An advisor is chatting with a client over a cup of coffee. The client mentions that his daughter is moving to the U.S. To the client, it’s a little tidbit of family gossip; for the advisor, this information rings alarm bells.

The daughter’s move has tax implications for the client’s estate plan, says John Waters, manager of tax planning at BMO Nesbitt Burns Inc. in Toronto, which may make it necessary to redraft the client’s will and reconsider the terms of the family trust. A U.S. tax specialist should be consulted.

Waters offers this scenario not only as an example of specific issues that arise in the tricky area of intergenerational wealth transfer but also as an illustration of the importance of advisors developing strong personal relationships with clients so they take in all the dimensions of a broad, ever-changing picture.

In this case, the fact that the daughter is about to become a U.S. resident means that her inheritance will be subject to U.S. estate taxes, while her interest in a Canadian trust could have huge practical implications. “It introduces another level of complexity and the plan could be horrible now,” says Waters, noting that such changes might easily be missed — unless there is an alert advisor quarterbacking the client’s estate plan.

As Waters and other experts point out, transferring wealth to the next generation involves grappling with a huge number of issues, including such obvious ones as wills, insurance, investments, taxes and estate law, while also encompassing consideration of family dynamics, psychology, provincial family law, business arrangements, charitable foundations and various concerns that are specific to each situation.

“There are no cookie-cutter solutions,” says Kim Moody, treasurer of the Society of Trust and Estate Practitioners Canada and head of Calgary-based tax advi-sory firm Moody LLP. “And you cannot work alone. One advisor can’t know it all.”

What the individual financial advisor can do, Moody says, is understand what the client wants to achieve, take stock of all the different forms of property or wealth that the client wants to pass on, identify the issues that might arise and bring together the right team of experts to draw up a comprehensive plan. The advisor must then revisit this plan frequently to respond to changes in laws and tax regulations, as well as changes in the circumstances of the client and his or her family.

This kind of advice is not inexpensive, and even wealthy clients often have a hard time appreciating the importance of paying for sophisticated expertise in estate planning, says Moody.

Clients sometimes assume that estate planning is simple and straightforward, and will even ask for a discount on the grounds that their circumstances are exactly the same as those of a friend or neighbour who had come to him for advice. “But it doesn’t work that way,” he says. “Everyone’s objectives are different. You have to pretty much start from scratch on every plan.”

People who fail to plan their estates, or try to do it themselves, run the risk of leaving a lawsuit as a legacy. “Estate litigation is going to be a growth industry,” says George Sirois, senior wills and estate planner with Bank of Nova Scotia’s private client group in Calgary. “There’s going to be a real explosion in that area. I’m convinced of that.”

Sirois points to the baby-boom generation’s huge accumulation of personal wealth, the complicated issues that arise in blended families, situations in which elderly people become mentally incapacitated and the dynamics of mistrust that sometimes arise in families. “There are so many points at which things can go wrong,” he says.

He is particularly concerned about what he sees as a “dangerous” trend: people doing their own wills, often using cheap templates that they have downloaded from the Internet. Surprisingly, he observes, these are often used by people who have worked hard all their lives to accumulate significant wealth, yet they put their estates at risk by trying to save a few hundred dollars on their wills.

“A lot of it has to do with confidence,” he says. “Successful business people are very confident in their own intelligence and ability to deal with business and assets. So, they consider a will quite simple. They have three children; they want them to have equal shares and that’s the end of it. They say, ‘What’s the big deal?’ and they convince themselves or allow themselves to be convinced that there’s not very much to it.”

@page_break@However, Sirois adds, there’s “a laundry list of reasons” why clients shouldn’t do it themselves.

There’s the obvious risk that the client might make a mistake. Then there is the less obvious fact that if a professional advisor were to make a mistake, he or she would probably have some protection from errors and omissions insurance.

Furthermore, a will that has been drawn up at the kitchen table is more vulnerable to legal challenges. For example, Sirois suggests, “Someone who wants to do mischief could challenge the estate and claim that the person did not have the capacity. And that individual is less likely to have a professional witness. Whereas, if the client had gone to a lawyer who took copious notes, he or she could document that the person had the capacity.”

Another pitfall that many people fall into — even while consulting advisors — is making what Sirois describes as “step-by-step ad hoc arrangements” instead of drafting a comprehensive estate plan. For example, they may put their house, bank accounts or rental properties in joint names with those to whom they want to pass on their wealth.

The reason for doing this is often to avoid probate fees, but Canadian probate fees are relatively modest, Sirois says, “And in trying to avoid a relatively modest charge, they’re exposing themselves to all kinds of pitfalls and tax consequences.”

A protracted court case that ended last year with a decision by the Supreme Court of Canada provides an excellent example of this risk. The case involved the estate of Edwin Hughes, a former miner from Timmins, Ont., who had amassed a $1-million personal fortune that he evidently wanted to pass on to his daughter, Paula Pecore, who was caring for her paraplegic husband, Michael Pecore. Acting on the suggestion of a financial advisor in 1993, Hughes put most of his money in joint accounts with Paula, believing, according to court documents, that he could “avoid the payment of probate fees and taxes, and generally make after-death disposition less expensive and less cumbersome.”

The problem was that Hughes also made a will to cover his other assets and named both Michael and Paula Pecore as beneficiaries. After his death, Michael and Paula separated and Michael launched a lawsuit seeking a share of the funds that Paula had inherited through the joint bank account.

After several years of litigation in three courts, the case was resolved in Paula’s favour and some rules were established in regard to how future cases of this kind might be handled. But, as Sirois points out, the circumstances of the case illustrate very clearly the need to consider and anticipate family dynamics and potential future changes in family composition when planning a wealth transfer.

Blended families with children from previous marriages further complicate these issues, as do age differences between spouses and the prospect of the surviving spouse marrying again, Sirois adds. Potential dependency claims have to be considered and the question of who has a legitimate claim on the estate may be resolved differently in various provinces.

Family dynamics should also be considered in making decisions about whom should be the executor of the estate, says Sirois. He notes that people often choose family members, for various reasons, but fail to anticipate situations that might arise. For example, if a relative is made a guardian and executor for the children, one of whom is a spendthrift or has a drug problem and makes unreasonable demands for funds — “You’ve ruined Thanksgiving dinner for the next 20 years,” he says.

Family issues can become even more complicated in situations in which a family business is part of the estate. Susan St. Amand, chairwoman of STEP Canada in Ottawa and founder of Sirius Financial Services, suggests bringing a psychologist onto the advi-sory team to separate the issues of the family from the issues of the business.

She notes that shareholders’ agreements must also be examined to ensure that they are not in conflict with the terms of the will.

Also, when the head of the family is planning to put some of the estate into a charitable trust or foundation — and he or she wants to ensure that his or her heirs will continue to honour this legacy — St. Amand suggests that members of the next generation also be brought together in meetings with outside experts.

Nesbitt’s Waters notes that there are many benefits to be derived from financial advisors meeting with the next generation of their clients’ families.

“One hears many horror stories,” he says, “about people who have plans for their businesses and wealth that do not match what their children want.”

By meeting the next generation, advisors can get a sense of who is tax-savvy and who isn’t; who may need extra help and feel overwhelmed by sudden wealth; and how differences in children’s wishes, interests and capabilities may be accommodated through estate planning.

And, as Waters points out, an added advantage — although not necessarily a reason for doing it — is that the advisor may develop an ongoing professional relationship with the children who inherit the family wealth. IE