While estate planning is not a pleasant topic to focus on, it is an incredibly important one.
Before getting started, it is important to understand exactly what flows through your estate. Items that are included in your estate and flow through it are subject to probate; certain assets can bypass probate, provided you have set things up accordingly.
It’s important to have an up-to-date will at every point in your life. It’s all too easy to go 20 years without updating your will; however, it’s essential to plan for unforeseen events to ensure your assets and estate will be distributed according to your wishes.
Note that the term “estate” can be used in different ways. In this article, we will refer to any assets that are divided according to your will as forming part of your estate. Below we will illustrate the “estate” term using various options that a client has with respect to their investment accounts, both registered and non-registered.
Registered accounts
Registered accounts are those investment accounts which are given tax-deferred or tax-sheltered status by the government. Examples of registered accounts are Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RRIF) and Tax-Free Savings Accounts (TFSA).
Account owners can name beneficiaries on their registered accounts. If the beneficiary is the spouse, then the account owner can name them as successor annuitant for RRIF accounts or successor holder for TFSAs. This not the case for RRSPs.
The difference between a successor annuitant/holder versus a beneficiary is that the successor annuitant/holder can only be a spouse or common-law partner and enables them to take ownership of the account without the need to transfer funds out of the account. A beneficiary inherits the assets in your account but does not take ownership of the account.
The benefit of directly naming a beneficiary/successor is the account is then excluded from the estate and bypasses probate. When a client opens a registered account, we ask them who they would like to name as their beneficiary(ies) or successor. A client can name an individual(s), registered charities, or simply name the estate as beneficiary of their registered account.
In the majority of cases, people will name their spouse the beneficiary of their RRSP or successor annuitant of their RRIF accounts to obtain the tax deferred roll-over to the surviving spouse on the first passing.
With a TFSA, benefits exist for naming your spouse as the successor holder because the full amount of the deceased’s TFSA can roll into the surviving spouse’s TFSA without using the survivor’s contribution limit.
When a person(s) is named beneficiary or successor annuitant/holder on a registered account, it essentially bypasses a person’s estate. As a result, the funds are not subject to probate.
Individuals also have the option of naming their “estate” the beneficiary on their registered accounts. When “estate” is named, it is especially important for clients to have a will. Essentially your will divides all registered accounts where “estate” is named and will distribute to the corresponding beneficiaries.
In reviewing a client’s will when compared to their registered account, we sometimes come across inconsistencies. For example, any account that has a named beneficiary does not go through your will; therefore, it should not be included within the will. We typically suggest not including specific accounts and account numbers within the will unless the estate has been named the beneficiary of those accounts. We ensure clients are aware of this and obtain clarity with documentation to ensure no confusion and dispute.
Contingent beneficiary
Another perhaps lesser-known option is the ability for clients to add a second layer of beneficiaries to their registered accounts, known as contingent beneficiaries. If something were to happen to both spouses, then the contingent beneficiary designations would come into place and the registered accounts would go to the named contingent beneficiary(ies), and therefore still bypass probate.
While it is highly unlikely that something will happen to both spouses at the same time, having contingent beneficiaries in place can proactively plan for a situation where capacity of one, or both, spouses has decreased. Once someone loses capacity, they no longer can update their beneficiary designations.
By setting up contingent beneficiaries, in the event the surviving spouse has lost capacity, their registered accounts will go to the contingent beneficiaries. Setting up contingent beneficiaries is a straight-forward process that we help all our clients with. All that is needed is for them to sign a letter of direction naming the contingent beneficiary(ies) and what percentage of the account they would like to allocate to each.
Non-registered accounts
Non-registered investment accounts are those which are not given tax-sheltered or tax-deferred status by the government. Any investment income (capital gains, interest income, dividend income, foreign dividend income, etc.) earned within a non-registered account is taxable in the account owner’s hands for the taxation year it is earned.
Common types of non-registered accounts include individual, joint tenancy, tenancy in common, trust accounts, and corporate accounts.
Couples typically like to have investment accounts held in joint tenancy. Most joint tenancy accounts will have both individual’s names and then “Joint With Right of Survivorship” or “JTWROS” after the names. Typically, with a JTWROS for couples, on the first passing, nothing flows through the deceased’s estate. In other family situations (i.e. the other individual on the JTWROS account is not a spouse) where accounts have been structured only for estate planning purposes, this may not apply.
The surviving spouse would essentially bring us in a copy of the death certificate and a notarized copy of the will. Once these documents are brought in, we would have a couple of documents for the surviving spouse to sign (i.e. Letter of Indemnity and new account documents). Typically, a new individual account is opened in the name of the surviving spouse and then the securities would be rolled over as they are, including the book values, into the new account.
When a person passes away with an individual account or holds a percentage of a tenancy in common type account, then this would flow into the person’s estate and we would require a probated will, as opposed to a notarized copy of the will, prior to distribution.
Probate and executor fees
In British Columbia there are no probate fees for estates $25,000 and under. For estates between $25,001 to $50,000, the probate fee is 0.60 per cent. Estates over $50,001 are subject to a probate fee of 1.4 per cent. Executors are also entitled to a fee for their services in administering the estate. In British Columbia, the maximum compensation an executor can receive is five per cent of the gross aggregate value of the estate.
Couples often will seek to make their ownership joint tenancy on all their assets. For the assets that are joint, often the requirement for probate may be avoided if that’s the structure the clients choose for their holdings. In many cases couples name each other as executors to eliminate or reduce the executor costs.
In some cases, such as complex family situations (for example, second marriages or children from a previous relationship) probate and executor fees are required to achieve your primary goals. Your primary goals will trump other goals such as avoiding probate and executor costs.
In some situations, it is best to structure things so that probate and Executor fees may apply. On the second passing, it becomes more difficult to avoid probate and other costs such as legal and accounting fees. In some cases, we can set up family meetings to deal with complex situations or to do further estate planning after the first passing.
Utilizing charts and visuals
When discussing estate planning, we find that using charts and visuals are helpful. Drawing things out on a piece of paper can be useful to help clients understand and visualize the purpose of a will.
We will start the process by drawing a bucket in the middle of a blank page. At the bottom of the bucket, we will write the word “Estate”. On the top side of the bucket, we will write the word “Will”.
We then pause to make sure that the clients understands that the will only divides what goes into the bucket. Many things can be structured to avoid the “bucket” altogether (such as accounts that have named beneficiaries, JTWROS accounts, and other assets held in joint name).
On the left-hand side of the page, we will list all the assets that the individual has. Examples of typical assets listed include a RRSP, TFSA, boat, vehicle, bank account, non-registered account, house, and life insurance policy. In each one of these examples, we draw a line to see which part of your estate flows directly to the bucket and which part of your estate flows directly to a beneficiary or joint owner.
We also draw a faucet on the right-hand side of the bucket. The faucet represents probate fees, potential executor fees, accounting fees, legal fees, and other costs outlined in the meeting.
Primary and secondary estate goals
It is easy for estate discussions to drift toward minimizing probate and executor fees. In my opinion, these are secondary estate goals.
As much as clients would like to avoid unnecessary fees, this should never trump achieving your primary estate goals. During an estate planning meeting, most of the time is spent mapping out details of your primary goals first, and then focusing on your secondary goals.
Primary goals could be specific directions with respect to income taxes, protecting assets, succession planning for a business, asset distribution and transition, providing for family and friends, charitable giving, etc.
Secondary goals may be to minimize probate and executor fees, or to ensure your estate is distributed in a timely manner, or that estate expenses and taxes are managed in an efficient way.
These estate planning discussions are done to hopefully ensure everything is structured correctly. Once we know what you are trying to achieve then we can compare your primary and secondary goals to your existing will to ensure the two are aligned.
If they are not aligned, then in conjunction with your other professional advisers (such as a lawyer and accountant), we will provide some options and suggestions.
Fairness and equality
When designating a beneficiary for an asset of significance (i.e. RRIF account), the client should consider the impact on their will and estate plan.
For example, a client may want to leave a $1-million principal residence to one adult child beneficiary, and a $1-million RRIF account to another adult child beneficiary. Over time, the house may go up in value and the RRIF go down if it is depleted for cash flow and required withdrawals.
The principal residence would not be subject to tax, whereas the RRIF account would be fully taxable. If the goal is to have fairness and equality the division of significant assets can be problematic. Reviewing this regularly and documenting who should be liable for the tax resulting from an asset passing outside the estate can help with equality.
If fairness and equality is the goal to avoid conflict, then care should be taken with assets of significance, especially when beneficiaries are named.
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.
