The Case
Ronald a 67-year-old retired general manager is a widower and cancer survivor. His wife Pauline passed 16 years ago when Matthew, the youngest of four children, was born. Brian, the eldest age 35, is married with one daughter and lives in one of Ronald's three properties: a two-storey four-bedroom house.
Malory, 27, also recently married, lives with her husband in their marital home. Susan, 19, is in the second year of a four-year university programme and Matthew 16 is still in secondary school.
Ronald and his two youngest live in the family home upstairs of two fully furnished apartments that generate $11,000 in rent per month. This along with his NIS of $3,000 and company pension of $7,000 after taxes, take care of all the family's expenses inclusive of Ronald's $5,000 monthly medical bills; with a surplus of $6,000.
Ronald has not done too badly in terms of investments. Apart from the two properties above, which are worth $1,800,000 and $2,500,000, respectively, and have appreciated at an average annual rate of five per cent, he also owns a piece of land purchased six years ago costing $150,000 now valued at $350,000. Ronald also has a few other investments including five local stocks currently valued at $450,000, which has yielded an average annual portfolio return of nine per cent over the past 15 years.
He has $200,000 in the bank, $650,000 in three money market accounts, a seven per cent $186,000 government bond that matures in 10 years and a $1,000,000 term life insurance policy that expires at age 85.
Ronald has been grappling with possibility and implications of succumbing to his illness whilst Susan and Matthew are still in school. He wants to ensure their daily living and educational needs are covered and that his estate is distributed in the most equitable and functional way that caters to each child's needs whilst avoiding any potential conflict after he is gone.
He is perplexed by what to leave for whom and how best to pass his assets to his children so they do not have the headache of dealing with the courts or attorneys. Brian has given his word that if his father becomes incapacitated he will bring him home and take care of his needs until the inevitable happens.
Nick's Assessment and Advice
Caveat: This discussion does not adequately cover legal considerations and implications and appropriate counsel should be sought accordingly.
Ronald's case is quite common among families. The nature, function and value of assets can present a challenge when figuring out how to distribute an estate. Many individuals find it uncomfortable dealing with death and distribution and avoid the issue altogether. Others are pragmatic and simply do a will. Either way, the stress is often up to the executors and the heirs.
An executor's job is seldom easy especially when they have no beneficial interests in the estate. This can result in neglect and loss of value of assets. Sometimes for the sake of simplicity testators (individuals making a will) instruct that all assets be liquidated and the cash split equally or proportionately amongst beneficiaries.
A problem with this strategy arises when one or more of the heirs occupy an asset such as a family home.
Distribution strategy
Ronald's objectives include: being fair to all his children, minimising any potential conflicts, ensuring that assets continue to provide support for himself whilst alive and for the younger children until they can fend for themselves.
Another key issue in dealing with his estate is the, length of time, legal costs and headache associated with applying for letters of administration or grant of probate of a will. Even after the courts have given approvals there is still the task of transferring assets.
To avoid this, Ronald can consider setting up things whilst alive. He could either transfer assets outright or establish joint statuses so that the survivor automatically assumes ownership. He must, however, seek legal counsel regarding changes to his rights with such a strategy.
Definitions
Some definitions from: http://trinidadandtobagolegalrights.blogspot.com
Tenants in common: Upon death, the interest of the deceased co-tenant will pass to the co-tenant's heirs. Joint tenancy is presumed unless there are words indicating tenants in common.
Joint tenants: When a joint tenant dies, his/her heirs have no claim in the property because the property is left for the surviving joint tenants ONLY.
Which asset for which child?
1. Brian, the eldest, lives rent free with his family in a house owned by his father. He has given a commitment to look after him should he become incapacitated. Brian will have the use of Ronald's pensions to help defray ongoing medical costs. It may be a good idea for Ronald to have a clearly defined power of attorney to allow Brian to act on his behalf if he loses his faculties. If possible a smooth transition could be achieved by including Brian's name on the title of this property as a joint tenant with Ronald. Most probably, Brian is employed and his current need will be housing. The value of this asset is $1.8 million.
2.Malory, recently married, has her own home and living needs are likely covered by the family's income. This makes Malory a good candidate for any of the assets that are not critical to survival of her siblings.
3.Susan and Matthew, both are students, and are dependent on their father. The home they live in has the potential to support them with the rents of $11,000 even if Ronald passes and his pensions of $10,000 are lost. This property will best be suited to these children's needs, however, Ronald has to find out if they are legally eligible to assume title on the deed.
Tenants in common might be the better option if it is legally practicable.
Should this property be passed to them they can choose to continue living there if they have separate families. Of course, the spaces are not the same but each sibling could choose to occupy a separate floor. The one who uses the ground floor could convert the space into a single-family dwelling or live in one apartment and collect the rent from the other.
Moving forward, either sibling can buy out the other if he or she wants to move out independently or they can even decide to dispose of the property and split the proceeds equally. The value of this asset is $2.5 million.
Unassigned assets
Ronald will need to choose the best way to "top up" each child's inheritance to achieve equitable distribution. Thankfully, most of the unassigned assets are highly divisible and with the exception of the piece of land and the government bond.
Table 1 shows a possible distribution option for each child. You will notice that most of the money market funds have been earmarked for Susan and Matthew, which could cover their educational needs or a possible nest egg in starting a family.
Malory, by the process of elimination, receives all other assets including a debt of $266,000 from Brian because the value of his inheritance exceeds the equitable value of $1,784,000 for each child. He can possibly arrange a personal payment plan with Malory or use the property as collateral to borrow the funds.
Each child will receive an equal share of the $1,000,000 term life policy should Ronald pass as this is only a potential asset.
If you have any questions or need advice on today's subject please email me at: nickadvice@gmail.com or visit Web site: www.FinancialCoachingCentre.com