I work on a children’s book to teach kids about investing, taxes, budgeting and estate planning.
My story involves a prince and princess, a dragon, and the usual medieval backdrop. The last sentence reads: “Then the dragon ate the prince, but the trust of his family and the princess lived happily ever after.”
Well, the ending was not very happy for the prince, but still, the moral of the story is a good one: The importance of a good estate plan for the long-term health and happiness of your family cannot be overestimated.
Today, I want to share a framework for creating your plan – called the five “Ds” of land planning: Define, design, document, discuss and distribute. The five Ds method is adapted from author Sandra Foster Estate Planning Workbook was published several years ago. Now, let’s focus on the first two Ds.
1. Explain
A good place to start is to define what is most important to you. These are your core values. And if you’re looking for a great resource to help you figure it out, there are few people better than Dave Phillips, an experienced mentor to many successful business leaders across North America. He offers some free tools on his website. In particular, check out The Values Game he gives there.
It is your core values – not your children’s or others’ – that will guide your estate planning decisions. If you know, for example, that generosity is an important value to you, you may decide to include some charitable gifts in your will. And if faith is another core value, then perhaps your charitable gifts are to faith-based organizations.
Similarly, if family and adventure are important to you, then your estate plan should aim to make a positive difference for your family and perhaps build in some element of adventure. A couple I know, for example, decided to use a small part of the money they planned to leave the children to take the whole family (children and grandchildren) on an African safari to create connections and memories.
Once you have defined your core values, then define who in your life will receive your assets. You also need to specify how much they will receive, and when (during your lifetime, or upon death).
Here are some questions to ask yourself: Do you want to enjoy your money while you live? Do you feel a desire or obligation to help your heirs? Do you want your spouse to inherit everything if they outlive you? Should your children benefit equally from your estate? Are there specific properties that specific children should receive? Are you worried about leaving your heirs behind? Do you want to make gifts to charities? Do you have debts that need to be paid off before your heirs can receive them? If you own a business, have you considered the appropriate transfer of ownership and management?
2. Design
The second step in the process is to design what strategies, tactics and tools you will use to transfer your estate to your heirs. It should start by defining your goals, which should be aligned with your core values from Step 1.
Everyone’s goals may vary, but some generally include 1) minimizing taxes at the time of death or transfer; 2) ensuring that your surviving spouse can maintain his or her standard of living; 3) provide for the proper management of your assets after you are gone; 4) watching your children enjoy some of their heritage today; 5) ensure that minor children are cared for; 6) ensure that the children from the first marriage receive the appropriate share of your estate; and 7) maintaining family harmony after you are gone.
You may have to prioritize goals that conflict with each other. For example, wanting to see your children enjoy some of their inheritance now, and ensuring that your spouse’s standard of living is maintained without you may be conflicting goals.
Some of the tools useful to achieve the various goals may include: trusts to hold assets for minors until they reach a certain age; use of principal residence or lifetime capital gains exemptions to accommodate gains on a house, cottage or private company shares; a spousal trust to provide for your spouse but ensure that the assets go to your children after your spouse’s death; life insurance to give money to charity, fund a tax bill, or top up an inheritance to treat everyone equally.
Talking to a trusted tax and estate professional is important here.
Next time, I will continue the story of the five D’s.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be contacted at tim@ourfamilyoffice.ca.