Even with the best intentions, unequal distribution can be perceived as favouritism.Andrii Yalanskyi/iStockPhoto / Getty Images
Equal isn’t always fair when it comes to bequests to children. One child may have greater needs – for example, if that child is single parenting or living with a disability. Another may have received extra funds during a parent’s lifetime – say, toward education or a down payment for a home.
That said, leaving different sums to children can be tricky.
Rod Mahrt, senior portfolio manager and senior investment advisor with Mahrt Investment Group at Wellington-Altus Private Wealth Inc. in Victoria, says a common theme among the hundreds of financial plans he’s developed for clients is a desire for family harmony. So, when clients approach him about the possibility of making unequal bequests, he explains the pitfalls.
“The concept [we convey] is leaving an unequal bequest could create tensions among all the siblings and it may [increase] the likelihood of a will being contested, especially if there’s lack of communication beforehand,” he says. “The other thing I always try to emphasize is that even if the unequal distribution is well-intentioned, it can still be perceived as favouritism.”
If clients decide to go ahead with different inheritances for different children, Mr. Mahrt says it’s critical to outline the rationale to heirs in a family meeting or a letter of explanation attached to the will.
Joelle Hall, portfolio manager, wealth advisor and investment advisor with Hall Wealth Counsel at Richardson Wealth Ltd. in Ottawa, finds that when clients share a one-time gift with a child – for example, help with buying a home – they’ll often equalize things during their lifetime (helping with another child’s renovation, for example). In her experience, unequal bequests to children are generally an attempt to deal with a “long-term differentiated need.”
Reasons that may justify unequal bequests tend to come up naturally during client conversations, Ms. Hall says. In the process of creating financial plans, she makes a point of finding out who’s important in a client’s life, what kind of work their children do, whether they’re married and whether they have children. Along the way, she learns if a child is estranged from the family, irresponsible with money or struggling with substance abuse.
“The question becomes: How do we deal with the distribution to that child? Are we going to [be] equal? Are we going to set [the bequest] up in a trust? How can we accommodate this situation?”
She adds: “We will relay other client situations – how families have dealt with distribution or bequests – and let them come to terms with what the options might be and what they think may be appropriate in their situations.”
Ms. Hall notes there are ways to give more to one child upon death quietly. For example, maming a child as the beneficiary of the death benefit on a life insurance policy or segregated fund passes money to that person outside the will.
However, she encourages families to be open about their plans. Communication helped her family when her parents left less to Ms. Hall than to her siblings to make up for the private schooling she received.
“I got that, but it might have taken me a bit by surprise if I’d learned that on the reading of the will when my dad died,” she says.
Ms. Hall adds it’s worth considering the tax efficiency of leaving a specific asset to a specific child – for example, leaving a principal residence to a child who doesn’t own a home so it continues to benefit from the principal residence exemption. Then, other assets of equivalent value can be left to other children – although it’s worth keeping in mind that investments will incur taxes the principal residence never will.
Ask goal-based questions
Advisors can strategize with clients about how to make unequal bequests if a client brings it up first, but they should never suggest that the estate distribution be structured in any particular way, says Leanne Kaufman, president and chief executive officer of RBC Royal Trust in Toronto.
That said, it’s absolutely within an advisor’s purview to ask clients broad, goals-based and intentions-based questions about their estate plans and to help make sure they’re implemented thoughtfully.
She says unequal bequests can happen unintentionally as a result of the tax treatment of different types of assets. An inheritor who lives outside of Canada may be at a disadvantage when receiving certain assets or benefiting from certain planning (such as trust planning). Meanwhile, a child who receives the estate residue may be at a disadvantage if another child is the named beneficiary on a registered plan as the estate will be liable for the tax payable on the registered plan.
“You could be leaving the proceeds of the [registered] plan to one beneficiary and the tax liability for that money to the other beneficiary,” Ms. Kaufman points out.
When it comes to intentionally unequal bequests, she says they often don’t increase the chance of a will being contested because only British Columbia’s Wills Variation Act allows challenges to a will for being unfair. In other jurisdictions, those contesting a will have to prove it’s invalid.
However, Ms. Kaufman says unequal bequests may mean a greater chance of litigation. That’s why explaining and documenting the rationale is important.
“It could be proof of debt that was owed and unpaid,” she says. “Whatever the case may be, [there should be] something that gives your executor(s) and your beneficiaries an explanation as to the why.”
She adds: “It’s a very personal definition, but … fair doesn’t always mean equal.”