Q: We have an only child who just finished university and is starting a new career. We have no financial advisors or lawyers that we have used on a consistent basis. If both my wife and I were to die, I’m wondering what can be prearranged that would help my daughter with a mid-digit million-dollar inheritance?
If the portfolio remains intact it would generate almost $100,000 per year and she could choose not to work anymore if she liked. No boyfriend in the picture at the moment, but may want to protect her from a starter marriage.
A: Your conundrum is more common than you might otherwise think, Brian. Even people with more modest assets need to consider what might happen if they die, given real estate prices in some Canadian cities and life insurance on both spouses, when added to the mix, can make many “simple” estates into million dollar ones.
It’s not a bad idea to consider some sort of staggered estate distribution in the event a child inherits under a will. It helps ensure that not all the money is received at once and gives them a chance to make a mistake with the first tranche of an inheritance. So many wills that I see are generic ones that have an estate distributed to children at the age of majority (18 or 19 depending on the province).
So if nothing else, Brian, in your case, I think you want to consider a will that distributes your estate in tranches to your daughter. Your will should also contemplate the worst case scenario as of today and if that’s a $5 million inheritance for a 22-year old, you need to think about whether or not that’s what you’d want.
I’d say even the most responsible 22-year old could be pretty overwhelmed by the death of her parents and a cheque for several million dollars. That’s why your will should include a trust that holds some or all of the money back until a certain age or until certain ages. For example, Brian, she could receive 1/3 at 25, ½ of the balance (approximately another 1/3) at 30 and the remainder (approximately another 1/3) at 35.
For some, that’s controlling the kids from the grave, but I think it’s a prudent consideration. The money, held in trust, would be managed by a trustee—a responsible family member or friend who could hire financial advisors, lawyers and accountants to advise on the money in the meantime.
In some cases, parents will establish a trust in their will that will hold some or all of their estate and simply pay an income to their children without paying out the capital. This is more common in cases where a child is disabled or has other risk factors like substance abuse or gambling problems. But there’s nothing to say that you can’t consider an option like this for your wills. They are, after all, yours.
You can try to establish parameters for an inheritance in order to protect a child, but I think one of the best things you can do is try to protect them with knowledge. For you, Brian, that might be as simple as talking to your daughter about money. If you’re never going to spend all that money, your daughter is going to get it one way or the other. Maybe you should start her money education early.
That education could take the form of literally teaching her about money and sharing your own knowledge. Or it can be helping her get her RRSP or TFSA started so she can learn about investing and taxation firsthand. She may then pick her own financial advisor who can help teach her as well.
I don’t know that you necessarily need to go out and choose a family financial advisor or family lawyer to be prepared for your deaths. There’s about a one in four chance that either you or your wife will live to 95. So hopefully it will be a long time before your daughter needs to manage that kind of money.
Even then, your daughter may be that much more inclined to opt for a robo-advisor than a traditional investment advisor anyway. And as long as your will is up-to-date, your executor (who may or may not be your daughter anyway) will surely find a lawyer who will settle the estate (you don’t need a special, pre-existing relationship).
So make sure your wills represent your current wishes for your estate, Brian, first and foremost. Work with an estate lawyer, as opposed to a generalist lawyer, so you can get good estate advice instead of an assembly line will. Then talk to your daughter about money. A little prompting might cause her to take the initiative on her own and learn more about money than you could ever teach her anyway.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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