Estate Planning Guidelines

An estate plan tells others how to handle your affairs and finances after you die. It tells them how to distribute your assets at death, including money, property and other possessions. It will help to ensure that your estate is divided according to your wishes, rather than the government’s wishes. And, it can help to minimize taxes, so more of your estate is left for your heirs. An estate plan also offers benefits during your lifetime. It can help you accumulate savings for retirement and take advantage of tax savings opportunities. It can also help you maintain your lifestyle if you become ill or disabled for a lengthy period. An estate plan should be part of your ongoing financial planning.

Set Goals

The first step in estate planning is to decide on goals for your lifetime as well as what you want to do with your estate when you die. You may want to:

• leave as large an estate as possible for your spouse, children or grandchildren
• provide for a child or adult who has a physical or mental special need
• transfer your business to a family member
• contribute to your favourite charity

Take Stock

The next step is to identify everything that forms part of your estate — savings, insurance policies, your home, cottage or other real estate, pension plans, RRSPs and non-registered investments. This record will give you and those handling your estate a picture of your net worth. Once you’ve gathered this information, you should update it every two or three years and after significant life events, such as marriage or the birth of a child.

Store your important papers together in a safe, easily accessible place. Be sure to include:

• insurance policies
• RRSPs
• pension funds
• will
• bonds and stocks
• investment records
• property deeds
• birth and marriage certificates
• a copy of your social insurance card
• records of cash on hand and particulars of bank accounts
• the location of the keys to your safe deposit box
• a list of your assets

Draft A Will

Dying without a will leaves distribution of assets to provincial law. Who gets what varies depending on your situation and province of residence.

A will can ensure that your assets are distributed according to your wishes. It also means that the estate won’t be hit with fees for a court-appointed executor called an administrator in an extended period of probate when assets cannot be distributed. Dying without a will can result in exposure to high levels of taxation on accrued capital gains that are deemed by law to be realized or sold at the time of death. The time for probate under administration can be longer than when assets are under the control of an executor, for the administrator cannot act until appointed by a court while the executor can act from the date of death.

There are fill-in-the-blank templates available and one can write a so-called holographic will if the document is entirely in the hand of the decedent. However, it is far better to have a will in place, drafted by counsel familiar with this branch of law, reviewed by an accountant for tax implications and analyzed by a financial advisor for its investment implications.

Once executed, review your will at least once every three years, or whenever your circumstances change. The birth of a child, death of an heir, change in marital status, or relocation to another province all signal the need to review your will for possible updating.

Keep a copy of your will in your safe deposit box and another copy at home with your personal records. Store the original in a safe and don’t keep the only copy in your safe deposit box. If your will is locked inside, your family may not be able to gain immediate access to burial or other vital information.

Choose An Executor

In your will, you can name the person you want to manage your estate and carry out your final wishes. It’s usually best to choose someone who is close to you, such as your spouse, a family member or friend who is trustworthy and understands your wishes. You may consider the role an honor, but it is a time-consuming job with many duties. Choose carefully and think about the duties that your executor will have to perform. Your executor will be responsible for:

• notifying family heirs of your death
• arranging for burial or cremation and a funeral service
• applying for life insurance benefits (if the estate was named beneficiary under the policy)
• preparing an inventory of your estate’s assets and debts
• arranging for payment of all debts
• filing an income tax return for the year of death
• distributing estate assets

Choose someone younger than you, rather than someone older whom you may outlive. You may also want to appoint an alternate, if for some reason your executor can’t do the job.

If you own a business, avoid appointing your business’s accountant or lawyer as your executor in case of a possible conflict of interest in dealing with surviving shareholders. If your estate is complex, consider appointing someone with an accounting background or sound business judgement, who will have the expertise needed to administer your estate properly.

You may want to consider appointing a trust company as your executor. A trust company will have the expertise needed to manage large and complex estates. However, having a trust company handle your affairs may seem impersonal, and the fees can substantially reduce your estate. An alternative is to appoint a close friend or family member as executor, with a trust company or estate lawyer serving as a professional co-executor. This way, someone who knows you well will make sensitive decisions involving your family, but a professional firm will handle the financial aspects and day-to-day administration.

Note that it is customer to set a limit of the customary 5% of assets of the estate plus expenses as compensation for your executor. If a trust company is also involved, their professional services can be billed at a fixed price or on an hourly basis.

Special Considerations

Other aspects of planning that you should consider include:

Prearranging a funeral — Making funeral arrangements in advance, or at least discussing your wishes with family members, will relieve them of having to make these decisions after your death.

Organ donation — If you want to donate your organs at death, it is important to let your immediate family know your wishes, as they are always consulted when you die. Be sure to sign an organ donor card and/or the appropriate section on your driver’s license, and keep it in your wallet where it is easy to find.

A living will — A living will is a signed document that can say you do not want any medical procedures used to artificially prolong your life if you become terminally ill and are near death. To find out more about living wills and the laws in your province, contact your legal advisor.

Power of attorney — Consider appointing someone to manage your affairs for you if you are unable to do so, due to an accident or a prolonged or terminal illness. You may be surprised to know that your spouse does not automatically have this authority, which is called power of attorney.

Charitable giving — As part of your estate plan, you may want to make a special gift to your favourite charity. You can make this provision in your will or through a life insurance policy.

Special considerations for spouses and parents — If you are married, you and your spouse should have your own wills and should be familiar with the provisions of each other’s will. If you have children under age 18, it’s especially important to have a will. If both parents die at the same time, a will can not only provide for distribution of assets but, more importantly, appoint a guardian for minor children.

Providing for children or adults with special needs — Planning to meet the needs of children or adults who have special needs is often complex. You’ll want to safeguard their interests by providing for their guardianship at your death and you’ll want to provide for them financially.

Paying The Final Tax Bill

The objective, generally, in estate planning is to minimize taxes and preserve the estate for the beneficiaries. Capital gains on property, RRSPs and pension can all present a tax problem upon the death of the surviving spouse.

Although, effective lifetime tax minimization strategies (e.g. gifting, estate freeze, trusts) can reduce the tax liability at death, the estate could still be subject to considerable tax. Life insurance on spouses on a joint-last-to-die basis can provide a less expensive means of funding to cover the tax liability in the estate and preserve the estate for the beneficiaries. Joint-last-to-die life insurance is jointly owned and becomes payable only upon the second death.

The ownership structure of the policy is particularly important. With joint ownership, both spouses, while living, have equal rights under the policy. The problem is that at the first death, there is not an automatic transfer of ownership unless the policy wording clearly indicates this intention. If it doesn’t, evidence must be provided to show that the surviving spouse is the intended owner of the deceased’s interest in the policy. This can be a long, costly and frustrating process. That is why the most common forms of ownership under a joint last-to-die policy are:

Single owner — Only one of the life insured is named as owner of the Joint Last-to-Die policy. In such a situation, if the owner dies first, the estate of the deceased owner maintains ownership until ownership is transferred or otherwise dealt with by the personal representative. The Income Tax Act generally allows a tax-free transfer of ownership of a life insurance policy to a surviving spouse. 

Joint ownership — Where ownership is on a joint basis between spouses there is no deemed disposition at the first death. At the first death the ownership continues as between the deceased’s estate and the surviving spouse until a transfer is made. A transfer of the deceased’s interests in the policy to the surviving owner must be made in order to have all rights of ownership flow to the surviving owner spouse. In order to avoid the complications mentioned earlier, the ownership can be set up to include the right of survivorship. This provision can avoid the need to the transfer requirements mentioned above and the transfer can be made promptly upon receipt of proof of death.

Secondary ownership — Naming one spouse as primary owner and the other as secondary owner gives the primary owner full control of the policy during his or her lifetime. If the primary owner dies first, a transfer of the primary owner’s interest is made to the secondary owner. This can be done without a deemed disposition for tax purposes.

Probate Considerations

Probate rules vary with the type of property, and it can be a costly and slow process. But it can be avoided for some assets. Life insurance policy distributions to named beneficiaries and the assets within life insurance agreements, segregated funds and certain annuities can all pass to designated beneficiaries without probate fees. Customarily, the proceeds of life insurance contracts that are paid to beneficiaries are regarded as the property of the beneficiaries and thus have no need to go into probate.

Estate Planning Checklist

• Have you specified how your assets are to be distributed?
• Will there be a source of income for your family when you die?
• Will there be a source of income if you are disabled?
• Do you know what your income will be at retirement?
• Do you know what the tax exposure is on your estate?
• Do you know how any taxes will be paid?
• Are all your important papers together?
• Does your executor know where they are?
• Do you have a will?
• Do you need / have a trust agreement?
• Do you have a buy-sell agreement for your business?
• Do you have a current net worth statement?
• Have you chosen your executor?
• Does this person know of your choice?
• Have you explained your expectations?
• Have you made funeral plans?
• Have you discussed them with your family?
• Have you had a family meeting to talk about your estate plan?
• Has your family met your professional advisors?
• Does your family know who you’ve appointed as your executor?
• Is your life insurance beneficiary information up to date?