESS SUCCESSION PLANNING
Despite the plethora of solutions already offered to Liz and Phil, a few pressing matters still have not been addressed. The first is how to deal with the succession of the business – where the majority of their wealth is accumulated. The second is how to plan the transfer of wealth to their heirs.

In initial conversations, Phil and Liz expressed a desire to divide all assets, including the business, equally among all beneficiaries.

“This could be disastrous for Britannia Manufacturing,” explains Gregory Swanson, partner at the Saskatchewan-based law firm of McKercher LLP. He quali- fied his remarks as being restricted to Saskatchewan law, given that the corporation is located in Dog River, Sask.

Swanson suggests that a better solution is for Liz and Phil to agree that the business not be divided, but rather have a trustee appointed to make all the decisions. Then the shares could be distributed evenly among the 10 beneficiaries – four children and six grandchildren.

“Having a trustee or two trustees make all the decisions will help avoid the problems that may arise if 10 individuals try and run a company,” says Swanson. The two most obvious trustee choices, according to Swanson, are Chuck and Andy, based on their knowledge of the business. Swanson also points out that the company assets will require a Canadian lawyer and an American lawyer, in order to ensure that all decisions are within legal parameters of both countries.

Swanson explains that if Liz and Phil opt to take this business succession and wealth transfer solution, there will be immediate tax consequences if they create the trust and move all the shares into that trust while they are still alive. “The trust, then, could be responsible for paying the tax on the capital gains accrued on the transfer from owner to trust.”

Another option, if Liz and Phil did not want to pay the tax would be to create an alter-ego trust, which would defer the tax, consequences but enable the structure of the business succession and wealth transfer to take place. Also any future growth of Britannia would belong to the trust.

“We would also suggest that Chuck receive a greater share of the income and capital distributed by the trust, based on his contribution to the business,” says Swanson.

Swanson believes that this is a viable business succession option as everyone shares in the growth of the company and those that have and are contributing to the growth of the company are also adequately compensated.

However, Swanson cautions that the Royal family will need to address the U.S. estate tax issue. With a company and property in the U.S., the Royals would be subject to the tax on all facets of their estate – a cost that can be quite substantial, explains Swanson.

“To avoid the U.S. estate tax, the Royals could roll the U.S. shares into the Canadian company,” says Swanson. “U.S. estate tax arises only when an entity dies and a corporation never dies,” he explains. “By rolling the U.S. shares into the Canadian operation, the Royals could avoid these taxes. However, we would caution them to seek out specific legal advice to ensure there are no tax consequences in Canada for this action and to ensure that this is acceptable under U.S. law.”

The Royals need to realize that leaving equal parts of the business to each child could result in the demise of the family business, explains Elaine Froese, a certified coach based out of Boissevain, Man. Yet, Froese cautions that the discussion about how to pass on the family business needs to come after the discussion on which child contributes to the business and what division of assets is fair in relation to these contributions.

“Only 30% of family businesses make it to the second generation,” explains Froese, who, coming from a second-generation farming family, has direct experience in business succession planning. “This is because the work ethic of the founder of a business often differs from the work ethic of the successor. This difference is amplified when there is more than one successor in a family.”

Froese believes the Royals will run into work-ethic problems, among other issues.

“Who said Phil and Liz had to leave anything to their kids?” queries Froese. “But this type of question gets the conversation started, particularly on the topics that are taboo, topics that are considered undiscussable.” This discussion also allows the advisor to determine necessary planning points, such as: how much money is required for their retirement lifestyle; what long-term care planning do they have in place; and whether or not they should sell their business, instead.

Froese also believes that the advisor may need to call in additional help and expertise.

The Royals face various, multidimensional problems; an advisor can bring in a family therapist to help facilitate communication. The benefit of calling in a therapist who specializes in family dynamics is that this expert can sort out the non-financial planning problems within the family, thereby enabling the advisor to focus on their job of financial planning. (One good resource, says Froese, is www.crnetwork.ca). “The Royals are like any other farm-type family,” says Froese. “Less than 20% of farm family businesses have a written succession plan.” If the therapist works on the lack of communication in the family and the advisor works on developing a written succession plan, as part of a formal financial plan, the Royal family and their business may actually survive the succession process, says Froese.

ESTATE PLANNING: TRANFER OF WEALTH
But only if Phil and Liz are able to see that there is nothing more “unfair than treating un-equals equally,” says Froese.

“Those who contribute to wealth and the protection of that wealth should be given consideration for their ‘sweat equity’.”

Froese suggests splitting the estate on a 3 to 1 basis: $3 to every business contributor, such as Chuck, Andy and Billy, versus $1 to every non-business contributor, such as Annie and Eddie. Hence, if Chuck were to receive $3,000 as inheritance, Annie would receive $1,000.

“If Phil and Liz do not take into consideration Chuck’s sweat equity, he may be able to rely upon the doctrines of unjust enrichment and constructive claim against his parents’ estate to bring him up [his inherited portion to] fair market value based on all the work he has done,” explains Kim S. Korvan, a Regina-based lawyer with McKercher LLP, specializing in elder law issues. “Chuck could have worked for XYZ Company but stuck it out with the family business instead of making more money because he expects his due to be reflected in the inheritance. The courts may recognize the validity of his claim if Chuck brings an action against the estate for these reasons.”

Korvan suggests Liz and Phil sit down with a mediator to discuss and explain their intentions with Chuck and then with the entire family. While a bit more dif- ficult, Korvan also suggests that Chuck talk to Deedee, his ex-wife, in an effort to bring her on board with the plan so she does not take a run at any increase in income he may receive from his inheritance. “This form of communication is often all that is required to prevent family members from contesting a will.”

For his part, Swanson suggests that the Royals implement strategies that would prevent family members from selling the shares of the business, thereby diluting family control.

This is of particular concern to those siblings in financial strife, says Swanson. For example, Annie may be desperate enough to sell her existing shares to a family member at below market value. Not only would Annie lose out but this type of action could dilute ownership or create power struggles within the family. The easiest way to handle this type of concern is to set up a discretionary trust that holds the shares for the heir. This trust could stipulate stringent selling terms, or could prevent a sale unless voting members approve.

The Royals have also indicated a desire to exclude their children’s current and former spouses from benefiting from their estate.

In Saskatchewan all property received during a spousal relationship in which an adult child has an interest – including inter vivos and trust gifts – is property subject to division pursuant to The Family Property Act. Thus, the Royals decision to try and protect their children’s inheritance is a very real concern, says Korvan.

“Their best option is to call a family meeting and discuss their intentions and the legal ramifications of their decisions,” says Korvan.

In the matter of Annie – the daughter who struggles with addiction and who has received fi- nancial contributions from her parents – Korvan suggests including a hotchpot clause in the will.

A hotchpot clause would take into consideration all assets provided to Annie during her parents’ life and addresses the parents’ need to account for the difference in compensation their daughter will receive in relation to her siblings.

According to Korvan, an example of a hotchpot clause is: No gift of money or property made by me and no obligation entered into by me for the benefit of Annie Royal is to adeem any gift to her in this Will nor is it to be compensated for by way of hotchpot.

Korvan did not address whether or not Annie’s inheritance and the hotchpot clause should take into consideration accrued interest of monies advanced to her during her parents’ lifetime – a consideration financial planners at the sixth annual IAFP symposium suggested.

ESTATE PLANNING: CAN’T BUY HEALTH
While on the subject of trusts, Jamie Golombek, managing director, Tax & Estate Planning, CIBC Private Wealth Management, suggests the Royals examine the use of testamentary trusts.

“This type of trust protects the assets for the kids, grandkids, from any future re-marriage by the surviving spouse.”

Considering that Phil has already suffered a series of strokes, Golombek believes the testamentary trust to be an ideal solution for the protection of assets, the mitigation of taxes and the ability to control who, in the future, has a right to the estate.

“It’s a classic problem: One spouse leaves everything to the other and then dies. But what if, after the death, the other spouse decides to remarry? If the surviving spouse were to die, while married to someone else, then the new spouse may be entitled to the estate and could, potentially, leave the kids with nothing. That’s a serious problem.”

Golombek suggests that both Phil and Liz set up testamentary trusts that give each spouse limited access to the encroachment of the capital. He suggests the Royals see a lawyer in order to set this up, as both will have to take into consideration that their spouse is, at the very least, entitled to what they would receive if there had been a divorce.

“Still, if the spouse who remarries dies, only his or her portion of the estate would pass to the new spouse, leaving the remainder to the surviving children.”

The other benefit to the testamentary trust is the ability to income-split post-mortem, says Golombek. Because the testamentary trust is not taxed at the highest rates, as an inter vivos trust would be taxed, but at graduated rates, this allows for the postmortem income-splitting by having income taxed inside the trust post-death instead of in the hands of a high-income beneficiary.

“The Royals could set up four testamentary trusts and could potentially save over $12,000 in taxes annually, per trust,” says Golombek. “Plus Phil and Liz could limit the amount the kids have access to, thereby ensuring that their kids do not spend all the money at once.” Even if some of the children, like Eddie, can be trusted to be responsible with the inheritance, Golombek suggests the Royals still use a trust. “The potential to reduce the tax on the future income from the inheritance through post-mortem income-splitting is huge!”

ESTATE PLANNING: LEGACY GENERATIONS
While Liz and Phil are under no obligation to leave their estate to nonminor children, their intentions need to be clear and should be expressed in their wills, says Swanson.

This issue, however, prompts a more fundamental issue Phil and Liz will need to address: Their desire to “control the distribution” of their estate to only “natural heirs.”

Both Swanson and Korvan believe potential problems will arise if this desire is pursued.

“The Royals could include provisions for DNA testing or they could specifically spell out in the will instructions for the executor to divide the estate only among natural heirs, but this puts the executor in the hot seat,” and leaves the will open to being contested, says Swanson. “Hal has been treated like a grandson so to stop treating him as such would prompt problems. My advice is that Hal should be included as a beneficiary regardless of lineage.”

If the Royals refused to acknowledge Hal as a grandson, Swanson suggests that the couple “not use words to legally exclude children born out of wedlock, [but rather] use words to direct” the inheritance.

“I would not encourage people to state reasons, in their will, for their intentions,” says Swanson, as the burden of proof then is on the estate to prove the reasons are accurate. “Instead, I would encourage them to acknowledge that they are not leaving money to a particular person without stating a reason, particularly since the will is a public document.” If the Royals insisted that their potential heir should know the reason for the exclusion, Swanson suggests asking Phil and Liz to compose a private letter to the heir. “Put the reasons in a separate document;” one not considered a public document and, thus, need not be submitted into court.

Yet, one grandchild that does appear to cause Liz great concern is Mary – Annie’s mentally disabled non-minor child.

Liz, in particular, is very concerned that Mary is taken care of even after she and her husband are gone. In her efforts to gain some clarity on what to do for Mary, Liz is told that she may be able to roll her RRSP into the recently created registered disability savings plan (RDSP), which will solely benefit Mary. As of December 2008, approximately 10 financial institutions will launch the RDSP. Another means of ensuring that Mary receives the benefit of her inheritance, without incurring clawbacks from government assistance, would be to use a Henson or discretionary trust, either completed on an inter vivos basis or included in the wills.

Liz and Phil also need to consider that any money left to a minor grandchild residing in the U.S. will require a trustee to oversee the estate. “It is unlikely that Andy can be the trustee because he lives in a different state than his children,” explains Korvan. “That requires Liz and Phil to find another trustee or a professional fiduciary if they do not want Andy’s ex-wife, and mother to the children, to control the portion of the estate left to the grandkids, which could include shares of the business.”

PART 3: FINAL CONSIDERATIONS CHARITABLE GIVING After a great deal of discussion with their financial advisor, the Royals are much clearer on what they would like to happen to their estate after they are gone. They appreciate that certain trusts and intentions must be set up and communicated while they are still alive to ensure that their desires and legacy are carried out.

However, there is a final aspect of their plan to be addressed: how will they choose to distribute their wealth, given the charitable intentions they have expressed to their financial advisor?

“The Royals need to be told that should they want their children, or a particular charity, to benefit from their estate there are a few ways to go about this,” says Jamie Golombek, managing director, Tax & Estate Planning, CIBC Private Wealth Management.

The first is to simply gift a sum of money, a property, or a portion of shares. “Gifts are tax-free,” says Golombek “There is no gift tax and the Royals can give as much as they want with no obligation to record the gift on the tax record.”

However, a snag to this approach is that accrued gains are taxable, says Golombek. “For example, if the Royals had a cottage and decided to gift to a child, the Royals would be subject to the capital gains tax on the appreciation of that gifted property. The capital gains would need to be paid for the tax year in which the gift was made.”

In relation to the U.S. property and shares, various RFPs attending the symposium suggested that the Royals could opt to gift the U.S. portion of the company, thereby mitigating any taxable gains on the corporation’s shares. Other suggestions included gifting the Arizona condo – an option that would trigger U.S. gift tax, one that is significantly less than U.S. estate tax. However, these considerations need to be thoroughly examined by the financial advisor and must be viewed in context with the Royals’ overall financial plan.

Golombek also strongly recommends that all clients give shares or mutual fund holdings to charity, rather than writing cheques, to save the capital gains tax on appreciated securities donated to charity.

Finally, Gregory Swanson, a Regina- based lawyer with McKercher LLP, suggests the Royals offer their antique tractor collection and the quarter section of farm to their municipality. “By donating to a municipality, the Royals exempt themselves from the tax on the accrued gains of the donation. If they were to make the same donation to charity, they would be responsible for those taxes.”

If, however, the Royals decide to make these gifts while they are still alive, Swanson suggests that first they execute Enduring Powers of Attorney that include specific provisions regarding the gifting of part of their assets to charities.

Swanson concedes certain court rulings have enabled a POA to act upon the past practice of the grantor in relation to donations, but this practice has run into diffi- culty in court on more than a few occasions.

“It is now recognized that while a power of attorney is important to ensure a grantor’s wishes are carried out, a POA cannot offer gifts unless specifically instructed to do so in the Power of Attorney, which is a separate and distinct document from the will. That requires Liz and Phil to include specific clauses in their POAs – specific clauses for the POA to follow.”

THE PAPER TRAIL While a great deal of discussion has taken place in relation to Phil and Liz’s desires and goals, in the end it all has to boil down to action. One method of establishing a list of financial planning action steps is to start by compiling basic paperwork, such as the will, Powers of Attorney, a list of assets and health-care directives.

“Before taking instructions, it must be clear to the lawyer that Liz and Phil are competent to complete these estate planning documents. Phil needs to identify: the nature and size of the property he owns, the people who expect to benefit from his estate, the actual beneficiaries and their bequests and the types of claims – legal or moral – that might be made against the will,” says Swanson.

By doing this legwork, Phil will establish his capacity to make informed decisions and will lay the groundwork for completing these estate planning documents. In order to do so, Kim S. Korven, a colleague of Swanson’s at McKercher LLP, suggests the financial advisor meet with Phil alone.

“By meeting with him alone you can ensure that Liz is not answering for him, and assess whether he is competent. You can also discuss his relationship with his doctor, to solicit whether or not a medical consultation regarding competency is required, as a lack of competency can arise from different reasons that a doctor can comment on,” says Korven. During this private meeting, it’s important the advisor obtains consent from Phil to communicate with his doctor. Once the advisor has this consent, the advisor may contact the doctor. “There are benefits of involving the doctor,” explains Korven. “You learn the underlying reasons for Phil’s forgetfulness,” a concern Liz expressed during discussions with the Royals. “And you may learn if there are certain times of the day when Phil is more lucid. As long as a person is lucid at the time he or she gives instructions and signs the will, the person is deemed competent.” Also, by involving the doctor, and understanding more about your client, there will be less chance of someone successfully contesting the will, explains Swanson.

Once it is concluded that Phil is competent, a meeting needs to be set up to discuss and take instructions regarding wills, Powers of Attorney and health-care directives.

CHOOSING POWER OF ATTORNEY In addition to their wills, Phil and Liz also need to turn their attention to Powers of Attorney, says Swanson. In choosing who will be able to make decisions regarding their assets and person while they are still living, Swanson advises Phil and Liz to opt for a person who knows their values and who can understand information relevant to making decisions regarding property and financial affairs (or personal affairs, if the case warrants).

Given the complexity of the estate, Swanson also suggests not relying upon general POAs, but to use specific POAs instead. By using specific POAs, the chosen attorneys can “deal with their areas of expertise.” For example, Chuck could be named the POA for the Canadian portion of the business, Andy the POA for the American portion of the business and Billy, Chuck’s eldest son, could be the POA for all other estate matters. To ensure that not one person has complete control of any one portion of the estate, Swanson suggests that Eddie, or a non-family member, could be named as a joint attorney to any or all of the POAs above.

HEALTH-CARE DIRECTIVES If the Royals decide to complete “living wills” (otherwise known as Health Care Directives), the Royals have two choices regarding format. They can either sign a statement of their intentions, or they can appoint another person to act as a proxy in making health-care decisions. The benefit of a statement of intention is that it “makes it easier for family members to make difficult decisions and prevent family fights.” On the other hand, the benefit of a proxy is that the document is much more flexible and can continue to reflect the benefactor’s changing wishes. If Liz and Phil do decide on a proxy, Swanson suggests naming one another, while offering an alternate, in case of incapacity or death of the proxy. Either way, both the statement of intention and the proxy are documents requiring Phil and Liz to state “one’s wishes regarding medical treatment,” and will only be used if or when a person is unable to communicate or lacks capacity.

• For example, in Saskatchewan a Health Care Directive is effective when the person who has made it: Cannot understand information relevant to healthcare decisions (even in relation to proposed treatments that may arise);

• Cannot appreciate the reasonably foreseeable consequences of his/her decisions; or

• Cannot communicate a healthcare decision on a proposed treatment.

In Saskatchewan, a doctor is not bound to follow a Health Care Directive. If the Royals want to ensure that their wishes are followed, it will be prudent for them to provide their family doctors with a copy of the document and to discuss their wishes with these professionals.

OVERALL PLAN POINTS 

• Develop discretionary trust and put all estate assets into this trust. This will protect the Royals’ estate from spouses or other claimants other than their children.

• Roll the U.S. company into the Canadian company in order to avoid U.S. estate tax.

• Include a hotchpot clause to take into consideration advances of the estate made to heirs while the parents are still alive.

• Bequest the estate fairly, not equally, taking into consideration the sweat equity invested by family members.

• Avoid splitting the business up equally among the heirs and creating a shareholder board. This could jeopardize the continued operation of the company and could, potentially, erupt into difficulties if heirs do not agree on business decisions.

• Need to focus on how to obtain the retained earnings from the business in order to pay for Liz and Phil’s retirement, while ensuring their desire (to leave the business as a legacy to their children) is achievable.

• Use charitable donations to the advantage of the Royals, taking into consideration the lack of tax owing to land donations made to a municipality and the tax benefits of in-kind charitable donations.

• Need to address the U.S. holdings, including the condominium in Phoenix, AZ. If not, the Royals will be subject to U.S. estate tax, which could be substantial.

• Try to convince Liz and Phil to openly communicate their intentions with their children – explaining the rationale for their bequests. This may reduce or eliminate heirs contesting the will.

• Call in the expertise of a family therapist or professional trustee if family dynamics create problems for clear, informative communication during the financial planning process.

• Use separate and specific Powers of Attorney when deciding who should have authority to make decisions regarding the estate if Phil and Liz become incapacitated.

Originally published in Advisor’s Edge Report in January 2009

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