Three Common DIY Estate Planning Mistakes

Our office frequently meets with clients to review their estate planning strategies, only to find that they have already taken significant “DIY” steps based on a magazine article or an online blog – often from another jurisdiction – or even the advice of a well-meaning but mis-informed friend. Not all of these strategies are prudent and some can have significant negative financial consequences. Here are three common DYI estate planning mistakes.

Adding your children to title of your real property.

When questioned as to the reason for transferring real property to children, the rationale usually offered is to avoid or reduce probate fees. Like many other jurisdictions, Alberta’s probate fees increase on a graduated scale along with the value of the estate. Unlike many other jurisdictions, Alberta’s probate fee tops out at $525 for estates with a value over $250,000. This means the probate fee for an Alberta estate with a value of $250,001 is the same as for an estate with a value of $2,500,000 or even $25,000,000. Contrast this with Ontario for example, and those same estates will be subject to an estate administration tax of $3,000, $36,750 and $375,250, respectively.

Also, if the property in question is the parent’s primary residence, they will lose a portion of their capital gain exemption on the future increase in value of that property while the child begins to acquire a potential capital gain liability.

If the child is sued by a third party and becomes a judgment debtor, their interest in that residence is an asset that can be executed against by the judgment creditor.

And in the most common scenario, if that child is in a married or in a common-law relationship but separates, their interest in that property may be subject to a claim by their former spouse.

The Fix: State within your Will that your child or children will receive your real property – personal or otherwise – upon your death. This protects your property and capital gain tax exemption during your life.

Adding your child or children as joint account holders to your bank accounts.

As many people age, they understandably wish to focus on enjoying their life and wish to reduce the time and hassle of dealing with bills for credit card, utilities, insurance, taxes and other mundane items. To accomplish this, they will often add a child to one or more of their bank accounts with the expectation that the child will deal with these mundane items.

This is generally not a problem for “operational” accounts where the amount of money in the account is not significant at any given time, and any money coming in is usually paid out for bills each month. This does become a problem if a significant amount of money accumulates or if funds from sale of property or other assets are deposited to the account. Although the Supreme Court of Canada has ruled that the funds in such accounts remain the property of the parent during their life and forms part of their estate on death, this is cold comfort if the child on joint title to the account withdraws and spends the funds based on the notion of “right of survivorship”. Sorting out the source of the funds and the child’s “right” (or lack thereof) to the funds is a common reason for time-consuming and expensive estate litigation.

The Fix: Name your child as your Attorney under an Enduring Power of Attorney, during your life. This will give the child the ability to access your assets for bill payments, etc., but the funds will clearly remain yours. Plus, your Attorney is required to give an accounting of the funds that come in and out of your accounts and replace those funds if used inappropriately.

Failing to document gifts to your children.

Gifts made to children during your life, whether or cash or property, can become contentious issues when your estate is administered. The Supreme Court of Canada has ruled that gifts to adult children who do not suffer from a mental or physical disability require evidence of an intention to make a gift, failing which the recipient will be deemed to hold that cash or property in trust for your estate. This can include payment of the child’s debts or payments to third parties on behalf of the child. Not surprisingly, this is also a common issue in estate litigation, particularly where there is a concern that the recipient child is a chronic moocher, or has exerted duress or pressure for the parent to make the “gift”.

The Fix: Document your intention as to whether transfers of cash or property are gifts or loans. This can be a simple as an email, a note on the “Re: line” of cheque, a promissory note, or a hand-written note. Keep copies of those records/notes, preferably with your Will and perhaps a trusted third-party such as your accountant or financial advisor, so that there is no question as to your intentions.

We recommend that you consult with your financial advisor, accountant and estate planning lawyer when contemplating any of these issues, to ensure clarity of your intentions and avoid unnecessary and costly estate litigation.

Written by Gary Kirk

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