Estate planning

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Financial Planning
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Financial planning
Estate Planning
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Estate planning is the process of anticipating and arranging for the disposal of an estate during a person's life. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and beneficiaries in incapacity. Typical elements of an estate plan are: last will and testament; power of attorney for finance; and living will (power of attorney for personal care). High net worth individuals and blended families may find trusts a useful estate planning tool.

You also should remember to keep your estate plan up-to-date, as your circumstances may change due to life events and legislation may change. Suffice it to say, that this area of financial planning that generally requires professional assistance.

Dying

Life insurance

Main article: Life insurance

If you have dependents, you probably need life insurance.

Beneficiaries

Simplify your affairs by naming beneficiaries for life insurance policies, registered plans such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs) and company pension plans. Such designations allow assets to pass outside your estate, which will speed distribution and reduce costs. Note however that although registered accounts with a designated beneficiary are transferred directly to them, the estate will still have to pay tax on this, as part of the deceased's final return, unless the transfer is a tax-deferred rollover.[2] This can end up "unintentionally favouring one beneficiary at the expense of another"[2] (if one is a direct beneficiary and the other is a heir through the estate).

The rules are different in Quebec; for example, it is not possible to name a beneficiary directly in a RRSP or RRIF.[3][4] Such designations must instead be made in the will.

Last will and testament

Main article: Last will and testament

You should prepare a last will and testament. This document specifies how your property is to be distributed to your heirs, names the person responsible for overseeing this disposal (the executor but also sometimes trustee, administrator, or liquidator), and suggests who should be responsible for the care of minor children.[5] A will can also include burial wishes.[6] If you have a spouse, it is best to have the lawyer/notary prepare both wills at the same time to make sure they match. Once completed, the will should be stored in a secure and easy to find place, such as a fire safe or safety deposit box.[5]

If you die without one, the courts will decide who inherits your possessions and property based on the estate laws in your province.

Choosing your executor

Main article: Executor

Choosing your executor is an important decision, since this is the person who will make sure your final wishes are fulfilled and manage your estate. The executor is a fiduciary and has legal obligations to the estate.[7] This job requires "a substantial amount of time and effort – and the ability to make capable, and financially responsible decisions".[7] Your executor should be someone:[7]

  • You trust to manage your affairs the way you want and is reliable
  • Lives reasonably close to you, so it’s easy to deal with your family and your assets
  • Has some knowledge of tax, investments and financial decision-making and knows when to seek guidance from others such as tax professionals or lawyers
  • Is capable, sympathetic and good at getting things done and communicates well
  • Is likely to survive you

If nobody in your family or friends fits this description, or if you have a complex estate or are concerned about potential family conflicts, consider appointing a professional, like a lawyer or a trust company, as an executor.[7]

Probate

If you have more than minimal assets at death, your will is subject to a process called probate (in some provinces, administration). Probate is essentially an approval by a special judge, who will usually confirm your wishes as expressed in the will and issue what are generally called letters probate. Such documents will be required by your executor to take temporary title over your assets so that they can be distributed to beneficiaries. Fees for this process vary considerably by province.

In Quebec, a notarial will (a will prepared by a notary) does not require any form of probating (validation).[8]

Guardians

The court will also name guardians for minor children. Your desires as expressed in your will carry considerable weight. However, the court is tasked with ensuring the welfare of such children and has considerable latitude with respect to guardianship. (The court also has the power to vary the will's disposition of assets should it disadvantage minor children or other dependents.)

Dying without a will

If you have no will at your death - this is called dying intestate - provincial law specifies how your assets are distributed. This may or may not correspond with your desires and objectives. It will certainly result in delays as courts and the Public Trustee will be involved.

Taxes

Inheritances are not taxable in Canada.[9][10] This means that beneficiaries will not be taxed on their inheritance, not that no taxes are involved when settling an estate. The executor will have to file the deceased’s final T1, and perhaps at least one T3 return for the estate.

A major consideration is that all capital assets (including investments and property) are supposed to have been sold on the day of death.[11][12][13] This is known as a “deemed disposition” and can generate taxable capital gains, if the current value of the assets is more than their adjusted cost base, and there are no offsetting capital loses. Tax on these net capital gains must be paid on the final tax return of the deceased.[11][13]

There are some ways to minimize this, see Tax-efficient investing.

Letter of final instructions

The will is a formal legal document, often prepared using a lawyer or notary, and which is costly to update. So in addition to a will, it can be very useful to prepare an informal "letter of final instructions", also known as a "what to do if I die" document or "information package".[14] This will help surviving spouses, family members and executors by providing a lot more detail, financial or otherwise (instructions and wishes) than can be listed in the will. The letter can easily be updated every year or two at no cost. It should be easy to find.

The "information package" could contain:[14]

  • a copy of your will and Power of Attorney (see below), plus the location of the original signed copies
  • a list of all your financial accounts
  • a list of your digital assets such as social media accounts, music streaming accounts, etc.
  • a list of all the benefits your family members may be entitled to, such as life insurance and pensions.
  • a list of your debts and your major assets
  • the location of passwords, etc.

In terms of what to include, some further ideas are provided in:

Mental incapacity

Power of attorney

Main article: Power of attorney

You should have an enduring (sometimes durable) power of attorney for financial matters. If you become mentally incapable and unable to look after your own finances, name someone you trust who can and will do the job. In most provinces, you must have a lawyer draft this document. Take care about who you name to hold this power, as the document empowers the person to act as if they are you with respect to all of your assets.

You should also have an enduring power of attorney for health and personal care, sometimes known as a living will. (The name and format of this document varies from province to province.) If you become incompetent to make decisions about where you live and your health care needs, someone needs to make those decisions for you. Appoint someone you trust to do so.

If you do none of these, the provincial government and/or the courts will step in and act in your stead. You may not get what you want and the costs may be high.

Letter of instructions (incapacity)

Similarly to the "letter of final instructions" that complements a formal will, your PoA(s) could be accompanied by an informal but much more detailed "what to do if I become incompetent" letter.

Communicating your plan

Once your estate plan is ready, communicate it to your loved ones, to make sure they quickly have access to the information they will need if you die or become incapacitated.[14]

It is a good idea to discuss your estate plan with those concerned, for example when giving them the information package.[14]

Death of a spouse

According to Statistics Canada, in 2003, 82% of widowed Canadians aged 65 and older were women, and senior widows outnumbered senior widowers by about five to one.[15]

One's affairs can be in perfect order but the surviving spouse still has to deal with the loss which can be overwhelming. At the same time the spouse knows that life goes on and that there are things requiring attention and, yet the ability to think straight, seems to be missing. Life is a jumble: I feel unable to do just about anything on my own at this point. To help me through this process-life insurance-pension-taxes-rrsp's-investments etc., do I need a lawyer, accountant, financial planner or a combination of professionals? The questions are daunting. You can begin at the funeral home. Funeral homes do more than just deal with funerals. They offer grief counseling. They will usually help with the Canada Pension Plan death benefit application. Try not to make any long-term decisions right away.

If you are the executor, see Settling an estate.

See also

Further reading

  • Foster, Sandra E. (2016). you can't take it with you, Common-Sense Estate Planning for Canadians (sixth ed.). Headspring Publishing. ISBN 978-0968947722.
  • Financial Wisdom Forum topic: "Wills, Estate Planning, Life Insurance"
  • Financial Wisdom Forum topic: "Estate Planning for couples"
  • Financial Wisdom Forum topic: "Some Estate Planning Advice/Help?"
  • Financial Wisdom Forum topic: "Considerations in appointing an executor"
  • Financial Wisdom Forum topic: "Ensuring proper Will Administration and choosing Institution to do it"

References

  1. ^ Foster, Sandra E. (2007). you can't take it with you, Common-Sense Estate Planning for Canadians (fifth ed.). John Wiley & Sons Canada, Ltd. p. xxii. ISBN 978-0-470-83846-4.
  2. ^ a b Heather MacLean, Tax on RRSP/RRIF’s at Death – Does the Estate or RRSP/RRIF beneficiary pay?, McLaren Trefanenko Inc (CPA), September 26, 2018, viewed July 16, 2020.
  3. ^ Canada Revenue Agency, Unmatured RRSPs: Who is the beneficiary and how is the beneficiary designated?, viewed July 4, 2020.
  4. ^ Advisor's Edge, Think carefully before naming beneficiaries viewed July 4, 2020.
  5. ^ a b Romana King, Estate planning: What you need to know, MoneysSense, October 27, 2015, viewed July 5, 2020.
  6. ^ Ontario Securities Commission, Wills explained, viewed July 5, 2020.
  7. ^ a b c d Ontario Securities Commission, Choosing an executor
  8. ^ Government of Quebec, Probate of a Will, viewed July 4, 2020
  9. ^ TaxTips.ca, Minimize Taxes of a Deceased Taxpayer, Revised: June 03, 2020, viewed July 11, 2020.
  10. ^ Jim Yih, Is there such thing as estate and inheritance tax in Canada?, updated January 13, 2020, viewed July 11, 2020.
  11. ^ a b Curtis Davis, Capital gains and losses at death: the spousal advantage, Advisor's Edge, January 2, 2019, viewed January 25, 2020.
  12. ^ TaxTips.ca, Deemed Disposition of Property, viewed January 26, 2020.
  13. ^ a b Jamie Golombek, Death and taxes: Leave your assets to your heirs instead of the CRA, National Post, October 25, 2013, viewed January 26, 2020.
  14. ^ a b c d Ontario Securities Commission, Communicating your estate plan, viewed July 5, 2020
  15. ^ Canada Retirement Information Centre, Moving Forward (Death of a Spouse), Viewed March 10, 2009


External links

The Blunt Bean Counter

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