“The trouble with the future is that it usually arrives before we are ready for it.”
Andrew H. Glasgow
For many years advisors have been counselling clients to have a properly prepared and executed will as the cornerstone of their planning. While it will always be important to have a will, sole reliance on a will can create significant problems.
Problem #1: Wills don’t guarantee the result. A will only becomes legally effective upon and speaks from the date of death. The logic is inescapable. At the point the will becomes effective and binding, your client is dead and not able to clarify, correct or amend what has been done. Further, it is relatively easy for surviving relatives to challenge a will based on statutory non-compliance, ambiguity of the wording, lack of mental capacity of the creator of the will or on the basis that undue influence was exercised over the decision making ability of the creator. In addition, all Canadian provinces and most U.S. states have in one form or another, wills variation legislation which allow judges to discretionarily rewrite the terms of a will based upon what they perceive to be “fair”. Determinations are made on the basis of circumstantial evidence and arguments presented by competing claimants.
The more your client has, the more likely is the case that your client’s wishes will be challenged and perhaps overturned should you rely only on will based planning. Where there is a will there is a relative.
Problem #2: Wills aren’t confidential. Reliance on will based planning also guarantees full and complete public disclosure of all assets and liabilities on death—a problem for some clients. When a client dies, as part of the estate administration process, it is necessary to file a complete and full inventory of all assets (including values) and all liabilities with the Surrogate Court of the relevant province. This information becomes a matter of public record and can be accessed for a nominal search fee by any member of the public. Although a client may be able to maintain total confidentiality during his or her lifetime, to the extent they have relied upon will based planning, such confidentiality will be lost on death.
Problem #3: The probate process is time consuming and expensive. Depending upon the size and complexity of a person’s estate, the probate process can be complicated and expensive. Time frames of one to two years are common and if there are any contentious matters (such as challenges to the will) the process can take years and eat up a substantial portion of the estate in legal fees. In addition to potentially significant legal and court costs, government imposed probate fees have increased dramatically in the last few years (tripled in Ontario and increased 130% in British Columbia). Probate fees are a direct tax levied on the gross value of a person’s estate. With the exception of a possible offset in some jurisdictions for the amount of the mortgage on a principal residence, there are no other deductions, offsets or exemptions. The historical cost or cost of acquisition is irrelevant. The only issue is determining the fair market value of all of the property a person owns on death and applying the applicable percentage fee to that amount.
For example, if your married client borrowed $100,000 and bought an investment portfolio worth $100,000 just prior to death and left the portfolio to a surviving spouse, probate fees would be levied on the $100,000 in value (irrespective of the liability for the loan or who the property is left to–even if a spouse). If the spouse then died one month later and left the same $100,000 portfolio to another person, probate fees would potentially be levied again on the same $100,000! Clearly a double tax.
Problem #4: Jurisdictional Problems. Because wills are a creature of government legislation and have no independent validity at common law, a will, although valid in one jurisdiction, may not be recognized as valid in another jurisdiction and as a result several wills may be required. Apart and separate from the additional effort and expense this creates, any time more than one will is in existence potential problems can arise with regards to conflicts between the respective wills.
The substantive law relating to devolution of property on death may also vary from jurisdiction to jurisdiction. Generally speaking, the applicable law relating to a person’s movable property is governed by the domicile of the person on death. However, the applicable law relating to immovable property (such as real estate) is generally governed by the law of the jurisdiction in which the property is located. In this day and age, it is becoming increasingly common for people to have property located in different provinces, and even countries. This not only adds significant complexity, cost and potential delay on death but can also result in unintended consequences given differing laws.
Problem #5: A will does not deal with the issue of Incapacity. According to information published by the Canadan Life and Health Insurance Association, the likelihood of a significant long term incapacity is 8 times greater than premature death. The Canadian Heart and Stroke Foundation tells us that 1 in 2 Canadian males will suffer from heart disease, 1 in 3 from a life threatening cancer and 1 in 4 from a stroke related illness. Those are sobering statistics. Yet while many people have a will, very few have undertaken any legal steps to provide for a possible incapacitation. They believe that because they have a will, they “have taken care of it”. As stated previously, a will only applies on death and has no impact whatsoever in the event of incapacity. Absent specific planning, no one (not your spouse or business partner) will have any authority to deal with your financial assets or make decisions on your behalf. Often long and protracted court applications and litigation result.
There are various options for circumventing the problems associated with will-based planning. All of these strategies involve a common theme – taking action now while you are alive, healthy and in control. Isn’t that the best time to do any planning? Common techniques include joint ownership of property, gifting property while alive, living trusts, beneficiary designations and insurance based planning. With respect to incapacity, Enduring Powers of Attorney and representation agreements are available. No one of these is the “magic bullet” and any proper plan will include a strategic combination of these strategies.