Estate planning means knowing where financial and material assets will go after you die, but according to veteran financial strategist Chris Delaney, forgetting to prepare people to receive those assets can actually destroy long-accumulated wealth.
Not accounting for one’s fears, and failing to reconcile emotion with rational action, can make things even worse.
Why it matters: There are a large number of farms that which will change hands in the next 20 years and farm succession discussions are critical to that transition.
In his experience working with farm families, Delaney says fear that farm continuity will be lost, as well as many other emotional factors, are nearly always central drivers in estate planning.
While such motivation can be helpful, it also tends to reinforce avoidance behaviours — not approaching and addressing the best way to handle potentially negative circumstances, not keeping a will up-to-date, and so on.
“I think (farm families) fear approaching this because there are so many moving parts that they don’t understand and they feel are combustible… These problems just get exponentially worse from generation to generation,” says Delaney.
“As we procrastinate, as we flee and run away from those kinds of difficult decisions, we lose. Planning opportunities fall off the table.”
As described in a virtual presentation with Farm Credit Canada, those developing estate plans need to be introspective. That is, taking time to consider the key assumptions underpinning what they hope to accomplish and whether the steps being taken are supportive of goals.
Conducting a “pre-mortem,” says Delaney, can reveal the potential weaknesses in an estate plan, such as assuming all children involved will remain married, or that each is equally adept at running a business. Knowledge of such weaknesses, while potentially unpleasant to consider, support the planning process.
No one is immune to serious business disruptions
As far as weaknesses go, he says a common estate planning mistake is a failure to consider catastrophic occurrences.
Referred to as black swan events, Delaney says these include circumstances with severity above and beyond things like premature death, illness, and others that are reasonably expected to happen, and that estate planning is already trying to protect against.
“A diagnosis of cancer in itself is not a black swan event,” he says. “But what if we add to that, and therefore multiply, before insurance is placed? Would that cause you a severe consequence? What if a child died, after the wealth had been transferred to them, during your lifetime?”
What is considered catastrophic differs between families and circumstances and planning for every conceivable possibility is not practical.
The important thing to consider, according to Delaney, is whether you leave yourself open to additional crises unnecessarily. Not having a will, as is the case with half of Canada’s adult population, is one such example.
Opinions of beneficiaries matter
Estate planning as a subject makes people think about legal issues, finances, conflict possibilities, and their associated solutions. But what the beneficiaries think also matters.
“We are trained from the day we begin acquiring assets to think of the tax implications and to think of them as what we need to plan for,” Delaney says. “What we should be planning for is the beneficiaries instead. We should be inviting their input on a lot of this.”
On the ground, this means bringing them into the conversation.
Making estate planning a process by first establishing a dialogue through regular meetings is a good starting place.
Such meetings provide opportunity for participants to share their values, which can in turn be used to develop a mission statement. Once accomplished, individual goals can be identified, and broken down into objectives. Strategies to achieve those objectives, and what will be done to execute those strategies, can then be developed.
“We often jump right to the tactic before we have considered any of the preceding steps,” Delaney says, reiterating inaccuracies in earlier steps make estate plans less reflective of what people want, and the challenges faced.
Assuming wishes will be understood is also fatal, he added.
A will is constructed around an individual’s personal perspective. But after death, the individual can’t elucidate the details. Beneficiaries are thus left to interpret what they can. The burden of explanation can also shift to them, which can cause conflict.
For this reason, it’s necessary to avoid what Delaney calls “red flag” phrases such as “for reasons my children already understand,” and “because the individual has been so instrumental in the business.”
The perpetual struggle between what’s fair and what’s equal is another factor that needs to be defined ahead of time.
Central to everything is a willingness to engage others in the process, says Delaney, while attempting to account for differences in how people interact.
“Understanding people’s communication style is absolutely critical to getting over that ‘I assume you know what I meant when I was talking.’”