Michael Watkins
April 21, 2023
What is Estate Planning?
Quite simply, it’s ensuring that you’ve prepared for an orderly transition of your property in the event of your death. A common myth is that only the wealthy need to worry about estate planning, and because of this Canadians often end up incurring significant and unnecessary costs to their estate and additional burdens for their survivors. Regardless of the size of your estate, planning ahead can reduce taxes and other expenses as well as simplify the process of changing the ownership of estate assets. The goal here is not to give you specifics on your estate, as provincial rules vary widely on the subject; but rather to outline a framework to help you decide what’s important to you. Once you have a rough idea of your needs and desires in planning your estate, discuss it with a lawyer and accountant, preferably those with experience in the area of estate planning.
Important Estate Planning Documents
Once you and your loved ones have a basic idea of what you’d like to happen after your death, you need to document it. After all, no-one can read your mind, and the best intention in the world doesn’t help if your plans were unknown. We’ll cover the top estate documents below.
Wills
Your Will represents the foundation of your estate plan and is essential for ensuring that your wishes are carried out. A Will is a legal document that can be changed and updated at any time and only comes into effect upon your death. Though most view the Will as a vehicle for property distribution, a Will also names an executor or executrix who acts on your behalf to carry out your wishes. The powers given to the executor may be limited by the Will or given greater scope depending on your wishes.
Powers of Attorney
A power of attorney is a legal document that you sign to give one person, or more than one person, the authority to manage your money and property on your behalf. In most of Canada, the person you appoint is called an “attorney.” That person does not need to be a lawyer. Among other requirements, you must be mentally capable at the time you sign any type of power of attorney for it to be valid. In general, to be mentally capable means that you are able to understand and appreciate financial and legal decisions and understand the consequences of making these decisions.
Trusts
Trusts were once a staple of succession planning, but have fallen from favour of late due to restrictions in their use as a tax deferral or reduction strategy. However, trusts can still be an important aspect of your estate plan if used correctly and for the right reasons. Specifically, a testamentary trust can be set up to help control your estate on behalf of your beneficiaries after your death. By the details laid out in your Will, a testamentary trust only comes into effect upon your death. Assets named to the trust are held by the trustee and managed under the direction of your Will.
Identifying Your Assets and Beneficiaries
Types of Assets To Consider
Major assets such as your home, cars, and investment accounts should be considered when making up your Will. Of course, some of these assets will already have beneficiary designations (RRSPs/RRIFs, TFSAs, etc.), and your home may be in joint name. But a Will should be written to coordinate with those instructions. Additional smaller assets, such as furniture, can be added as well.
Designating Beneficiaries
Naturally, the first thing you’ll want to establish is who the beneficiaries of your estate will be. Primary beneficiaries may be obvious; your spouse and children are most often the primary beneficiaries of an estate. However, there can, and should, be secondary or contingent beneficiaries listed as well. Secondary beneficiaries are named in response to the worst case scenario where you and your immediate beneficiaries all pass at the same time.
The Importance of Keeping Beneficiary Information Up to Date
It’s extremely important to keep beneficiary details up to date. Circumstances change all the time, and the consequences can be disastrous. For example, perhaps you have life insurance with your parents as beneficiaries. But you get married and don’t update to your spouse, potentially leaving them in a devastating situation.
Working With an Estate Planning Attorney
Benefits of Working With an Attorney
It’s always a good idea to work with a professional, but not all lawyers and notaries are the same. Working with someone that specializes in estate planning means they have the expertise to guide you, and have likely seen a multitude of situations that other legal practitioners may not.
How to Find The Right Attorney For You
You could Google estate lawyers and notaries, but I’ve always felt that referrals are the best approach when looking for assistance. Talk to another trusted professional such as your accountant or wealth advisor, and they will likely have a list of estate lawyers that they trust.
What To Expect During The Estate Planning Process
An estate planning professional is there to help you articulate your estate plan. They’ll ask you a lot of questions about your assets and you beneficiaries, and will likely bring up issues that you may not have considered. Doing as much preparation ahead of time will help to smooth out the process, and likely save you some money.
Tax Consideration in Estate Planning
Federal and Provincial Taxes
There is no “estate tax” in Canada, but there is a final tax return. In essence, upon death, a number of things will be triggered in addition to your regular annual income. The balance of any remaining RRSPs/RRIFs will be included in your income. As well, investments held in non-registered account will be “deemed” to have been disposed. Now there are spousal rollover provisions for assets held in RRSP/RRIF, TFSAs, etc., as well as joint ownership that can greatly reduce taxes at death, but it’s a good idea to strategize with your wealth advisor and accountant to minimize taxes on death.
Gifting
Gifting is a practice that occurs constantly within family dynamics but becomes more complicated as a form of estate planning. Parents often give small chunks of money or personal property to their children as they age and feel no ill effects from Canada Revenue Agency. However, if you intend to gift significant assets or stocks
and bonds, you should talk to your accountant first as you could trigger a “deemed disposition” and a tax liability.
Common Estate Planning Mistakes to Avoid
Failing to Plan
Most people don’t like to talk or think about their death. However, avoiding the conversation and failing to make a plan can have devastating consequences for your loved ones. Even if you’re young, it’s never too early to create an estate plan.
Not Keeping Estate Planning Documents Up To Date
It’s been suggested that you update your Will roughly every five years. I would suggest that it’s better to update your Will and any accounts with named beneficiaries as soon as there’s been a material change in your life (marriage, divorce, child birth, etc.).
Not Considering All Assets
It’s easy to miss things when you’re considering you plans. That’s why it’s a good idea to use a checklist when creating your Will. Most state lawyers will have them, or you can easily download them from the web. Your Will may specify your wishes, but if you’ve forgotten to update your RRSP beneficiary from your ex-spouse, you’re likely to have some trouble down the road.
Neglecting To Account For Tax Implications
People often focus a lot on reducing or avoiding probate (that fee that the government charges for validating your estate). However, making changes to get around probate can have the unintended consequences of costing you much more in federal and provincial tax. Having a tax strategy is an essential part of the estate plan.
Conclusion
Many Canadians do not have a Will. That means, should they die, the intestate rules of whichever province in which they reside will take over. These rules vary greatly, but the result may be very different than what you may have wanted to happen. Take care of your loved ones and start your estate plan today.