I’ve been working on a children’s book that teaches kids about investing, taxes, budgeting, and estate planning.
My story involves a prince and princess, a dragon, and the usual medieval background. The last sentence says: “Then the dragon ate the prince, but the trust of his family, and the princess lived happily ever after.”
Well, the ending is not so happy for the prince, but still, the moral of the story is good. The importance of a good estate plan to your family’s long-term health and happiness cannot be understated.
Today I’d like to share a framework for developing your plan called the five D’s of estate planning: Define, Design, Document, Discuss, and Distribute. The Five D’s approach was adapted from author Sandra Foster Estate Planning Workbook was published several years ago. Today let’s focus on the first two D’s.
1. Define
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 highly successful business leaders across North America. He offers several free tools on his website. In particular, check out The Values Game he provides there.
It is your core values, not the values of your children or others, that should guide your estate planning decisions. If, for example, you realize that generosity is a core value to you, you may decide to include charitable gifts in your will. And if faith is another core value, perhaps your charitable gifts will be to faith-based organizations.
Similarly, if family and adventure are important to you, your estate plan should aim to make positive changes for your family and perhaps create some element of adventure. A couple I know, for example, decided to use a small portion of the money they had planned to leave the kids to take the whole family (kids and grandkids) on an African safari to bond and make memories.
Once you have established your core values, then decide who in your life will receive your assets. You also need to define how much they will receive and when (during your lifetime or upon your death).
Here are some questions you can ask yourself. Do you want to enjoy your money while you live? Do you feel a desire or obligation to help your descendants? Do you want your spouse to inherit everything if he or she survives you? Should your children have equal access to your property? Are there certain assets that specific children should receive? Are you concerned about leaving your heirs too much? Want to make a gift to a charity? Do you have debts that need to be paid off before your heirs receive anything? If you own a business, have you considered an appropriate transition of ownership and management?
2. Design
The second step in the process should be to plan which strategies, tactics and tools you will use to pass your estate to your heirs. This should begin by setting your goals, which should align with your core values from step 1.
Everyone’s goals may be different, but some common goals include 1) minimizing tax on death or transfer; 2) ensure that your surviving spouse can maintain his or her standard of living; 3) ensure proper management of your assets after you are gone; 4) watch your children enjoy some of their inheritance today; 5) provision of care for minor children. 6) ensure that the children from the first marriage receive an appropriate share of your property; and 7) maintain harmony in the family after you are gone.
You may need to prioritize goals that conflict with each other. For example, wanting to see your children enjoy a portion of their inheritance today and maintaining your spouse’s standard of living when you are gone may be conflicting goals.
Some tools that are useful for accomplishing various goals may include: trusts to hold assets for minors until they reach a certain age; using principal residence or lifetime capital gains exemptions to protect gains from a flat, cottage or private company shares; a marital trust, which is supposed to provide for your spouse but ensure that assets pass to your children after your spouse’s death; life insurance to give cash to charity, fund a tax bill or top up an inheritance so that everyone is treated equally.
This is where it will be important to speak to a trusted tax and property professional.
Next time I will continue the conversation of the five Ds.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, author and co-founder and CEO of Our Family Office Inc. tim@ourfamilyoffice.ca:.
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