Many of us know that having a will is important, but estate planning is more than just the will. Estate planning is the opportunity to consider the next generation, to create a plan that maximizes wealth transfer and provides you the peace of mind that your loved ones are looked after. A comprehensive estate plan gives you an overall big picture of what you want your personal and family legacy to look like and provides a road map to maximizing the value in your estate.
The elements that an estate planner will consider when contemplating your overall plan include the following:
• Your will and the choice of executor in the will
• The power of attorney for both property and personal care
• Trusts and the choice of trustee
• Marriage, cohabitation or separation agreements, divorce orders
• Joint ownership of assets
• Direct beneficiary designations on registered products and life insurance
• Dependant relief legislation in you jurisdiction, which would allow a spouse (or common-law spouse) and dependants to make a claim against your estate if they feel that your Will did not adequately provide for them
• If you are a business owner or shareholder, any shareholder agreements or partnership agreements that may affect your business interest
• Philanthropic objectives and strategies; and
• Tax and probate planning.
Why should you have a will?
All adults should have a valid will, particularly if they have dependants or multiple assets. A will is the document that establishes your final instructions with regards to your assets, as well as the opportunity to include personal gifts, charitable donations and other final wishes. In addition, there can be important considerations to make regarding your minor children, or any disabled beneficiaries.
Passing away without a will (which is called dying “intestate”) can lead to further complications and delays for your loved ones during an already challenging period. Taking the time to prepare a will ensures that they are looked after by allowing you to tailor the distribution of your assets to their specific needs instead of leaving your affairs to be handled in accordance with the provincial legislation. Every jurisdiction has laws which govern the administration and distribution of an estate when a person dies intestate, with a result that might not reflect your wishes.
Choosing the executor
The executor is the person tasked with carrying out the terms of the will and completing the estate administration. You can name one or more individuals, or a trust company, to be your executor. It is important that the executor is available and willing to take on the important and often onerous task of administering the estate. It is very important to select one or more alternate executors to be named in your Will, as your first named executor might decline the appointment, lose capacity or pass away.
Some of the main duties of the executor include:
• Carefully manage all assets until they are distributed or sold
• Maintain regular communication with the beneficiaries
• Apply for and obtain a grant of probate, where required
• Identify, secure, and prepare an inventory of estate assets
• Settle debts and liabilities of the deceased
• Prepare and file all required tax returns and obtain clearance certificates
• Prepare a full accounting of the estate, detailing all transactions for the approval of the beneficiaries.
Although being named an executor in a will is often considered an honour, it can also be a burden. If there is any complexity to your financial affairs, or if there is a complicated or sensitive family situation to deal with, the role of executor can be both time-consuming and demanding.
A professional executor is often the best choice for people that would like the reliability of an experienced executor with the knowledge and expertise to navigate the various financial, legal and taxation challenges involved in estate administration, particularly if the estate is complex. Owning complex assets such a private company or investment properties, having a blended or non-traditional family, having beneficiaries or assets located out of the country are also considerations in choosing a professional, impartial executor.
Many people feel that a major benefit of using a professional executor is that you are easing the burden on loved ones during a difficult time.
The estate plan
Having a cohesive estate plan protects your wealth and reduces the risk that your assets may not be distributed as you wish. It also provides the opportunity to look for tax minimization strategies or find more efficient methods of transferring assets. Because each family is unique, there is no one size fits all approach. Planning ahead can be critical for some families to prevent disputes, estate litigation and disgruntled beneficiaries.
Maybe you are in a second marriage and want to consider using a trust to ensure children from a previous marriage get their inheritance. Perhaps you would like a testamentary trust for your minor children that covers their young adulthood, so that they are in a better position to manage trust funds as they mature. If you have a family member with a disability, trust planning can be the best way to protect their future.
Many people have charitable objectives that resonate with their personal values and beliefs. This can include educational funds for an academic institution or an endowment for a charitable organization that is meaningful to you. There can be certain tax advantages for the estate when charitable donations are included in the Will.
Joint ownership
Holding assets jointly, with a spouse for example, is a practical method of transferring ownership and can save on potential probate fees. The jointly held asset with right of survivorship passes outside of your estate directly to the surviving owner, reducing the administrative burden on the estate.
Always consider the downsides of joint ownership, such as the loss of control, exposure to creditors or spousal claims, and any unintended tax consequences. Holding assets jointly with adult children can be problematic and requires additional considerations. Always seek legal advice before putting assets in joint tenancy with your children.
Trusts
There are two basic types of trusts. A testamentary trust, which is established in a testator’s will and comes into effect as a result of their death. An inter vivos trust takes effect during the trust creator’s (settlor’s) lifetime. Trust assets are no longer owned by the settlor and are instead held and managed by the appointed trustee(s). For example, a spousal trust can often be a good choice for allowing a spouse to receive income for their lifetime with the capital in the trust fund ultimately going to the children.
For Canadian residents over 65, the Income Tax Act specifies certain provisions for alter ego trusts and joint partner trusts that we review with our clients. These are unique trusts that can play an important estate planning role for individuals and families that would like to keep assets out of their estate for a variety of reasons, often probate and incapacity planning. There can be trust and tax laws that create additional implications, thus professional advice should always be sought to determine whether a trust makes sense for you and your family.
What is a power of attorney?
A power of attorney (POA) is a legal document that gives someone (the attorney) the right to act for you when you cannot do so yourself. In British Columbia, powers of attorney are used to manage the financial and legal affairs of an adult. The attorney is given the power to make financial decisions on your behalf such as banking or selling a property.
An enduring POA allows the person appointed as your attorney to act even if you lose mental capacity. Without an enduring POA, a court application would be required to appoint someone to act on your behalf, which can be costly and cause significant delays in the management of your affairs.
A POA for personal and health care is called a Representation Agreement in B.C. This document would appoint a representative(s) to make decisions regarding your medical and personal care when you cannot. The representation agreement is particularly useful because it can describe your preferences around the types of care you receive.
Life insurance and beneficiary designations
Life insurance can serve as a vehicle for risk management and wealth transfer. At death, a policy can provide capital for various purposes, from business succession to covering tax liabilities. Life insurance proceeds can be paid out as a tax-free lump sum or held in trust, providing income to beneficiaries while promoting stewardship of the funds for future generations.
Adding beneficiary designations or naming a successor on your registered plans (RRSPs, RRIFS, TFSAs, RESPs) is also an important method of transferring wealth and providing for the beneficiaries, outside of your estate.
Shareholder’s agreements and other private agreements
Estate planning for business owners is especially important and can help with transitioning the business and planning for succession. A shareholder’s agreement can be used to establish rights around ownership of the shares and restrict their transfer, as well as provide a mechanism for the sale or transfer of the business ownership.
The agreement should cover shareholders disputes, disability, divorce, death of a shareholder and transfer of shares on death as well as other potential divestitures.
Many people have multiple relationships over the course of their lives. Private agreements with regards to the assets each party brings into a relationship are becoming more popular. Examples of private agreements that can affect the distribution of assets are marriage or prenuptial agreements, cohabitation agreements, separation agreements and any terms of the divorce order.
Charitable giving
Charitable giving is an important priority for many Canadians. Giving reflects our values and commitment to make a difference in our communities and around the world. There are ways, however, to help more by employing tax effective giving strategies.
The most common type of estate donation is a gift by will that pays out after death. A gift by will is highly flexible. It allows the donor to retain use of the property while living and permits changes during life. An estate donation can be claimed against up to 100 per cent of income on the final two lifetime returns, plus against up to 75 per cent of income on estate returns. If the gift is significant relative to income, there is the potential of eliminating most taxes payable at death.
Changes to your estate plan
It is important to review your estate plan every three to five years or when there is a major change in your life, such as marriage or divorce. Plan to review and update your will after having your first child or grandchild, if you are retiring or experiencing a significant health event.
Corporate trustees can help
Corporate trustees have the benefit of never passing away. Having a professional executor and trustee is the right decision for many people. Sometimes, there are difficult conflicts in a family, and this can greatly impact even the most well-thought-out estate plan.
A professional, impartial executor such as corporate executor can act as a buffer against family dysfunction and promote a more harmonious, better result to the estate administration.
Our specialized planning process involves an in-depth estate planning conversation with the appropriate Scotia Wealth Management specialists who interact with your external advisors in order to give full effect to your estate plan. We work with you to help you make planning decisions related to your estate and how you want to support your loved ones. The end goal is to create a legacy plan that reflects your values and wishes, as well as offering you enduring peace of mind.
A professional executor is particularly indicated when your family circumstances present unique challenges, or there is a complex estate to administer. Some examples include foreign property, family business, blended families, trusts for disabled beneficiaries and other trusts that require management.
An estate planning example
Peter and Alex live in Vancouver and are married with two adult children. Their son is single and living in the US. Their daughter has a common law spouse and child and is living in Halifax. Peter and Alex wish to ensure that their children receive the maximum value from their final estate and wish to support certain charities that are important to them. Alex is a consultant that ran his business as an incorporation and is the sole shareholder of the company.
Peter and Alex own a home in Vancouver, a condo in Whistler and a condo in Miami. Alex is concerned that their daughter in Halifax is in a difficult relationship and her spouse is currently unemployed. Alex is worried that their daughter’s significant inheritance will not be managed properly.
The main issues in this situation include efficient transfer of the wealth to the next generation. There may be concern over protecting an inheritance from spousal or other claims. Peter has philanthropic objectives that are very important to him. Both spouses require an incapacity plan around financial and healthcare decision making.
How would an estate and legacy plan assist?
An estate planning conversation would help this couple focus on their estate planning goals and identify potential pitfalls. A fulsome plan might provide recommendations that reduce probate fees and allow for a transfer of their wealth in a more tax efficient manner. This couple’s plan included a will, a joint partner trust agreement,enduring powers of attorney and a representation agreement.
Scotiatrust was appointed in their will and trust agreement as alternate executor and trustee, to provide professional guidance and experience in the administration. A Donor Advised Fund was established through the Aqueduct Foundation to benefit Peter’s preferred charity for years to come.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit greenardgroup.com.
