Like retirement planning, estate planning is an ongoing process that needs to be revisited every few years or if there is a significant change in circumstances. It is also like retirement planning – better late than never, but there are often benefits to starting sooner rather than later. Many people assume that they are good to go (so to speak) so long as they have a Will, a bit of life insurance and named beneficiaries to their RRSPs and pensions. This may be true, but there are usually further steps they could have taken to minimize taxes, disruption and the chance of unintended consequences. In some cases, a lot of the estate planning might be outside the Will, especially if there is a chance of the Will being challenged, if you are trying to avoid probate fees or your estate is primarily life insurance. More about my Estate Planning services.Here are some of the recommendations I regularly make to my clients:
- Use trusts in your Wills. Most Wills only set up trusts for minor children and release the funds to them at either a certain age or gradually at set ages in chunks. Either alternative is usually better than having the Public Trustee administer the money and write a cheque to your children on their 19th birthday! On the other hand, there are often significant advantages to using trusts in other situations or keeping a child’s trust in place indefinitely. There are often enormous potential tax savings, potential creditor and matrimonial protection through properly executed trusts. As well, the trust document can indicate who gets the remainder when the beneficiary dies, which may be particularly helpful in blended family situations, such as when you want to provide for a new spouse for his or her lifetime but want to make sure that your previous children get a share of what remains at her death. Many trusts aren’t as difficult or expensive to administer each year as most people expect in many situations, particularly if the beneficiary is administering his or her own trust. Quite simply, trusts can make any inheritance go further and significantly reduce the chance of any unintended results.
- Set up trusts for life insurance (or for registered investments if no surviving spouse). Life insurance trusts enjoy the same advantages as trusts set up in your Will, particularly when they allow the beneficiary to spread the tax on subsequent investment returns to low income family members. If you have life insurance, it is likely because you want to ensure that your family is protected when you die. Leaving your insurance to a trust provides an extra layer of protection that also allows your heirs to maximize the benefits of your insurance coverage.
- Review beneficiary designations for all life insurance assets, including segregated funds and annuities, registered plans and all group coverage through your employer. As well, make sure your family can find a list of your assets and your Will. I have occasionally seen people whose named beneficiaries on such assets don’t match their current intentions (such as when an ex-spouse is still mistakenly named on a life insurance policy)! As well, it might be possible to maximize tax efficiency by changing who gets what, such as leaving registered money or assets with deferred capital gains to a new spouse and leaving life insurance or tax-paid money like non-registered annuities to children. As well, in some cases, clients may need to decide whether to leave assets directly to heirs, create separate trusts outside the estate or leave life insurance and RRSPs to the estate to take advantage of trusts in the Will even if this means paying probate fees.
- Carefully review how real estate, bank accounts and investment accounts are owned. Although jointly owning assets with a spouse or children can be a good idea, it can also cause unintended problems. Many joint accounts and real estate owned in joint tenancy have a ‘right of survivorship’ which means that the surviving owner acquires the deceased person’s interest. This may be exactly what you intend, particularly if you are trying to avoid probate fees and simplify your estate planning. On the other hand, perhaps you have set up a joint account so a child can help you administer your finances or just to avoid probate fees, with the understanding that the asset will be distributed according to the terms of your Will. Either way, it now makes sense in most situations to clarify your intentions in writing, as a judge may otherwise be forced to determine your intentions! As well, putting assets into joint name might also expose the asset to the other owner’s creditors or divorcing spouse. It is also possible for the other owner to liquidate the asset in some cases without your knowledge. There can also be immediate tax consequences, such as if there are unrealized capital gains on the transferred asset if you are intending an immediate gift. Accordingly, it is important to be careful when adding another person as a joint owner and I suggest talking to a lawyer and your other professional consultants before proceeding. They can help you make an informed choice and take the steps to minimize your risk if you do want to proceed.
- In blended family situations, consider owning homes as a “tenancy in common” rather than in “joint tenancy” or changing from a joint tenancy to a tenancy in common. If a home is owned in joint tenancy with a right of survivorship, it automatically passes to the surviving owner(s), who are free to do with the property what they will. In some cases, although both spouses may want to ensure that the survivor is looked after for life and can continue to live in the family home, they might also want to make sure that their kids from previous relationships inherit their share on the second death. Owning property as a tenancy in common and leaving it to a trust that gives the survivor the right to live there for life but then gives it to the children at his or her death can provide the best of both worlds. Although it can mean extra probate at the first death, it will reduce the bill at the second passing and means that your children aren’t at risk of missing out if they don’t get along with the surviving spouse.
- Focus on tax minimization and planning if you own companies or farms. There are many tax planning opportunities available in this situation that result in enormous savings. There are many steps that are possible to freeze, reduce or defer the tax bill that might be owing on your death for your company. In some cases, the potential benefits can run in the hundreds of thousands of dollars!
- Draft Powers of Attorney and Health Care Documents, such as Living Wills and Representation Agreements at the same time you get your Will done. Taking steps to ensure that your assets are properly managed if you are incapacitated can make life easier for you and your family if something happens to you. Completing health care documents increases the chances of your health care wishes (from the level and type of care you want to whether to keep you on life support) being implemented and may help your family make difficult decisions on your behalf with less guilt or disagreement.