After my wife and I married, she often joked that the whole issue of marital property was quite simple: "What's yours is mine and what's mine is mine, okay?"
I disagreed in principle, but I think she won in practise! When it comes to estate planning, the whole principle of a will is a bit more equitable. Between a married couple, it goes something like "when I die, what's mine becomes yours and vice versa."
It gets more complicated after that, especially when parents want to leave legacies for
the children, or grandchildren.
You see, Mary might be a gifted young granddaughter, studying with honours and working part-time to make sure she has no student debt.
On the other hand, Johnny dropped out of high school, has rolled several cars and has been unable to hold down steady employment, which he needs to pay for his expensive car insurance premiums.
Mary can be counted on to deal responsibly with an inheritance from her grandmother. Johnny, on the other hand, will have one thing in mind if he receives a $100,000
inheritance cheque: a bright red Corvette! That's a guaranteed inheritance melt-down! One tool in this case is the use of a formal testamentary trust that is set up upon death to channel monies under the management of a trustee to the desired beneficiaries under certain conditions stipulated in the trust document. If I'm starting to lose you at this point, it should be a clue that a formal trust is potentially a complicated, expensive option.
There is a simpler alternative. In this case, Grandma could set up a $200,000 term deposit or segregated account with a life insurance company using a "Gradual Inheritance Concept."
You see, under insurance law, the life insurance company, GIC, or segregated fund allows us to designate multiple beneficiaries, and also specify how those proceeds are received.
Grandma would be able to use these funds in whatever way she sees fit, perhaps to supplement retirement income, or she can simply let them grow. Either way, she can split the beneficiary between Mary and Johnny in many different ways.
What I might recommend in this case is to leave a lump sum to Mary, given that she has shown herself responsible with money. On the other hand, Johnny can't handle more than a little at a time, so we would arrange to spread his share of the inheritance over 10 years, or perhaps over the rest of his life, through a structured annuity settlement which can be specified in the Gradual Inheritance document. He'll unable to blow the money in one shot.
This approach has great flexibility, very broad investment options and also gives Grandma the ability to quickly change her mind if necessary, all without the expense, complexity and publicity of the will/trust option.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Vetter is a certified financial planner and owner of WealthSmart Financial Group in Richmond (www.wealthsmart.ca).
