Our lives were upended a few years ago by the pandemic, and things since then have been anything but typical.  From elevated inflation to skyrocketing interest rates, our expectations for the future and our perceptions of what is normal have been challenged.  The word “unprecedented” may be overused, but it does articulate the point that we never know what might happen with our daily lives or our financial situations.  That is why dynamic planning, combined with agile risk management, are essential to a successful wealth management strategy.

The best tool at our disposal is a financial plan, which offers a snapshot of one’s existing financial situation extrapolated over a lifetime using intricate models and assumptions to forecast future cash flows and asset values.  This cornerstone document informs decisions on portfolio construction and management, on adequate insurance coverage, and on the most tax efficient method to draw down on assets, to name a few.  But it can do more than that in the context of estate planning:  a financial plan can help a testator plan for the financial stability of future generations, leave a legacy, and plan for the needs of their dependants.

Financial Planning with Estate Planning

How can a financial plan be used when planning an estate?  A strong financial plan should consider estate planning as one of its central tenets, and at its core, a strong estate plan should be built around the financial plan.  This is because financial planning and estate planning have a lot in common:  both look to identify goals and determine the feasibility of achieving them, while considering the best strategies to improve their likelihood of success.

For most people, an estate plan asks the question “what will be left at the end of my life, and what do I want to do with it?”  The answer varies between individuals, but common estate plans include intergenerational wealth transfers, the support of dependants, and charitable bequests.  When making an estate plan, it is usually unknown when the testator will pass away and what their estate will look like when they do pass.  Enter, financial planning.  While financial planning is not an exact science, prudent cash flow and net worth analysis combined with Monte Carlo modelling helps to provide an indication of the value of an estate at various points for the remainder of our lives.  It can also predict the capital gains tax on our assets, forecast what our portfolios and real estate may be worth, and give an indication of how much we can expect to pay in probate tax.

Examples

The symbiotic relationship between financial planning and estate planning are demonstrated in these three brief examples:

1. A client wants to give to each of her two children equally.  She wants to leave the family cottage to one of her children, as that child is the one who uses it the most.  She wants to leave their sizable RRSP to her other child who lives abroad.  This plan is complicated by the fact that the client is uncertain how the capital gains tax should be paid with respect to the cottage, and the future after-tax value of the RRSP is unknown.  By forecasting the future values of each asset as well as the potential capital gains, stipulations could be added to the Will outlining how the gifts to the children can be equalized.  The client may consider options such as having an insurance policy or using a non-registered asset to neutralize the difference between the values of the gifts.

2. A client who does not have children wants to make a bequest upon his death to establish a charitable foundation, while ensuring that he is able to meet his ongoing lifestyle needs. By modeling out different cash flow scenarios and expense levels, the client would be able to determine the optimal level to withdraw from his portfolio each year without fully drawing down his capital, to leave the desired estate for his charitable aspirations.

3. A client has a dependant under the Succession Law Reform Act. A financial plan for both the testator and the dependant can help to determine how much capital the dependant will require to be adequately supported for the rest of their life. This is particularly relevant for parents of children who have disabilities. The testator may adjust their spending or their portfolio management strategy to ensure that their estate is sufficient to meet future obligations.

Conclusion

Estate planning is an essential practice that everyone should undergo at different stages of life, but without a thorough financial plan, the testator may not achieve their wishes.  While a financial plan cannot predict everything, it does provide a risk-based roadmap that can be leveraged to illustrate a range of outcomes.  These outcomes can be used to guide estate plans to ensure that a testator is as prepared as possible.

Austin Walker, Wealth Advisor, Scotia McLeod and Holly LeValliant, Estate and Trust Consultant, Scotiatrust