Giving a big inheritance? Don’t neglect to prep the recipient

It’s counterintuitive, but high-net-worth beneficiaries can feel unprepared to handle a rush of wealth. Having conversations with recipients sooner rather than later can help you decide when it’s most appropriate to pass on a legacy.

David Israelson • Canadian Family Offices

Everyone knows that you can’t take it with you. But for wealthier people, distributing one’s estate can pose a dilemma: Is it better to give away money now or in the will?

“There’s no right or wrong answer, and there’s not even a single answer,” says Patricia Saputo, co-founder and executive chairperson of Crysalia Inc., a chief learning and development office firm based in Montreal. “It depends on a lot of factors.”

Among those factors are whether you’re going to give money to children, relatives or charity, but also how and why. “It depends on what you want the result of your generosity to be and how you prepare to make the gift,” she says.

“Whether you’re planning on giving away funds now or after you’ve gone, you should plan on having a serious conversation with the family members who are going to receive the funds,” Saputo explains.

Having these conversations sooner rather than later can help you decide when it’s most appropriate to pass on the legacy. “You want to understand their readiness to receive and whether they’re going to need help getting ready for the gift,” she adds.

Some recipients act out of character

It may seem counterintuitive, but many high-net-worth recipients feel unprepared and uncomfortable handling a sudden rush of great wealth.

“Sometimes people feel that they didn’t deserve it because they didn’t earn it themselves and so they try to give it away as fast as they can,” Saputo says.

This may not be what the donor had in mind.

The need to guide and educate recipients underscores the importance of working with a family office, says Chris Clarke, chief executive officer of First Affiliated Holdings Inc., a multi-family office in Collingwood, Ont.

“That’s what we do. We work with families to develop a well-thought-out stewardship program,” she says. “Handing financial wealth to an inexperienced benefactor carries risks.”

You wouldn’t hand over the keys to your luxury car or yacht to an inexperienced driver, she notes. “People don’t necessarily understand the difference between receiving $500,000 and $5 million, and they don’t always grasp that even large amounts don’t last forever unless you take care of the funds,” Clarke adds.

One way a family office can educate beneficiaries is to work with them to invest smaller amounts of money. “It gives them the opportunity to practice, in an age-appropriate manner,” she says.

When making the decision to give away money, you should put yourself first, according to RBC Wealth Management.

“It’s crucial to first assess your financial situation, anticipate future potential needs and identify the type of lifestyle you want to live in retirement,” RBC says in prepared materials. “Simply put, you should be taking stock of all sources of income and assets and then comparing that with your objectives and requirements, taking longevity into consideration.”

Manage your family’s expectations

Before contemplating giving away a fortune while you are still alive, even high-net-worth individuals need to calculate what they’ll likely need to maintain their own lifestyles, says Andrew Higdon, senior associate, estates and trusts, at KPMG Canada.

“If you’re high net worth it may not be as much of an issue, but you can work out your needs exactly with a financial planner,” says Higdon, who is based in Ottawa.

One of the biggest considerations is managing family expectations, he adds. Timing is important. If the funds being given are for a child or grandchild’s education, for example, or to buy a house or set up a business, it’s worth considering timed gifts that are provided at regular intervals.

Giving money on a timed schedule is often a prudent way to make sure it gets handled well, says John De Goey, wealth management advisor and portfolio manager at Wellington-Altus Private Wealth Inc. in Toronto.

“It’s a common concept. If you watch America’s Got Talent, for example, you’ll see in the fine print when the credits roll that there’s a $1 million (U.S.) prize, but they hand it out in chunks of $40,000 a year,” he says.

High-net-worth donors should also be aware that their generosity might be treated differently in different provinces and territories, especially when it comes to taxation, says Kate Marples, partner, estates and trusts, at KPMG Canada in Vancouver.

“This comes up often with families who live in Alberta and have property in B.C. that they want their family members to have,” she says. Land transfer taxes are one consideration.

Mind the taxes

Certain types of gifts are taxable, others are not and others are taxed at different rates, Higdon says. “The sooner you can get together with an estate planner and set up an advisory team, the better.”

Obviously, considering the tax implications of gifts can make a huge difference in how much is received, says tax lawyer Anna Malazhavaya of Advotax Law Professional Corp. in Toronto.

“There are both tax advantages and disadvantages to waiting to give away funds in your will, and there are also advantages and disadvantages to giving it away while you’re alive,” she says.

One question that sometimes comes up is how to minimize probate tax, but Malazhavaya, Higdon and other experts agree that while this is one consideration, it’s not the most important one.

“The most important decision is what you want to see happen with your money,” De Goey says. “If you give it to family and see them enjoying it and using it well, that’s something in itself.”