YOU CAN’T GIVE WHAT YOU AIN’T GOT!

MISTAKE # 35

Not paying enough attention to describing the gifts in your will appropriately

THERE ARE A LOT OF DIFFERENT SKILLS needed for good estate planning. These include math, a little economic forecasting, and, most of all, the sense to know that our financial picture the day we sign our wills may be quite a lot different than it is the day we die. The increase or decrease in our net worth between signing wills and passing away must be kept top of mind as we plan who gets what in our estates.

giving away more than 100 percent of the estate’s value

We really do understand that professional hockey players can “dig down deep” and give “110 percent” in a big game, but the rest of us are stuck with having only 100 percent of anything, and so we need to keep an eye on how the shares of our estate are adding up as we sit down to plan our will.

One lawyer with years of experience in estate planning told us that she sees people “on a daily basis” try to give away more than they have. They arrive at the will-planning meeting armed with their lists of who gets what percentage and who gets what if some or all of the first named beneficiaries predecease them, and, lo and behold, on careful analysis it adds up to more than 100 percent if certain scenarios occur.

The same lawyer recommends the flow chart method of mapping out visually all of the various beneficiaries and their shares, which reduces the chance of giving away too much or too little. Giving away too much means that your estate is going to spend some time in mediation or court as everyone tries to figure out your intention by looking at the will’s wording. And giving away too little is also bad because the remaining assets will need to be distributed as if you died without a will—an undesirable result as we discussed at length in Part 2.

ending up with an unintended result

Cash gifts are easy for your executor to figure out and pay—if a gift of $10,000 is to be paid out, that is pretty straightforward and everyone, your beneficiaries included, will know exactly how much they will receive once the estate is ready to be distributed. On the other hand, in a recessionary time, cash gifts can wind up being disproportionately large.

Here’s an example:

Gillian’s net worth was $1,400,000 when she signed her will at the age of 75. The economy was vibrant, her investment portfolio had just nudged over a million dollars and her downtown condominium in Calgary had increased in value from $350,000 to $400,000 over the past year.

Gillian wanted her only son, Harold, to receive about $750,000 from her estate and she fully expected to see her net worth continue to rise until her death. Gillian enjoyed vibrant good health.

Thinking along these lines, Gillian included in her will some significant cash bequests—to her sisters, to several favourite charities and to two neighbours—totalling $600,000. At the time she prepared her will, after the payment of these gifts and the estimated taxes on the portfolio, the remainder in the estate going to Harold would have been about $750,000, exactly the amount Gillian had in mind.

Unfortunately, two years after her will was prepared, Gillian suddenly became ill and the economy entered a severe recession. When Gillian died six months later, her investment portfolio was reduced to $750,000 and the value of her condo to $275,000. The taxes on her portfolio were of course lower due to the reduced value of her investments, but the stated cash gifts in the will were exactly as they had always been: $600,000.

Now the math didn’t work out so well for Harold, because cash gifts are paid out before the balance is paid. After payment of cash gifts in the amount of $600,000, the balance of the estate was $475,000, not nearly what Harold’s mother had intended to leave for him. If Gillian had considered the possible interplay between the specific cash bequests and the value of her estate, she would have considered using percentages for the gifts to sisters, friends and charities to ensure that no matter what happened in the economy her son would have received the lion’s share of her estate.

points to take away

• Giving away more or less than the entirety of an estate happens more often than you might think. Use a flow chart to walk through each of the scenarios set out in your will to be sure that once all the portions are distributed there is neither a positive nor a negative balance.

• In providing for substantial cash gifts, think through the possible scenarios that may have an impact on your net worth. Ask yourself whether the cash gifts will still make sense if your estate suffers a serious drop in value. Speak with your lawyer about ways in which your will can be drafted so that your overall intentions will be carried out regardless of significant changes in the net worth of your estate.