A sensible estate plan is crucial to ensure a smooth and uneventful transition of your assets to your beneficiaries. While estate planning need not be overly complicated, here are some items that should be thoughtfully considered in consultation with a lawyer, tax accountant or financial advisor.
Tip: Perhaps this is too obvious, but make sure you have a Will, and ideally, a Personal Directive (for personal and health care decisions) and Enduring Power of Attorney (for financial decisions). This trio of documents forms the basis of your estate plan. According a 2018 Angus Reid poll, more than 50% of Canadians surveyed said that they did not have a Will and 35% said their will needed to be updated. If one dies intestate (without a Will), their estates will be distributed in accordance with “one-size-fits-all” government legislation. If none of the prescribed beneficiaries exist, the estate will be transferred to the provincial government.
Tip: Make sure your Executor knows where your Will is stored. This might seem obvious but our office frequently hears from the children of a deceased person who think there is a Will but have searched diligently and cannot find it. This effectively results in an intestacy.
Tip: Choose an Executor who has the personal and professional skills to carry out the job. This is a thankless task and has a steep learning curve. The Executor is personally liable for errors and omissions. Consider naming a trust company to act as your Executor. The expertise and experience of a trust company more than justifies their fee. This also alleviates the burden of time and stress that most people experience while acting as an Executor.
Tip: Name guardians for your minor children. A testamentary appointment of a guardian is effective upon death, and alleviates the need for an expensive and often contentious court battle as to who will act as your children’s guardian.
Tip: Make adequate provision for your family members in your Will. The traditional principle of “testator intention” – that a testator can dispose of his or her estate in whatever manner they wish – has been overlaid with statutory and common-law requirements to provide for one’s surviving spouse, minor children, children under 22 who are in full-time attendance at school, and children over the age of 18 who are unable to earn a livelihood by reason of mental or physical disability. In cases where the testator has shown a settled intention to treat their grandchildren or great-grandchildren as their own child since their birth or at least 2 years immediately before the testator’s death, the obligation may be extended to those individuals. Currently, this obligation applies only to biological or adopted children – not stepchildren.
Failure to make adequate provision may result in one or more family members making a court claim against the estate for ‘Family Maintenance and Support’. This will delay administration of the estate and typically leads to significant legal fees, further diminishing the value of the estate and potentially encroaching into residual and specific bequests to others.
This is a particularly relevant issue for blended families. Making adequate provision for second or third spouses, and for children that emerge from multiple relationship can be very challenging and will require careful consideration, particularly when assets have already been divided with former spouses and there are limited resources to meet one’s legal and moral obligations. Estate planning in this situation can be challenging even when family dynamics are good – and more so when family dynamics are…complicated.
Tip: Consider use of a Spouse Trust. A Spouse Trust allows a testator to leave assets to a surviving spouse in a trust, provided the terms of the trust comply with the Income Tax Act. The terms of the trust must clearly specify that the capital assets and income from the trust may be used only for the sole benefit of a surviving spouse. This option is particularly attractive to make adequate provision for a spouse who is not also the biological parent of the testator’s children, as those children can be named as the beneficiaries of the remaining capital in the trust upon the death of the beneficiary spouse. Another attractive feature is that any latent tax liability associated with assets in the trust is deferred to the point that the asset is liquidated, or until the trust comes to an end on the death of the surviving spouse. In the meantime, assets such as residential or commercial rental properties, and non-registered investments that form trust capital can continue to grow and generate income.
Tip: Consider creating a Qualified Disability Trust for disabled beneficiaries. This results the trust being taxed a graduated rates rather than the highest marginal rate to which trusts are otherwise subject. As with a Spouse Trust, Canada Revenue Agency requires strict compliance with creation and administration of a Qualified Disability Trust, the most important of which is confirmation that disabled individual qualifies for the Disability Tax Credit.
Tip: Consider use of a “Henson Trust” for a disabled child that does not necessarily qualify for a Qualified Disability Trust, but which will enable assets to be preserved for that child’s benefit without disqualifying them from government benefits such as AISH entitlements.
Tip: Where one’s spouse is not also the biological parent of one’s children, consider giving a life estate in real property to that surviving spouse, with the children named as ultimate the beneficiaries of that property. This can assist in meeting the obligation to make adequate provision for a spouse, but preserve the property for one’s own children.
Tip: Make advance provision for any contractual or court-ordered spousal or child support obligations, ideally from resources outside of your estate. Former spouses to whom the deceased person owed ongoing support can make a claim against the estate. This obligation can often be secured by life insurance policies, but in their absence that claim will be paid in priority from the estate’s assets and specific or residual bequests.
Tip: Make sure that your RRSPs and life insurance policies have named beneficiaries. This will allow those beneficiaries to receive those assets directly, outside of the estate. Often, the benefit is distributed from the relevant bank of insurance company relatively quickly, and in any event much more quickly than if those assets fall into one’s estate. Naming beneficiaries and flowing those assets directly also insulates those assets from a claim by a creditor of the estate.
Tip: Consider use of a discretionary “spendthrift trust”, whereby beneficiaries who have demonstrated an inability to manage their funds prudently, or are in relationships with individuals who would encourage speedy dissipation of an inheritance, have limits placed on the amount or purpose of funds bequeathed to them. Alternatively, funds can be disbursed from the trust in the discretion of the Executor or another person – often a more mature and thoughtful family member – who can be trusted to make appropriate decisions as to the use of trust funds. This ensures the beneficiary is supported but also prevents them from dissipating their inheritance.
Tip: Consider delaying or staging distribution of a bequest over several years – particularly with respect to minors or younger adults. Unless this is specified, a minor beneficiary will receive their entire bequest at the age of 18 – generally not a good idea. Specifying delayed payment will allow a potential beneficiary to gain life experience and an appreciation for the financial gift received, and minimize the likelihood that it will be dissipated.
Tip: Prepare your estate for tax liabilities that arise upon death. Any untaxed liability, e.g., RRSPs, corporate holdings and capital gains on a recreational property, crystalizes on death. This often creates an unexpected and onerous tax burden, payment of which may require liquidation of other assets which otherwise would have been transferred to beneficiaries. Again, life insurance is common-sense solution to covering these liabilities and preserving estate assets for your beneficiaries.
Tip: If your estate is sufficiently large, considering making inter vivos gifts – gifts distributed during your lifetime – rather than waiting until your death. Of course, make sure that you retain sufficient assets to cover the cost of your retirement and care as you age, but if there is clearly an excess of assets it may be worthwhile to provide that benefit to your children during your life, rather than delaying that benefit until after your death.
Tip: In most circumstances do not transfer real property to children during your life as an estate planning strategy. First, if done on one’s primary residence the primary residence capital gain exemption is lost. Second, any property transferred to a child with who becomes a judgement debtor result in a judgment creditor encumbering and potentially selling that property. Third, any increase in the value of that property becomes potentially divisible family property if that child separates or divorces.
Tip: If you own property outside of Alberta, consider consolidating your property within Alberta, to avoid the significant probate fees often found in other provinces. In Alberta, the probate fee charged by the Surrogate Court in Alberta tops out at $525 for estates with a value of $250,000 or more. For example, in British Columbia the probate fee on an estate of $2.5 million is $34,464, and in Ontario, $36,750. In Alberta, the probate fee is just $525.
These are just a few items for consideration when making an estate plan. Careful advance planning will reduce uncertainty and cost, and promote an uneventful and smooth administration of your estate.
Written by Gary Kirk