Personal Finance


Boomers expect to inherit windfalls from their frugal parents. They’re in for a shock.

JAMES DEACON November 8 2004
Personal Finance


Boomers expect to inherit windfalls from their frugal parents. They’re in for a shock.

JAMES DEACON November 8 2004


Personal Finance

Boomers expect to inherit windfalls from their frugal parents. They’re in for a shock.


THERE IS NO way to guarantee an inheritance, but it’s dead easy to lose one. Take Mark Parker. The middle-aged London barrister lost his court bid for a share of his late mother’s £250,000 (about $560,000) estate last month largely because of a letter he wrote to her while she was terminally ill with cancer. “I would rather sit in the gutter than ask you for a penny piece,” he wrote to his dying mum. He added that neither she nor his late father “had the emotional capacity to bring up a dog, let alone a child.” Charming. His mother then amended her will to make her other son the main beneficiary. Yet after she died,

Parker—suddenly less interested in gutters— claimed he deserved a share. A county court ruled against him, as did the Court of Appeal in London. In fact, the appeal court’s panel of judges concluded the mother’s reaction to Parker’s letter demonstrated without a doubt that she was of sound mind when she redrafted the document.

Wills and inheritance bring out the worst in some people. Otherwise sensible adults get aggressively sentimental about their parents’ possessions, vying through the courts for everything from family jewellery to summer cottages. Parents, meanwhile, often open the door to disputes by failing to make adequate arrangements—or any arrangements at all—to dispose of their assets. In the

legal scuffling that ensues, it’s not just family relations that take a beating. Portfolio values plummet—in some cases, the legal costs of the battle are greater than the value of the estate. “We appear to be living in more litigious times,” understates John Armstrong, a lawyer with Bennett Jones LLP in Calgary. “That adds to the cost of carrying out the parents’ intentions, especially if their plans are not properly thought out.”

But there’s another big reason why there may be more upset heirs these days: the boomers’ ballyhooed inheritance windfall is not panning out as planned. In 1990, many

leading economists predicted that, over a 20year period, the amassed assets of the frugal and debt-shy Depression and wartime generation would enrich their free-spending offspring. Maclean’s, in fact, produced a cover story on the subject: an estimated $1 trillion worth of real estate, stocks, bonds, jewellery, art, livestock and cash-stuffed socks would be handed down by dearly departing relatives. It’d be the biggest transfer of wealth in the history of the universetens of thousands of dollars for every greying postwar baby in the land. Yippeeee!

But far less—perhaps as little as half—is actually being passed on. No one knows for certain what the figure is—we report income to Revenue Canada, not wealth, and

there is no inheritance tax to go by, only capital gains on investments and property. Still, 15 years after the original predictions, it appears the forecasters had failed to take into account the impact of parents living longer, or the possibility of a prolonged period of historically low interest rates that would hurt retirees’ income. And there are people who, for philosophical reasons as well as ones of good tax management, prefer to endow charities rather than their children. “Not everyone feels compelled to leave something to the next generation,” says Nancy Graham, a financial

planner with PWL Capital Inc. in Ottawa.

Where’s the money? It may once have been there: back in 1990, economists added up the estimated household assets held by Canadians then over age 50, factored in a modest annual rise in asset value and subtracted living expenses and capital gains. Those calculations were based on assumptions that were reasonable then. Real estate values had been rising for a decade and didn’t appear ready to stop. The stock market, save for Black Monday in October 1987, had been climbing steadily as well. And interest rates on fixed-income investments such as bonds were high—in 1990, banks paid more than 12 per cent on some savings accounts.

Had everything stayed the same, there might have been trillions to inherit. But things changed. Home prices fell sharply in the early 1990s, and while they have climbed back up, some experts are forecasting another downturn in North American real estate. Sluggish stock markets, not fully recovered from the tech collapse in 2000 and 2001, have hurt portfolio and pension plan values. And,

by late 2003, the rate offered by banks on daily-interest savings accounts had dropped to less than one per cent.

LAWSUITS are certainly the highest-profile cause of diminished bequests. Some adult kids, anxious that their inheritance is being frittered away, launch legal action even before their parents pass on. In some cases, the trigger is a parent remarrying and changing the will to include the new spouse. Grasping children also challenge succession plans when a family business is involved.

Others launch suits when “their share”

of the estate is compromised by a large charitable bequest. Archie Rabinowitz, a lawyer with Goodman and Carr LLP in Toronto, cites the example of a successful businessman who died and, in his estate plan, handed control of the company to a trusted colleague while his daughters were left to share the assets with a charitable organization. The daughters contested the will, and after a long battle in court, they won a slightly higher percentage of the assets. But the actual proceeds were dramatically cut by the huge legal costs. For that reason, Rabinowitz adds, the majority of suits handled by the larger

firms involve bigger estates. “If mom and dad haven’t left much money to fight over,” he says, “no one can afford to litigate.”

One example of this dictum that resonates with boomers is the fight over Jimi Hendrix’s will. There were no suits when the rock ’n’ roll great died back in 1970; due to bad management and worse habits, he was largely broke at the time. But thanks to his enduring popularity and rich royalties from CD sales, the estate is now estimated to be worth US$80 million. So it’s no surprise family members are fighting over the spoils. In September, in fact, a court ruled against his brother

Leon’s claim for a share—Al Hendrix, who had inherited the rights to his son’s music, had deliberately left Leon out of the will. The court also chastized the current executors for failing to disburse funds to others who were included in the will.

Still, the key factors affecting the size of the coming wealth transfer are more mundane than family melodramas. People don’t make out wills, or do so without being explicit. They fail to buy insurance to offset unexpected costs for everything from long-term care to funerals. They don’t have a tax strategy for disposing of assets in a way that reduces

costs. Few merge their tax strategy, investments and insurance into a coordinated estate plan. And, human nature being what it is, many parents don’t like talking about their plans with the kids, leaving it to lawyers or accountants to explain their wishes. “In my experience, people often have to have some kind of epiphany, or some brush with fate, before they are prepared to really focus on these issues,” PWL’s Graham says.

As well, the economy hasn’t favoured retirees of late, with low interest rates proving especially cruel. Seniors prefer low-risk investments, and yields on bonds and GICs have fallen, reducing the income their holders planned to live on. So the question for many seniors isn’t whether they’ll have something to leave the kids; it’s whether they’ll have enough to support themselves. Never mind the winter getaways—they have to contend with rising property taxes and health-care costs. “If people have super-safe portfolios, they’re lucky to get a five per cent return annually,” says Jane Baker, a PWL adviser in Toronto. “That means you need to have $1 million to generate $50,000 a year—before taxes—and, let’s face it, most people haven’t saved $1 million. So they are having to spend more of their capital on living expenses.” Just as important, says economist and demographer David Foot, is increased life expectancy. Parents are hanging onto their nest eggs longer, and the shared assets are then passed on to surviving spouses, usually women. This pattern, in turn, affects the anticipated jolt to the economy predicted when pundits were still talking trillions, as older people are generally more conservative in their spending. And if parents are dying in their 80s, their heirs are likely to be in their late 50s and 60s by the time they inherit—when they, too, are more likely to be conservative, putting the money toward their own retirement rather than splurging on travel and shopping sprees. “The money’s being transferred from one saver to another,” Foot says, “so it’s going to have no significant effect on the economy at all.”

Given the trends—declining inheritances and rising retirement costs—the natural assumption is that the benefit of inheritance will be lost for future generations. Some forecasters have even suggested boomers would take on more debt in anticipation of being bailed out by bequests, and that they’d have nothing left to hand over to their own kids. But as with so many of the original

predictions, these, too, are misleading. Foot says the postwar generation’s biggest expenditures have been on hard assets—mostly real estate—so debt-to-asset ratios are in good shape, despite the higher debt. And even

if boomers leave smaller estates, their kids will do fine. “Our parents had four kids,” Foot says, “and we’ve had two. You need far less wealth to be able to transfer just as much.” Of course, that’s just a prediction. fi1]


Nothing guts an estate like a court battle. Protect yourself,

It may be that most retirees hope to leave something behind for loved ones. Still, they (and their family members) often don’t do enough to make sure that happens. Poorly planned estates get ravaged by taxes, lousy investments, insufficient insurance and litigious kids. To prepare a comprehensive plan, people have to make their wishes clear to the professionals handling their affairs and, especially, their kids. Here’s a basic checklist: KNOW YOUR WORTH. Add up the value of your real estate, pension benefits, stock portfolios, RSPs and so on.

GET GOOD ADVICE. From lawyers, accountants, insurance experts and investment pros. BUY THE RIGHT INSURANCE. Premiums add to retirees’ expenses, but insurance policies covering extended health care or funeral

costs can save the estate thousands later. CONSIDER TAXES. Portfolios can be designed to produce income, protect capital, and still be subject to the least amount of tax when the estate changes hands.

WRITE A WILL The blunt instrument. With a lawyer, lay out the plan, and keep it up to date-it may require changes when grandchildren are born, parents remarry, offspring divorce and assets are sold.

REMEMBER POWER OF ATTORNEY. It may take two people-one to handle property assets and another to deal with health matters.

TELL THE KIDS. No one except Woody Allen likes talking about death, but parents need to explain to their heirs exactly what’s coming, and why. A little discomfort now can prevent bad feelings-or worse-tomorrow. J.D.