Avoid These 3 Mistakes In Managing Intergenerational Wealth

You have built up significant family wealth, through entrepreneurship or otherwise. Now you wish to allocate it in a meaningful way—to empower future generations and set them up for success. You probably have a vision for the sort of impact you would like to have for generations to come, and perhaps have some idea as to what proportion of your assets beyond your needs you wish to allocate to particular family members. However, there are likely complexities to navigate as you plan out the cascading of this wealth. In this article we highlight 3 key mistakes to avoid in the process of distributing this wealth and in managing it once received.

1. Overlooking Estate Laws In Foreign Jurisdictions

An all too common pitfall in planning out legacy can originate innocently enough during the process of drafting a will. For Canadians that own property or other assets in jurisdictions outside Canada, having a valid and updated will in their home province may not be enough to secure their estate and ensure seamlessness in future bequests. This may be because the foreign jurisdiction’s laws differ from those of Canada and as a result may give rise to unexpected costs and delays, or it may not recognize your Canadian will at all.

For instance, Canada does not impose death or inheritance taxes, which may not be the case locally where your assets are situated such that an additional, and unaccounted for, tax burden could be created. In other cases, local laws may stipulate that a resident of the foreign jurisdiction must be appointed as an executor, which would need to be included in your Canadian will when it is prepared. If foreign assets make up a part of your net worth, consulting a professional in the foreign jurisdiction in conjunction with your lawyer locally could go a long way to ensure that your estate plans are not headed for unexpected roadblocks.

2. Passing Down Wealth Outright And Hoping For The Best

If children or other family members you wish to pass your wealth down to are too young or have had a history of mismanaging their finances to make prudent decisions with significant wealth, you may consider gifting wealth gradually while you are present to maintain control; however, estimates of personal longevity is uncertain so this strategy may not fully deliver the peace of mind that you are looking for.

An alternative means of maintaining control would be through the use of a trust. With this approach, assets intended for the future benefit of the individual would be contributed to a trust by you, the settlor, to be distributed after your passing by the named trustee. The trust may be set up on a discretionary basis, leaving much of the decision-making up to the trustee, or specifically governed by a trust agreement detailing your wishes as to when, how much, and under what conditions, the wealth held within the trust is to be distributed by the trustee.

For instance, in the latter case, you can stipulate that certain amounts are released to the beneficiary upon attaining certain ages, completing post-secondary education, or even maintaining full-time employment in general. Trusts offer a great deal of flexibility and variety in how they are set up and their use may involve some tax implications so it is always recommended that you consult a professional for this part of your planning.

3. Inadvertently Co-Mingling Assets

For adult children or other family members who are desired beneficiaries of your wealth and who have spouses, another potential pitfall may present itself depending on how this wealth is transferred and how it is handled after the fact (this point may be great shareable material, as awareness is required on both your side and that of your beneficiaries).

Inheritances and gifts received by an individual during their marriage do not form part of Net Family Property and as such are excluded from division in the event of separation or divorce. However, it is possible (and often the case) that these assets are inadvertently co-mingled with Net Family Property such that this exclusion no longer applies. For instance, in our current era of rising housing costs, it may seem like a thoughtful idea to help a child pay off their mortgage to free up their cash flow and improve their lifestyle, or this may be a plan of action they contemplate for themselves with wealth gifted to them. While done with the best of intentions, if the property is owned jointly this course of action effectively co-mingles the gift with Net Family Property, making it subject to division in the event of marital breakdown.

For reasons like this, it may be worthwhile to discuss your gifting and legacy ambitions with your desired beneficiaries, perhaps in conjunction with a professional, to ensure that all parties understand the implications of their decisions and to prevent unintentional outcomes.

The Bottom Line

Altruism and the desire to financially empower future generations can be a noble component of a wealth plan, and beyond this may yield a great sense of pride and fulfillment. Navigating the legal and financial implications of such gifts however, both in terms of their impact on your finances as well as on those of the ultimate beneficiaries, can be challenging and often require a thoughtful approach with attention and time spent on planning and consulting trusted advisors. Nonetheless, the end result remains powerful—setting future generations up for success and perpetuating your values and capacities forward to have a lasting, meaningful impact on those people or causes most important to you.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.