It's time to talk to your parents about your family finances
Depending on the dynamics of your family, discussing money with your parents can be a complicated subject to broach. Yet, whether you are a Millennial, Gen Xer or a Boomer, conversations about financial health and eventual transition of wealth will help answer key questions regardless of which stage your parents are in; pre-retirement, early retirement or beyond. Hopefully, they have done an excellent job in preparing for these life changes. While it is uncomfortable, and depending on your family, it’s possible that money conversations are almost a ‘taboo’ topic, it is essential to have these talks.
But where to begin when asking your parents about their finances? This article will highlight key finance-related questions that one should be asking their parents to get the conversation started. But before we get into the key questions, it’s important to have a basic understanding of what an estate is, and what happens when someone passes away.
WHAT MAKES UP ONE’S ESTATE?
Over the years, people build up personal and business assets—house, car, jewelry, paintings, RRSPs, TFSAs, cash, recreational property, or shares in a company. Everything listed makes up your estate. As well, everything you owe- your liabilities- also form part of your estate.
When someone dies, what happens to everything in their estate?
When a person dies, a terminal tax return must be filed on their behalf. Upon death, a person is deemed to have sold all their assets. So, not only will the terminal tax return include any income earned in the year of their death, but also any deferred taxes or recaptured depreciation. This is true for both personal and business assets. Capital gains taxes must also be calculated, though in certain cases, these may be rolled over to the surviving spouse. The decision becomes, does it make more sense to pay all the capital gains taxes now? Some of it? Or, if possible, roll it over? All these added costs increase the rate of your terminal tax.
The next bill that comes due is for probate fees. Probate fees in BC are 1.4% of your total estate (for amounts over $50K). For example, if your parent’s estate is worth $1,000,000, the estate owes the courts ~$13,500. As well, all debt, personal guarantees, lawyer fees, and accountant fees are due. Accountant and lawyer fees can be significant; from our experience, this can equate to up to 15% of the total estate! In addition, the estate will incur other miscellaneous costs, such as funeral expenses.
While these costs will vary from one estate to another, they can add up very quickly without any advance planning. We estimate that anywhere between 30-90% of the value of an estate could be depleted through estate costs and taxes before your family receives a penny.
This is where understanding the estate and being prepared is critical. Does the surviving spouse need an income? And where is that coming from? How can the estate create capital to pay the debts? Where will this cash come from? The details of the will become critical; is it updated? Is there value in creating a family trust? Does it make sense to incorporate certain parts of your estate?
Note: Many people falsely assume that they can avoid true estate planning by just adding their children to their accounts in order to avoid the probate process. However, there are legal complexities to consider beforehand and this strategy may not give you the intended result. We recommend that you consult with a professional for a complete understanding and assessment of your individual situation.
NOW FOR THE KEY QUESTIONS:
Do you have a Will?
This is one of the most asked questions at Ciccone McKay, and one of the first questions we ask when we’re getting to know a new client. A will forms the foundation of estate planning because, in short, a will dictates what will happen when you die.
Having an updated will and estate plan ensures your parent’s wishes are carried out. Without a will, your parent’s assets will be decided upon by the courts or held up in probate. A valid, up to date will helps survivors avoid arguments and added stress in an already difficult time.
We cannot stress enough how important it is to keep a will updated! Major life events like the birth of children, the death of other family members, marriages, the sale of properties all can impact an estate, and need to be addressed. So beyond asking your parents if they have a will, you should know:
What does it say? Who is the Executor? Does the family agree the will is ‘fair’? And lastly, where is a copy stored?
Further, if your family owns and operates a business with multiple shareholders, an updated shareholders agreement is needed to which the will should refer. A will covers all assets, including any special consideration for business assets, etc.
Are you (or if already retired, were you) financially prepared for retirement? Do you carry any debts?
In short, what you really need to know is what ‘financial shape’ they are in. Are they all set, with debts paid off and all the savings to create their desired retirement income? Or, are they not as prepared as they hoped to be?
If, unfortunately, your parents were unable to save enough to cover their anticipated expenses, they may need your help in the future. If you aren’t confident with their financial planning, have you and your spouse accounted for these expenses in your plan?
Assistance could come in several ways, whether it means providing living space, paying bills or helping with medical expenses. Knowing ahead of time will better help the entire family prepare earlier than later. It is better to have a plan in place than have the topic arise during a situation of desperation.
What sort of insurance do you have? Do you have life insurance?
You may assume your parents have life insurance, when in fact, they decided a long time ago that it was no longer needed. Or, your parents may have life insurance, but you do not know anything about it! Regardless, it is important to know what to expect. If needed, it may not be too late for them to place life insurance or determine another solution to create capital at death.
What would you like to happen with your current home, where would you like to live?
Often a family home is not favourable for an ageing parent—steep driveway, small hallways, second-floor bedrooms. It is important that you discuss a plan with your parents if their home needs to be retrofitted or if they are considering downsizing.
On a related note, long term care insurance may be another consideration. Care expenses such as in-home nursing care and assisted living facilities are not typically covered through government coverage and can be extremely expensive. Long Term Care Insurance provides payment for these types of expenses, should your parents be unable to care for themselves. While we all like to think we will take care of our parents, there are many cost and time constraints that make this very hard.
What would you like to happen if you can longer manage your affairs?
If your parents become incapacitated in any way, they need legal documents appointing someone to make final medical and financial decisions for them. This is called a power of attorney (POA). The POA gives someone the authority to act for another person in legal and financial situations. For medical situations, a Director of Care will need to be appointed.
There are multiple types of POAs, and many are made for specific purposes. You can have multiple POAs revolving around various needs, and they all vary per province. It is important that if your parents do not have a POA signed, you do the research and know which exact document you will need.
Where are all your important records stored? Do you have an itemized list?
Over the years, most people end up with numerous accounts, some active, some largely forgotten. Having an itemized listing of all accounts, investments, loans, property titles or any other relevant financial documents makes it much easier down the line. Connected to this, ask if there is a named beneficiary on the account (where possible). Is it up to date?
Do you have a trusted financial advisor?
Your parents may have been working with an advisor for many years. He/she will probably have great insight into all these questions and a strategy to answer them. Having your parents include you in a meeting with their advisor will be an important starting point to understand and set up the steps to better organize financially. The advisor can assist with organizing their affairs--investment and bank accounts, insurance policies, homeownership papers, Wills, Trust etc.
The best solution of all? Having the same advisor for the entire family. A multigenerational plan, or a plan that accounts for the various intricacies of more than one generation of a family, provides the most comprehensive approach to your family’s financial planning.
CONCLUSION: A SIMPLE LIST IS A GREAT STARTING POINT. ENGAGING A TRUSTED ADVISOR IS EVEN BETTER.
It is mutually beneficial to have these financial conversations with your parents. It is always better to have the entire family on the same page on matters like these, as it helps move family towards a common goal—financial clarity and purpose.
While it may never feel like the right time, it is important to prioritize these crucial conversations.
To see how we can help you with your estate plan, contact us at 604-688-5262 or email us at info@ciccone-mckay.com
