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Simplicity vs. Oversimplicity in Estate Planning

Often people who are doing their estate planning have one overriding goal in mind: keep it simple. The so-called “KISS” principle is attractive, and may be appropriate for some. But for many, simplicity can be oversimplicity. Instead of being cost-efficient in the long term and allowing a streamlined estate administration process, oversimplicity can create more complications, increased taxes, disputes and, all too often, litigation than could have been avoided if their planning had been more comprehensive.

There are a number of ways that too simple a plan can lead to additional complexity after a person’s death. Some of these arise because certain assets are not planned for correctly, such as insurance policies and retirement plans. People frequently rely on the simple beneficiary designation forms provided by their insurance company or financial institution to deal with these insurance and retirement plan proceeds. However, these forms do not allow for trust terms to be set out as might be provided in a will, or for trusts for minor beneficiaries. They are also very limited in the options available for naming contingent beneficiaries. Reliance on these forms can lead to a disconnect between a person’s wishes and their existing will terms.

Some problems arise because no tax advice was obtained in estate planning. While many consider tax advice to be necessary only by the affluent, or those with complex assets, relatively simple estates can benefit from tax advice and founder from the lack of it. One example is the taxation of RSP or RIF accounts. On death, if an RSP or RIF is not rolled over to a surviving spouse, it will be taxed as income of the deceased in their final tax return, and the burden of paying the income tax, which can be considerable, will fall on the residue of the RSP/RIF holder’s estate. Many consider leaving an RSP to one child and a house of equal value to the other to be an equal distribution of their estate, but due to the income tax consequences of this plan, the child inheriting the house could be greatly disadvantaged and end up with a much smaller inheritance.

Some complexities arise because family dynamics are not dealt with appropriately. The familiar example is dealing with the family cottage. Failure to properly plan for the capital gains tax burden after death can be one unplanned source of frustration and expense, but strained family relationships are a frequent cause of disputes if special family cottage planning is not undertaken. Children or other loved ones may want to keep the cottage but be unable to co-own a property without guidance and planning to assist them to avoid disputes. Some children may not wish to be included in ownership, despite assumptions by their parents to the contrary, which can create tension if their siblings won’t buy them out or a dispute regarding valuation arise.

Another type of complexity which can derail an estate plan if not taken into account is second marriages. Even where family members get along well now, a failure of proper planning to ensure, for example, that the surviving second spouse is appropriately taken care of while ensuring assets ultimately pass to children of the prior marriage can lead to frustration and difficult relationships at best, and litigation and huge emotional and financial costs at worst. If family members do not get along, a lack of comprehensive planning may mean that, win or lose, they will all end up worse off at the end of the day.

Everyone wants an estate plan that they, and those who will benefit from it after their death, can easily understand. Certainly, over-complexity can lead to confusion, frustration and added expense. However, it is easy to get seduced by the opposite approach, thinking that making things as simple as possible will ensure a cost-efficient plan and a smooth estate administration. All too often, loved ones will have good reason to lament a lack of comprehensive planning, and end up wishing more thought and expense had been spent before death, saving needless expense, time and grief afterwards. Having the right professional advice can help guide away from the “KISS” traps awaiting the unwary, providing true peace of mind instead of a false sense of security.

— O’Sullivan Estate Lawyers

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.