Background
Alan and Sue have three adult children: Sharon, Shayla, and Charlie. Charlie, who lives with them, has significant disabilities; he is unable to work and receives social assistance benefits that provide a monthly stipend and prescription drugs. Alan and Sue want to ensure Charlie’s well-being after they pass.
Discovery
While Alan and Sue initially wanted to update their wills, we explained that a properly structured tax-efficient estate plan is much more than a will. In addition to Charlie’s needs, they needed to consider their full family situation, goals, and concerns. Through a focused, relaxed, discovery conversation, we learned:
- Charlie qualifies for the disability tax credit. Alan and Sue also recognize that Charlie should not receive a direct inheritance because he would not be able to manage it, and it could cause him to be disentitled to future social assistance benefits.
- Shayla is a spendthrift and declared bankruptcy a few years ago. Alan and Sue are concerned if she inherits a large lump sum that she would not properly manage it.
- Sharon and Charlie have a close connection, and Sharon is committed to looking after Charlie after Alan and Sue pass.
- Sharon’s relationship with Shayla is strained because she feels she has taken advantage of their parents financially over the years.
How we helped Alan and Sue with their IG Living Plan
Set up a Henson trust for Charlie (Discretionary trust in Québec)
- In most provinces and territories, if funds are left to a fully discretionary trust for the person with disabilities, the assets within that trust will either be fully exempted or at least partly exempted from social assistance asset limits.
- Even if Charlie wasn’t on social assistance, using a trust would still be valuable because he lacks the mental capacity to manage an inheritance, especially if Charlie is vulnerable to financial predators.
Establish a Registered Disability Savings Plan (RDSP) for Charlie
- Charlie qualifies for the disability tax credit, so we explored establishing an RDSP for him, including obtaining government grants.
- Because Charlie is not capable of managing his own property, Alan and Sue, as his parents, are able to be the initial “holders” to his RDSP.
- Once they both pass, Alan and Sue anticipate Sharon will want to step in to act as “holder” for Charlie. In their will, they authorized using the funds in Charlie’s Henson trust to pay for the legal costs associated with Sharon applying to become Charlie’s financial guardian (legal representative in Québec) (which would then enable Sharon to become the replacement “holder” to Charlie’s RDSP).
Set up a discretionary trust for Shayla
- Creating a trust in their will should help to protect Shayla’s inheritance from creditors and from her own poor decisions.
- Alan and Sue can ensure the terms of the trust are flexible enough that
- if the trustee decides Shayla is sufficiently responsible, then the trustee can wind it up, or
- if the trustee is finding it too burdensome to maintain the trust, then the trustee can use the trust funds to acquire an annuity for Shayla.
- Rather than Sharon acting as the trustee, Alan and Sue agreed it was more appropriate to bring in a neutral party (their nephew Brian, a tax lawyer).
Analyze estate equalization
- Life insurance should be considered as a tax-effective solution to help increase the funds available on the death of the second parent.
Guide on family communication strategies
- Alan and Sue hope that updating their wills to forgive the loans that they have thus far made to Shayla will clarify their intentions. However, they also recognize their children may perceive this as “unfair”, and that a family discussion to communicate their wishes for all children is critical.
- Introducing intergenerational wealth resources, such as IG’s interactive Family Mission Statement, may help reconnect the family, while also guiding Shayla towards improved financial literacy and responsibility.
Although Alan and Sue were primarily concerned with Charlie’s needs when creating their estate plan, we helped them see how accounting for the dynamics amongst all three children was critical. By easing into open family conversations, they found clarity for the future while alleviating family tensions.
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DISCLAIMER: For illustrative purposes only. All situations described above are hypothetical and based on various client situations. Any similarity to any one individual person(s) is purely coincidental.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant. Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).