Podcast - March 26, 2024
Latest Episode: Talking to Your Kids About Money
Maybe not the easiest conversation you’ve had to have with your kids, but arguably the second most important. Listen in as Colin and Matt discuss the best ways to start the ball rolling when it comes to talking to your kids about money.
The transcript is automatically generated
Announcer: Welcome to Barenaked Money, the podcast where we strip down the complex world of finance to its bare essentials with your hosts, Josh Sheluk and Colin White, portfolio managers with Verecan Capital Management, Inc.
Colin White: Welcome to the next episode of Barenaked Money. It’s Colin here with Matt Kempton who’s joined us today as a special guest, to have a conversation about talking about money. So Matt is going to perform Josh’s role and keep us on track and walk us through, all the various aspects of talking about money.
Colin White: Welcome, Matt. Where did you wanna start
Colin White: the conversation?
Matt Kempton: Well, I thought we might focus on, a couple key areas today for the conversations around money. And and and one of the big ones I think we should start with is speaking to your kids about your estate plan. I mean, as we know, and and CPA Canada gave some numbers around this, there’s a very, very large generational transfer of wealth coming up here. In fact, the biggest ever in Canadian history with over the next few years are combined expected about $1,000,000,000,000 to change hands. So, a lot of money is about to change hands as, as as as this current generation sort of moves on.
So, with that, hopefully, a lot of conversations happening. However, we know from the stats that this isn’t necessarily the case. And so I just have a like Josh would, I’ve gone in and looked at some surveys, looked at some data here, and, maybe a little data here, but I imagine it’s still quite correct here. A 20 18 Wells Fargo study showed that majority of aging parents have not talked to their kids about their end of life needs and and haven’t done so because they don’t feel any urgency. And this would even be true of respondents in their eighties.
And then, a similar study in 2018, showed that the 9 out of 10 adult children who have had these discussions only had them because a life altering event had occurred. So they aren’t just happening naturally. They’re happening because some urgency gets put behind it, which isn’t maybe the the best scenario to be in to have a calm, thoughtful, rational discussion. It it creates just a, let’s put something in place because, well, we absolutely have to. So but then interestingly, those that had a conversation, those that actually the the, you know, the the minority who have, felt at ease and felt the process was actually quite straightforward after they went through that.
So, you know, it it’s it might be hard to talk about money, and there’s there’s a lot of reasons around that why that might be true. But once people you know, there seems to seems to be once you do so, you might feel better about it. So, Colin, you’ve got a number of decades of experience having these being, you know, being in the room for these type of discussions and probably encouraging these type of discussions. What has been your experience with, you know, with with the reluctance that might be there and then, you know, going through the process and then the aftereffects of having actually had the conversations.
Colin White: Well, I mean, families are complicated things. And, honestly, it’s one of the things that attracted me to this line of work because it’s something you’ll never get a complete handle on. I mean, let’s be honest, people’s many people would rather talk about politics or the color of pus that’s coming out of the sore on their arm that they don’t know know what it is. You know, they would rather have a conversation like that than talk about money. And, you know, so it’s just for those taboo conversations.
It’s got a lot wrapped up in it. There’s a lot of emotion around it. And I think regardless of what’s at stake, you know, the the emotional side of this is what drives the bus. There are people with very little or very modest estates who have had a very thorough conversation and everything is nicely lined up. And you’re right.
For those people, that’s a huge sense of comfort, but most families have, you know, the the the family dynamics are tied up. And those those change over time too. Like, you can have a good conversation at one moment in time, but then things happen, and, you know, you maybe aren’t talking about it. But the stakes are quite high to to do it right. There can be huge savings on the tax side.
There can be a huge emotional advantage to talking things out so that there’s not surprises down the road or missed expectations, but it’s so you’ve you kind of frame this as, say, parents talking to kids, but this is also kids talking to parents. This is a two way conversation. Either can bring it up. And, you know, for me, the the onus is more on the children talking to their parents because if the parents don’t do something, then the burden is gonna drop squarely in the lap of the kids. So they’re the ones with the vested interest to have some kind of a plan.
So, and sometimes for them, once they’ve been the executor of one estate, they don’t ever wanna be an executor again. Right? So and part of that is is how messed up the process can be. So planning can go a tremendously long way. But just because it’s practical and rational and reasonable doesn’t make it any easier.
It doesn’t make it any more likely to happen, you know, because all the emotions can’t get in the way. I have people crying in my office most regularly over family and money. Like, that’s the most reason the most obvious reason for tears to be shared in my office because that’s how emotionally fraught that it is. So it’s regardless of how important it is, it’s gonna remain something that’s difficult to talk. One of the things I would offer is sometimes having a a moderator in the form of a seasoned professional just to moderate the conversation because, you know, the vast majority of times when I’m sitting in a room having a conversation like that, they get to a point in the conversation they’ve never gotten to before because they had preconceived notions and lack of a true perspective that little bit of perspective can go a long way.
You know, there could be, you know, there could be an insurmountable problem that’s very mountable. It It could be something that’s actually very simple to deal with, but it’s built into a big boogeyman that really isn’t an issue. There’s many, many examples of that kind of thing. So, you know, having a moderated conversation with a a good adviser who will take the time to help you have that conversation can be really valuable and important, but you have to overcome all the ickiness of talking about money because there’s a real downside to it too. Like, you can really screw it up.
You can cause a lot of family stress over talking about money. It can cause problems while you’re alive. And some people will just make the decision. I’d rather that problem happen when I’m dead, so I’m not gonna talk about money. Therefore, I’ve planned.
Thank you.
Matt Kempton: Well, you’re right. I mean, I suppose in a worst case scenario, you you do hear the the nightmare scenarios where, you know, parents maybe start to use their their state distributions as a a weapon, or, how much do you love me? Come visit me. If not, well, you might be cut out of the will. And so, you know, maybe worst case scenario that gets taken at that point.
Colin White: That never happens. That never happens, man. You don’t love me anymore. Therefore, you’re under the will. You know?
So so, yeah, I I think that that’s a very important point to make. Sometimes this can be weaponized, and this can cause damage if not properly considered. And there’s many different ways it can cause damage. Sometimes it’s issues nothing to do with money that get transferred into the money arena. Like you said, you don’t love me therefore I’m not giving you money.
Yes. Sometimes that is the case. And other times, it’s, you know, just changing priorities over time. Like, you know, something you said to somebody when you’re talking to your children about money, then they have grandkids. Okay.
Well, now now this is a different different ballpark. You know? So it’s, there’s a lot of upside to having a good open conversation about it, but the reason it doesn’t happen is that there’s danger in having that open conversation. It can cause resentment that, can affect the family. So it’s it’s not a mystery.
Like, this isn’t like, oh, I can’t believe people aren’t doing this. So obvious they should be doing this. No. No. It’s it it is legitimately scary for for good reason, which is again finding good counsel.
Like, you know, whether you find that with your accountant, your lawyer, your financial adviser, you know, somebody who’s a professional who can sit in the room and moderate a conversation and help you keep it on track.
Matt Kempton: Yeah. Absolutely. And I think as you were sort of as you’re getting out here, I mean, one of the hardest things, you’re talking about money. That’s already hard to do, but you’re effectively talking about debt. And that’s very, very hard for people to do.
And so you’ve added in 2 very hard areas of discussion, and sort of lumped them together as part of this. And so that’s a hard wall to even get over for some and, emotional all the way around.
Colin White: Oh, yeah. And you also have the situation where maybe the older generation is trying to exert a control or trying to reach back from the grave and make sure that their money is used for priorities that they think are important. And, you know, a little bit of that is is reasonable. After a certain point, it just becomes untenable. You know?
At the end of the day, once you’re dead, you’re dead. And, you know, your legacy is going to be decided by those who are still here. And to try to put a whole lot of controls or expectations on how that money is allocated. 1 or 2 things. Either you’re gonna set up more animosity within the family over, you know, doing things of that nature.
Or 2, you’re gonna create a legal and accounting nightmare that’s going to actually drain money out of your your your estate and actually make it way less effective at accomplishing any goals. So, you know, it’s really I encourage people to when they’re making their plans to trust the next generation because at the end of the day, they’re going to make the decisions And they may or may not make them the way you think you that they should be made, but, you know, they that’s gonna be their they they get to write their own movie. They they get to decide their priorities. They get to decide what they’re gonna do with with their situation and expecting that you can put enough strings attached. Like, this money is only to be used for education of the grandkids, and that pot grows to $5,000,000 and none of the grandkids wanna go to university.
And now what do you do? You’ve you’ve you’ve created a problem that’s gonna have to be addressed well. You’re that’s an exaggeration to make a point, but that is something that you see where they try to set up and say, okay. Not only existing grandkids, but all future grandkids. Just just stop.
I mean, like, you’re you’re now envisioning, you know, the birth of more humans after your death, and you and you want to have a say in how money gets spent to support them. That’s that you know, at at a certain point, you just, in my humble opinion well, in my opinion, I shouldn’t call it humble. In my opinion, stop it. Don’t don’t don’t make it more complicated. Trust that you’ve raised the next generation.
You’ve given them the right set of moral compasses that they need to make good decisions for themselves in the moment because you know no idea what the situation they’re gonna be facing down the road.
Matt Kempton: Well, yeah, that’s a good point. I mean, when you start planning for people you’ve never even met before, you’re probably taking it too far. I mean, the idea of generational wealth of of, you know, is appealing to some, but that’s effectively what you’re doing is saying, well, let me plan for all of these individuals who I’ve I’ve never met it, but I think I know what’s best for them. Yeah.
Colin White: Arrogance. No knowledge. Unmitigated arrogance to behave that way. And I listen, I I have very frank conversations with people over their expectations because I think it’s very, very important to take a good hard look at, you know, what your expectations are. Because putting restrictions on something imagines that you can understand all the variables that are gonna be there in the future, And that’s that’s just not knowable.
I mean, you know, you take a look at the advances and the hiccups that have been seen on a global scale that have dramatically altered, you know, financial realities for people. It’s it happens on the regular. Giving the next generation your trust and confidence that they’re gonna deal with that in the best way possible, is is 9 times out of 10 the best way to go. Now I’ll I’ll contradict myself. Do you want me to contradict myself?
Please. Please do. There’s nothing more damaging to somebody than sudden wealth. You know, the all of the studies about people who won a lottery and how quickly they go bankrupt and, you know, things of that nature. So there are some real concerns that people have about, you know, the next generation kind of thing.
And some of it may be something you can work around or you can improve, but sometimes that’s just the reality. Sudden wealth really can do and does do and statistically does do and studies have shown that it does. It really destroys or can destroy or negatively affect somebody’s economic outcome. So, you know, I’m arguing against myself now, but having an eye to that. Now the the way to deal with that maybe is not putting restrictions in your will to try to protect against that.
It may be working with that generation to help them gain the money skills that they need, while you’re still around so that you give them a better chance of behaving properly. But it’s tough. It’s absolutely tough. And, I mean, I would get tasked from time to time. It’s like, you need to talk to my 16 year old about setting up an RSP.
Really? I’m pretty sure that the 16 year old is not thinking about RSPs. I’m not that talented. I’m not gonna be able to give them the gift of wanting to invest, you know, at that age.
Matt Kempton: Well, you didn’t know me at 16 then, I guess. I
Colin White: I should. But it well, I wasn’t gonna walk in the room and convince you of shit. Like, you you at at that age, most 16 year olds are not thinking about savings. They’re thinking about the other sex, and they’re thinking about cars, right, or whatever. So sometimes the expectations of parents and how quickly and frankly what the next generation needs to learn, And that too is a bit arrogant because, you know, you may have done well for yourself, but you may or may not have, you know, the the the proper perspective to pass that out to the next generation.
But but that’s more of a an issue you can deal with while you’re alive. And it is it’s a cautionary tale. But at the end of
Colin White: the day, if somebody’s gonna be bad with money, they’re gonna be bad with money. Yeah.
Matt Kempton: Yeah. I mean, I think that’s a fair contradiction really because it’s hard. And but that’s why the conversations are very important to have, and they might I think they’d create a better chance of success, but that sudden wealth item is is very hard. I mean, a big part of, I think, what advisors are here to to do and can help in doing is preparing the next generation for wealth, showing them you know, getting them accustomed to how to work with a wealth adviser, how to build a plan for themselves, and maybe forecasting, well, an inheritance might come in at some point. It might you might be able to use it for buying that home, paying off a mortgage or these purposes and putting maybe putting some financial putting a plan around it versus, you know, a $1,000,000 drops in a bank account, and they say, I’m off to Vegas or or who knows?
And you’ve seen it. I’m sure I’ve seen the the very damaging things that can come from, well, from from that sudden wealth. So, you know, but you hope to create more of a chance of success by by having those conversations earlier because it it, that lottery ticket win can can do a lot of damage.
Colin White: Yeah. And it’s it’s a matter of trying to increase the odds of a good outcome. Right? Yeah. So, when you’re having a conversation between generations of a money, it’s high risk.
I won’t lie. I’m not I I don’t want this podcast message to be everybody should talk to their family immediately about money, without giving us some serious thought because it it can be damaging, and you shouldn’t minimize that. But there’s ways that you can go about it that are less higher potential for positive outcome. If you can set up a moderated conversation, that’s great. You know, having a professional in the room to guide a conversation and help you, you know, talk about and, you know, having a conversation with that professional in advance of that meeting.
You know? It’s it’s funny. I’ve had conversations where I’m talking with the parents. They’re going, okay. We really have to keep this family property in the family.
It’s the most important thing to us. You’ve been in the family for generations, and I have a relationship with the kids and the kids are going, oh, fuck no. No. I I I’m never gonna go back there. I lived in BC.
Matt Kempton: Here. Yeah. Exactly.
Colin White: I’m not gonna travel back to that. Grace, no.
Matt Kempton: I’ve never met my cousins. I don’t wanna be.
Colin White: Right? So I’m now I’m sitting between those two groups going, wow. They never have talked, have they? And, like, the parents are twisting themselves into a knot. And, like, their whole life is around accomplishing this goal.
And I I really it’s maybe not my place. I don’t have the heart to tell them. It’s like, it’s really not that important. Right? But they would have to consent to our let’s have a family conversation about money and I can offer.
But it’s it’s gonna be up then up to them to think. But that that that that’s an illustration of the advantage of it because, again, there can be a misunderstanding between generations that, you know, mom and dad have these priorities and the kids have different priorities. And maybe when they get together, it gets way simpler than anybody thought. You know, maybe it gets way simpler. So it’s it it’s a fraught conversation for sure.
But the other point I’d like to make is, one of the dangers of the next generation is if they know, and this is again one of the dangers of talking about money. If all of a sudden, they get a figure in their heads like, well, I’m gonna get enhanced from mom and dad, and that’s my that’s my retirement plan, so I don’t need to do anything else. Yep. That’s that’s dangerous. True.
That’s a very, very dangerous so that absolves yourself yourself for the responsibility of making sound financial decisions on your own. That opens you up to the idea that maybe you’re wrong and that money gets spent on end of life care for your parents and you never do see the money, now you’re in a pickle. You got no money, no skills, and no time because you’ve waited for this for so long. So, again, it’s another one of the trap doors you can fall through in having these conversations in a negative outcome that some people avoid. I mean, I do have parents that say, my kids don’t think they’re getting anything, and I’m not talking to them about it because I don’t want them to behave as if this is coming.
That’s their strategy.
Matt Kempton: Well, that’s true. And, so I just I think that one that one has a lot of risk too. But then the sort of the counter I’ve seen to that is parents don’t share. Kids work their whole lives to whatever state, maybe struggled always for a number of years and then, you know, enter, say, their sixties and then have this windfall that at that point, they don’t really they didn’t know it was coming. And it helps them, but they they didn’t necessarily need it at that point.
They needed it earlier, but had no idea that that level of wealth existed because it was never discussed. And hurt feelings can happen there too to say, well, I I could’ve done trips with our family and
Colin White: A grasshopper, the older guy looking back going, that struggle is what you needed to go through in order to be where you are. Right?
Matt Kempton: Yes. Yes.
Colin White: To think that money is going to buy people that are going through struggle, and that’s good. History would disagree. You know, there’s the old old the old saying. You know, hard men make easy times, easy times make weak men, weak men make hard times. Like, there’s there’s a and you can I watched it happen?
Like, you’ve got one generation that is super successful financially, and the next generation pisses it all into the wind. Right? Just and because if you it’s a different mindset if you have a scarcity and you, you know, you’re an accumulator and all the rest of it. That that that is a mindset for sure, And part of that is born out of scarcity. And so the next generation comes along and doesn’t have that that doesn’t that there’s more likely they’re gonna accumulate way less or diminish what’s there.
And and, again, that’s a very, very repeatable cycle that happens.
Matt Kempton: Short sleeves to short sleeves in 3 generations, that that just happens. It’s just how it goes.
Colin White: Yes. But I mean, the the the and this is why you know, to go back to earlier, the way you kind of set this up, which is, you know, a very typical way of setting it up. You had this huge health wealth transfer happening. Nobody’s talking about it. That’s bad.
You should talk about it. There’s a whole lot of reasons people aren’t talking about it because talking about it doesn’t always make it better. Right? Sometimes it it’s just gonna go for a shit. Like, Like, no matter how much you talk about, this just isn’t fixable.
So it’s it’s all about increasing the likelihood of having the best possible, and both of those are are constrained. You’re never going to get an ideal outcome. If you if you give $5,000,000 to somebody and say, there, you’re gonna be happy. Science isn’t on your side. It’s Yeah.
You know, that that’s just not how happy is. Right? You can remove some of the strain on shelter and food and lifestyle, but those aren’t all of the ingredients of being being content. You haven’t fixed anything. So, again, I think that’s why this is a fraud conversation.
I don’t mean to be too demoralizing. I might be
Matt Kempton: too demoralizing. No. Not at all. I mean, again, it’s so complicated, and a and a good outcome is different in all cases. You know, a good outcome might be, you know, families coming to the conclusion that or maybe the heirs coming or rather the parents come to the conclusion.
We will start some gifting earlier. We’ve got the ability to do so, and you could see a need on your end, and we’d like to and, you know, maybe it’s just a a portion of it over time to share with you. And and that that feeling on the next on of the next generation feeling, that’s very fair. We’re so appreciative of that, and that’s a good outcome. Or maybe the outcome is it’s all we’re we’re going to retain everything.
It’ll all come your way eventually, but we need to make sure that we are secure in our lifetime, and maybe the next generation is okay with that, and that’s a good outcome. Or maybe they’re maybe the next generation doesn’t like either one of those outcome decisions by the parents, and so it’s a bad outcome. Yep. Decided by some or by 1 party. You know?
It’s, consensus is not this is not guaranteed. And, again, as an emotional item, but I still think the conversations are worth having, though they are they can be challenging.
Colin White: But but you you have the optimism of use. You know? We can talk about this to make it better. And, yeah, that that’s how you should get out of bed in the morning. You should be optimistic.
You know? So and either either scenario you described can be the absolute best scenario or the absolute worst. Right? Because, you know, gifting along the way in the right situation done the right way with the right people is very appreciated and and doesn’t really diminish their their ability to to function on their own. Other times, all of a sudden, it becomes a crutch, and the person loses the ability to make, you know, truly sustainable financial decisions for themselves because they consciously or subconsciously are expecting the next, you know, bit of money to show up.
You know? So all of the all of the different ways that we’ve talked about approaching this can work out and can also not work out because, you know, again, another one of the old expressions, you can commit no errors and still lose. Like, you can do everything that’s right that you possibly can and still have an outcome that you’re not happy with.
Matt Kempton: Yeah. Maybe to that outcome, when we talked about the inheritor who views it as, you know, a lottery ticket or a big win and then, you know, goes on a free fall of spending, There’s another profile that exists, a challenge one, and that’s the inheritors’ guilt profile where they inherit and feel that’s not my money. I can’t touch it. Or maybe I can only touch income. I could never touch the capital.
That’s dad’s. That’s mom’s. That’s theirs. Yeah. And that’s not necessarily a healthy one either.
Now what’s the money for? And was that their intention that you would never benefit truly from it? And and now where does it go from there? And and do you pass that same guilt on to the next generation so that they can go the other extreme where I say, I just can’t touch it. It’s not mine.
And I’ll live below my means despite having this now.
Colin White: Like, if I if enough money comes in every month for me to feed myself and clothe myself and put a roof over my head and that’s it, I don’t have to make any decisions. That’s pretty free. Now you in in that life, you’re gonna find something to worry about whether it’s politics or climate change or, you know, some conspiracy theory. You’re gonna find something to worry about. But you give that same person, you know, $5,000,000 and they’re faced with all these decisions, that could be equally stressful because now it’s like, oh, well, what do I owe my my siblings?
What do I owe my nieces and nephews? What do I owe my kids? How how can I be fair with this? There’s no easy answer to those questions. All of those questions are hugely open ended questions.
And so in the with the right kind of person, that is tremendously anxiety provoking and can be very debilitating, honestly. So, again, it’s it’s I feel a negative today. I don’t know what it is whether I’m in a bad mood, but, I got I guess I’ve I’ve dealing with a lot of estates right now. So there’s a lot of examples kinda whirling around in my head, of the of the challenges of exactly this kind of conversation.
Matt Kempton: Yeah. But it so on that estate end, I think it’s important, and and you would have seen much of this. I mean, you you know, in in the role, you have planning conversations, but then you see the estate distribution. And so you see the actual way it plays out. And in in terms of, well, how did how was it received by the by the heirs?
Who’s involved? The executives. How did that piece of it go? We haven’t touched much on, well, who’s actually going to carry this plan out? Are they capable of doing so?
Did they know they were in the role? Are they interested in being in the role? But that and did you set it up in such a way that it’s going to what you thought was going to occur will In that, did you the way you wrote the document, is it going is the carrying out of that going to follow what you thought were your intentions or are you’re going to have unintended consequences based on who you set up or the restrictions you might’ve applied or, or whatever it, it might be. So that part of it, it’s just interesting occasionally how there’s a gap between what you think is written down, what you think is going to occur, and then ultimately what does just for whether it’s bank policies or all sorts of different reasons, the just the ultimate execution of it can be challenging and different than you expected.
Colin White: I’ll go on record right now and say if you’ve named somebody as the executor, if you will, and you haven’t told them, you don’t like that person very much. That is perhaps the meanest thing you could ever do to somebody that you’re putting that kind of responsibility on because sweet love of god, the responsibility taken on by an executor and the burden that is on them and the the legal responsibility that they take on is monumental. And if you superimpose over top of that, you expect them to execute on your wishes while they’re keeping everybody happy. It becomes very quickly a full time job, and I’ve only met one person in my entire life who was an executor who said they would do it again. Every other executor I’ve talked to said, oh god.
No. Never again. I would recuse myself if I ever got named again because it is a burden. So, you know, when talking about having conversations about money, talk to your executor. Never ever ever ever let that be something people find out about after you’re gone.
And I’ll go further and recommend that having one executor is way better than having 5, you know, because, again, if you need 5 people to sign off in every document, that’s monumental. You know? You you know, find one person who’s a good administrator. It’s not an honor to be named as an executor. Like, it’s it’s not it it’s like, hey.
Congratulations. You get to be the executor. It’s like, oh my god. That’s amazing. No.
No. This is like, would you mind doing this for me? It’s gonna be a lot of work. Could could you do this for me? You know, it’s that’s what you’re doing.
But people feels like, oh, I need to put both of my kids on there. I need to put all 3 of my kids on there. No. You don’t. In fact, they’re gonna not like you very much for having done that.
That’s because it’s kinda dramatically complicate things for them. All good points.
Matt Kempton: And, I mean, to that to the point around the honor of being named an executor, I think that’s maybe a a way of thinking of years past that I’ll name our most capable child as as the executor and and what an honor to do so when really it’s a burden. You you’ve just created a burden to this person and then but the alternative name everybody. Well, now you’ve created a real problem. How often are all these people in the same room at the same time At this emotional time, especially, are they all going to be able to agree on anything, and have you just really challenged the execution and, of this estate and the deliverance of it because it,
Colin White: if you’ve got a very super capable child who lives in Calgary and, you know, they maybe have got the most skills to deal with it and you’re you live in Halifax, and you’ve got another child who lives in Halifax who is not as skilled but is super capable, well, they probably would just name the person in Halifax, you know, from a practical perspective. Like, if they’re capable of doing it, maybe but, again, it’s not a judgment call between the siblings that this is more capable than the other because you’re right. That’s what it gets into. That’s where the the emotional the lizard brain kinda kicks in. It’s like, why didn’t I get picked to be the executor?
I thought mom mom always loved him more. Right? You know, that that kind of response kicks in. Yeah. We haven’t even touched on the other biggest mistake people make.
Matt Kempton: Okay. What did we miss?
Colin White: Oh, was it have you got to the end of your list?
Matt Kempton: So are we are we heading on to the next next area of conversation? No. No.
Colin White: No. I’m still I’m still Oh, you’re still there. Go. Alright. What did we miss here?
The role of tax planning in in in your estate. Of course. Of course. Right? Because, you know, that’s what happens when you’re dealing with a very messy conversation, and there’s some questions you can’t answer.
There’s things that you just can’t come to a determination on. You will default back to something that you can make a decision on, but you got something you can calculate. So instead of turning it into, you know, the smoothest estate transition you can find, you turn it into, I need to tax optimize this. Why? Because all the other questions are too tough for me to deal with, so I need to feel like I’m doing something.
So I’m going to tax optimize this. And then you start going down the road of twisting yourself into a pretzel trying to minimize taxes in the estate. And many, many of the actions taken in the name of tax simplification or probate avoidance can be hugely complicated in actually adjudicating an estate, sometimes when you’re alive because some people will change ownership on assets while they’re still alive with the goal of of circumnavigating some of the probate and their tax consequences. Number 1, they’re not very effective. Number 2, they tend to be hugely complicated in unintentional ways.
And it it it it’s a default for people to say, I can’t make any of these hard decisions. I I I but I need to plan my estate. Therefore, I’m gonna have a really tight tax plan and then pat myself on the back and say, I have an estate plan. And it’s not really being honest. It’s it’s just transference, I think psychologists would call it.
Matt Kempton: Well, that’s a really good point. And this is one that I find experiences to me has been so helpful in this one because you might think about in a state and that, you know, that that feels like one of the top things you should consider. Let me just minimize probate, especially here in Nova Scotia. But the ways that people go about it, often, again, have unintended consequences. So let’s look at a few key examples of way people’s people might do it.
So let’s say, you know, you know, somewhat commonest state of tax free savings account, couple RIF accounts, maybe a maybe a smaller joint investment account. Well, let’s set up the beneficiaries immediately and a life insurance policy or maybe multiple. Let’s set up the beneficiaries immediately to all of the children, all of the heirs. Monies will go directly to them quickly, and there’ll be a smaller estate, less probate to deal with. But what about, of course, the tax bill that’s going to get generated from the from the triggering of those risks?
Now how does that bill get paid? Where are the funds to pay that? The executor now, you’ve put in a position to say, I might have to claw back funds from the heirs to cover this tax bill or be personally liable to the CRA for this. And so the the well intentioned piece of let me avoid probate. Let me just make them get the money right to my heirs and do so quickly has created an unintended but very real consequence of no funds available.
And this also happens in in areas where, you know, maybe there’s real estate involved. It’s not liquid. It’s meant to stick around. Oh, tax bill triggered. How do you fund this?
And that, well, I’ve seen that go poorly. That’s for sure.
Colin White: Well, yeah. You know, in CRA, we’ll go after a beneficiary of a registered account if the estate is unable to pay the tax bill. So the money goes to a beneficiary. The beneficiary spends the money on a based on their mortgage to buy the property. The money’s gone.
The CRA kind of shows up 3 months later and says, yeah. You owe us a $120,000. They’re going, what? You can’t do that. Like, yeah, we can, and we just did.
You know? So that’s one way it goes wrong. Wrong. We’ve had a situation where a client put a one of their children, entitled to a property. It was a recreational or an investment property.
They had a falling out, so she goes, okay. I wanna take them off the property now. I was like, that’s not the way that works. I guess. Yep.
You know? But it’s, again, all in an effort to chase this elusive, I need to avoid probate. People, get over yourself. Probate’s not that big a deal, and the the unintended consequences and potential costs and screw ups of taking dramatic steps of changing ownership of assets and leaving a bankrupt estate are gonna cause way more fees and complications for the heirs than you were could ever possibly avoid. Right.
And in the case
Matt Kempton: of that oh, sorry. Go ahead.
Colin White: Mhmm. Mhmm. Okay.
Matt Kempton: Well, and just on that piece of, you know, the falling out scenario, but they’re both on title. Oh, and now you’ve created a trust filing requirement based on the new CRA rules. So so if you it’s only become ever complicated. So
Colin White: Well, that yeah. Yeah. That’s just it. And and people don’t understand. The more complicated you make it, the more complicated it is and the more fragile it is.
Right? The more the more fragile it becomes. Right? So there’s and and I fault the professional community for that in many regards because it’s very compelling to walk into somebody that’s a prospect or client to show how smart you are. It’s like, oh, you’re paying way too much probate.
I can have you pay way less probate. I’m gonna save you money because I’m a really smart guy. That’s compelling. That that will earn you a client. That that will open up a relationship for you as a professional.
And I don’t say that it’s done consciously necessarily, but that is subconsciously the effect of of behaving that way. So there’s a self fulfilling, do you wanna save tax? I love saving tax. Well, I wanna save you some tax. And nobody pulls back and looks at it from 30,000 feet and say, did this make the whole situation better, or did it just solve a little problem over here that has ripples and gonna cause other problems that are actually bigger?
Right? It’s it’s not looked at from that perspective.
Matt Kempton: Well, I think you’re very right. I think that’s a place where we sit at an advantage in, and we can sort of walk through well. If minimizing taxes is a goal of yours, here, we can do so by doing these, but here are the other here are the offsets that occur. And and being able to show the fulls or the the cause and effect that can happen versus simply saying minimize tax, do this, and this will be your outcome where we see it all the way through and and just know the downsides that can happen when you solely focus on something like that.
Colin White: Yeah. And then this is where the perspective of a of a qualified adviser comes in. Because when I’m sitting listening to somebody plan something, really good chance I’ve watched somebody else do it. And I’ve watched Yep. The number of ways it can go wrong, and then I’ve watched some of them come to fruition.
Right? So real world experience actually has a role there when properly reflected upon because, you know, something that’s good in an academic sense. And the other thing with time you understand is that the the the environment doesn’t say static. Like, you you bring up trust reporting now. Like, there’s an example.
You know? So people took, you know, what seemed to be very reasonable steps for estate planning a number of years ago, but because of regulatory changes now, it’s getting less comfortable. And this is the first step of those kind of planning mechanisms becoming less comfortable. So now what do you do? Have you taken a permanent step that’s un undoable?
Is that the way you would say that? Irreversible. Irreversible is better. Un undoable, I don’t think is a word. But, you know, now you’re you backed yourself into a corner.
You thought you were smart in the system. You were you thought you were getting cute. System has a way of smacking people like that in the face every once in a while. So part of it’s kind of relax. You can only control so much.
There is gonna be tax. There’s gonna be fees, and twisting yourself into a knot with the understanding you’re mitigating any of this. You might be fooling yourself, and you put a lot of effort into something that isn’t gonna accomplish that goal.
Colin White: Yeah. No.
Matt Kempton: Very, very good point. One area all of that is important. It it all kinda comes out of a good conversation. Another area that’s it feels a little more administrative in nature, but it’s it’s pretty key at a, you know, at an emotional time of someone passing is, right, you’ve had these conversations. So, hopefully, now the beneficiaries or the executives, they know who to call.
They know where documents are. They know where everything is and how to access it versus, mom’s passed away. I don’t know who to call. I don’t know who she dealt with. I don’t know where anything is.
I don’t even know if there is a will. That that’s probably worst case scenario, but I think that things like that often happen versus a, here’s an inventory of where everything is. You can find my safety deposit, box key here. Please call these people. You’ve already met them, hopefully, accountant, lawyer, financial adviser, that type of organization, and, it all stems out of these conversations, but it can just it it just eases everyone at a very challenging time.
I’m disappointed in you, and and
Colin White: I’m disappointed in me. We should’ve led with that. You know, for all the stuff we for all the stuff we’ve been pooh poohing as a waste of time. Get organized and put in your favorite colorful expletive there. Get effing organized.
That is a benefit to everybody. Right? So you know? And that’s being basically organized shouldn’t cause any ripples. Like, you know, here’s some very detailed instructions.
Here’s a list of accounts, institutions, you know, and keep it relatively up to date and make sure that that’s findable because if you don’t do that, you’re a bad person. Like, you are a bad person. If you if you if you leave, like, a treasure hunt behind, yeah, nobody’s gonna like you. Your your your whole life is gonna be invalidated. Yeah.
Be don’t be that person.
Matt Kempton: So what about on the treasure hunt front? And and we didn’t talk about this much of this. We spent a lot of time talking about money. A little personal property and the China collection and just the the years of your school project from the 4th grade and and things that can get built up, especially in a family home that’s been in the family home for decades. And it may be a feeling of the parents to say, I I want so and so to have this.
I know they’d want this. This the the old grandfather clock that has to go to to so and so. That piece of it, a lot of them and that’s often more an emotion, maybe even more emotional because the the the goods might have little monetary value, but one one of the beneficiaries might say that painting means everything to me. It it was I have all these memories associated with my childhood and that painting and being in that room, and I need that one. Why didn’t mom give that one to me?
So that that’s a complicated area where, you know, it’s not even so much a money discussion. It’s really just I have these feelings associated with these items.
Colin White: Well well, for me, that lends a little bit more to pre gifting. Right? Like, that that lends itself a little bit more to that because you’re not financially putting yourself in a bad spot by doing stuff like that. I will share one funny story that I was I was I was aware of where there was a family that didn’t get along very well. So So their way of dealing with that particular issue was there was a family house and the grandparent final grandparent was getting close to passing.
So they were instructed to go through the house with little sticky notes and put a note on anything that they were had an interest in. So then it became a game of going around and taking other people’s notes off and sticking your note on stuff. So they fought with sticky notes. You know? So you you you pull something up and, like like, why sticky notes gone?
Why is David sticking out there? So, you know, again, you’re absolutely right. And that is something that’s not monetary. And, also, something doesn’t lend itself to being necessarily enumerated in a will. That’s something that can be a or you’ve missed a piece of paper that is, you know, stored with the final magazine.
But also keep in mind, your will doesn’t get read for a few days after death. So keep that in mind too. There’s a time delay from the time you pass to the time, whatever you put in your will. Yeah. You may already be buried, and then they read the
Matt Kempton: Well, especially if probate’s required, we might be looking at it even further to make sure that’s the final.
Colin White: I’m talking the initial reading of the will. Right? Right? So the executor may not even be the you know, the funeral may have happened and you’ve been cremated or planted or whatever is gonna happen, and you realize, like, whatever you do, don’t cremate me.
Colin White: Oh, shit. Don’t put that in your will.
Colin White: That’s you’re gonna just disappoint people. Well, that’s that’s a good point.
Matt Kempton: So make sure those wishes are clear and maybe separate. Yeah. Well, I can.
Colin White: Well, just just keep in your mind that there’s there’s gonna be a time lag when you’re passing till we get they get around to sitting down looking at the well, potentially. And that could be a period of days or weeks. So Yeah. No. Tales tales from the edge, man.
Oh, some of the stuff I’ve heard and seen. Yeah. So have have we thoroughly had a conversation about communication, money, state planning issues with regards to the from a communications perspective? Have have we beaten all of the the pulp out of this?
Matt Kempton: I you know, we’ve we’ve hit on some key items. We’ve dived. We’ve dived in to an extent. I mean, this could be frankly, I think this could be a 5 hour discussion. I mean, it’s so there’s so much to it.
There’s so many scenarios you’ve seen, scenarios I’ve been through and, and just unique pictures. But we’ve done a good job, I think, of hitting some key pieces and of areas of areas of thought and, maybe hopefully spark some some some reason to, if nothing else, tell people where documents are. Step 1. Yeah.
Colin White: Step 2. I’m a conversation.
Matt Kempton: And there’s Yeah.
Colin White: Shit. Says Colin, so Sean. Yeah. Oh, no. It’s a fact.
You are a demonstrably a bad person if you don’t do that. Now this is the whole point of, like, virtually all of our podcasting is to provide some food for thought and cause you to ask questions and make you better prepared to sit down and talk to a professional. Like, if you if you listen to this and it cue some thoughts in your head and starts to organize your thoughts, that’s gonna make you better prepared to walk in and talk to your lawyer or your accountant or your financial adviser about these issues. That’s our goal. I mean, this is not the the do it yourself, listen to this, and you’re all fine.
This is just designed to better prepare you to have a conversation with a professional who is qualified to take a look at the whole playing field and say, in your situation, this is the kind of things that apply.
Matt Kempton: Yeah. That’s a good point. And I I find I mean, start the conversation wherever you’re comfortable. I find, you know, for those that are maybe uncomfortable having the conversation, let’s say, with a lawyer or aren’t fully decided, we can serve a a good sort of starting point to say, well, let’s let’s start the conversation here, about what your wishes might be and put together a you know, have that estate planning discussion, you know, beginnings here, and then let’s take it to the lawyer from there, whether we attend with you or you go on your own. You’ve maybe feel a bit more prepared and a bit more you’ve thought things through to an extent more than than you had versus going in, and let’s let’s make it happen.
Colin White: Yep. No. Absolutely. I mean, because there’s a whole bunch of decisions. I mean, you know, state planning, obviously, is a very personal thing, and, you know, it got the conversation with all the involved parties, which is, again, the the topic of the podcast is, you know, having that conversation with with the various stakeholders if you wanna put a business term on it to the extent that that’s possible or doable or desirable.
You know? And there’s situations where it happens with part of the family and not the other part. But this this is worth considering how much of this you can do because if you can get comfortable with and execute on this, it does make the world a better place.
Matt Kempton: Yeah. Well, it’s interesting you say part of the family, not the other part. We didn’t even touch on blended families. That’s a whole another episode maybe planning there. Yeah.
This certainly adds in some complexities. This is not
Colin White: a university lecture. This is a podcast. And, yeah, if if you have a blended family, there’s a whole other chapter that that we would get into.
Matt Kempton: Right. That’s 201. This is 101 here. There you go. Yeah.
Colin White: Alright.
Colin White: So you think we beat this one to death, Matt?
Matt Kempton: I think we have. Till next time.
Colin White: Thanks, everybody. Like, follow, and pass this on to your friends. Looking forward to have you listen to us when the next one comes out. Thanks.
Matt Kempton: Right. Thank you.
Colin White: If you’re breaking a sweat trying to figure out what your financial advisor is talking about, you’re not getting the service you need. You probably hate trying to get an answer from them, but you also think moving your accounts will be a headache, And it might be. But working with Dontrocktheboatwealthplanning.comor.ru isn’t exactly stress free, is it? Call us.
Colin White: We will demystify the world for you.
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