Decoding End-of-Life Planning: Overcoming Cognitive Biases and Building a Comprehensive Strategy
Are You Having a Hard Time Navigating End of Life Planning? There’s a Good Reason For That.
So many people struggle with talking about end-of-life planning, it is very common in our practice despite recognizing the importance of this critical element of financial planning. However, failing to have a well thought out strategy in place and properly documented could leave ones finances in disarray, putting the onus on the executors or worse, courts to make sense of one’s legacy after death.
According to the Angus Reid Institute over 51% of Canadians say they do not have a Will, while a further 13% say they have one, but that is out of date. Leaving only 37% of Canadians who say they have a Will, that is up to date. (angusreid.org). Key word here is “up to date". Sometimes having no Will is better than having one that hasn’t been looked at in years and is not at all in line with your current life and wishes. Upon reviewing Wills with our clients regularly, we have had too many situations where clients are horrified at how their estate would have been distributed had they not reviewed their Will.
A study by Statistics Canada found that the typical Canadian household now has a median net worth of $329,000, while the average net worth in Canada is $738,200. (statcan.gc.ca) If we pool these two statistics together, and the average net worth of Canadian’s is $738,200, only 37% of that average has a Will – that properly addresses how they would like their Estate distributed.
In Canada, if you die without a Will, it’s called dying “intestate”. When that happens, your money, assets and debts are put into an Estate and a court-appointed representative closes your financial affairs and distributes your assets according to the rules and regulations of your province. This can vary significantly in each province, though in most cases assets pass to spouses, partners or along the family tree. However, a loss of control over dispersal of assets is only one downside factor in dying intestate. The time in which it can take to settle an Estate without a Will can be substantial but moreover, it can also pose extreme significant tax burdens if individuals die intestate and without any proper Estate planning. Potentially leaving a greater portion of the Estate due to the government vs. in the hands of your loved ones.
For many individuals, the paralysis stems from being stuck on decisions like “who will be the guardian of my young children should I pass prematurely”, “how would the trust look should I die with dependent's that need to be financially supported”. You might be on your second marriage and dealing with a blended family and thinking “how do I protect my children’s inheritance but also considering my new spouse and our blended assets”. These tough decisions can result in becoming stagnant and stuck, resulting in not making any decisions at all, which is worse.
There is also a lack of understanding surrounding the implications of dying without a formal Will in place. Regardless of the size of these Estates, chances are if you own assets or have debt—or both—someone is going to have to step in on your behalf and wrap up those affairs. If you haven’t created a Will and you haven’t established an executor, then family or friends will have to navigate a court process to get the authority to step in. The last thing you want a grieving family member or friend to do is have to jump through hoops to settle your Estate, this is already a difficult task with a Will in place.
So many Canadians struggle to have these conversations with their loved ones about their final wishes. It’s an all-too-human thing for people to put off something they know they should do, especially when it concerns their mortality.
Cognitive Biases are at play when it comes to end-of-life planning
Some might be surprised to know that when it comes to financial planning a big part of our education and practice is studying Cognitive Biases to better understand people’s decision-making patterns in order to realistically help them reach their goals. A cognitive bias, is a predictable pattern of mental errors that result in us misperceiving reality and, as a result, deviating away from the most likely way of reaching our goals. (psychologytoday.com)
People assume their decision-making is logical and based on rationality however that is not always the case. Coming up with a Will is a key example of something which you should do—it’s logical—but people tend to put it off. Why?
Behind the decisions people make are cognitive and unconscious biases that shape the way you think.
One of the most common cognitive biases is called present bias—the idea of living in the moment vs. planning for later. It’s the concept that if people have a choice to save for retirement or spend that money today, they somehow disassociate with their future self. When planning for end of life and all that comes with it, that is something that comes “much later”. Planning for that today does not carry the weight it should because of our present bias.
To overcome this bias, people must recognize that they and their future self are the same.
Another hurdle is loss-aversion bias, in which individuals avoid making a choice out of fear that it may result in a loss. The concept here is that psychologically, the pain of losing is twice as powerful than the pleasure of gaining. When you create a Will, there will be losses. You have to pay to create a Will, then at death all assets are distributed. The whole concept around creating a Will is based on “loss”.
The best way around this bias is to recognize that it’s necessary and something people will have to pay for regardless, and we will all die eventually, and the loss will be further compounded without a Will.
Status quo bias can also be a factor. Unless there’s an overwhelming reason to make a decision, people will prefer to stick with the present. This can greatly affect our decision making as people perceive change as a risk or a loss.
What’s needed is motivation. It’s so important that people understand the reasons behind writing a Will and the consequences of not having one.
Depending at your stage in life (because Will’s require updates or at the very least a thorough review every 5 years) guardianship for your minor children is one of the most paramount reasons for having a Will. Who will take care of your beloved children if you were to pass? Maybe the choice is not an obvious one and in the event of your death there will be disputes as to who is best suited. Would you want someone else making this decision for the kids, or should it be you?
Each province and territory have their own rules for how assets and family affairs are handled if someone dies without a Will. Often, they favour traditional family structures, which can create problems if there are meaningful people in someone’s life who don’t fit within that framework.
Considering the whole picture
Regular reviews with an advisor can create an opportunity to go deeper into Estate planning. At the bare minimum, everyone should have a power of attorney appointed and a Will in place - everyone!
It’s important to remember this is not an entire Estate plan. Those are just the cornerstone documents.
A holistic Estate Plan maps out how the POA and Will work with other financial elements, such as designated beneficiaries, registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and insurance policies. A holistic Estate Plan should address any tax- or probate-planning, and any family trusts that might come into play. Because they’re all interconnected and touching, one could have ripple effects on the other so it’s never advisable to just focus on one of those items without considering how it relates to the broader plan.
The more complex the situation, the more important it is for individuals to seek professional advice to help them protect their interests. Not only do we assist in navigating the planning, we help our clients approach the conversation with family members who will be affected by an end-of-life plan.