Estate Planning
If we view financial planning as a way you build assets, estate planning can be viewed as a way of preserving those assets both before and after your death.
Estate planning is not just for the wealthy either. Your home, your RRSPs and other investments all become substantial assets that must be considered in estate planning.
Most people put off estate planning, yet the process can often involve things that take effect while you are still alive - a living trust is one example. You may want to pass the family business to your children so future capital gains will be taxed in their hands.
Preparing a power of attorney in the event you become incapacitated is also very important. All of these things fall under the realm of estate planning.
The best place to start is to have a lawyer draw up your will and power of attorney. You will need legal advice to make sure your wishes are properly carried out.
For more information....
When you die, your will gives legal authority to deal with your estate to your executor (estate trustee in Ontario, liquidator in Quebec). Although your executor is legally entitled to do so, when the time comes to redeem or transfer certain assets registered in your name (such as investments with financial institutions, publicly traded shares and, in some instances, real estate) probate is usually required. Probate serves as proof to financial institutions, financial advisors and the land registry office that your will has been certified by the court and that your executor is authorized to represent your estate. This process of obtaining court certification is known as probate.
Probate taxes have been in existence since 1358, when they were launched in England. In Canada, the first legislation dealing with this issue was enacted in 1793. In 1950 the legislation was amended and the tax was designated as a "service fee". Although services provided are identical across the provinces (with the exception of Quebec), the cost varies under the laws of each province. Click here for Probate Fee Schedule.
Some provinces vary the terminology used in the probate process. Ontario now calls the cost of probate an "Estate Administration Tax" while other provinces call the cost of probate a "fee" or a "tax". The actual grant of probate in Ontario is now known as a "Certificate of Appointment of Estate Trustee with a Will".
When it comes to settling a person's estate, banks, trust companies, and other financial institutions will want to make sure the will is valid and legal before they transfer any assets. As a result, they often ask for probate, or court approval, of your will.
To obtain a grant of probate, your executor will submit the will, a list of your assets - including their current market value - and the probate application to the provincial court. This process can take several weeks.
In addition to being a lengthy process, probate will be costly for your heirs.
Current Probate Fee Schedule:
| Newfoundland | $50 for the first $1,000, $4 per $1,000 thereafter. No maximum |
| Nova Scotia | $800 for first $200,000, $4 per $1,000 thereafter. No maximum |
| PEI | Progressive rates: $50 for first $10,000, increasing to $400 for estates of $100,000, and $4 per $1,000 thereafter. No maximum |
| New Brunswick | $5 per $1,000. No maximum. |
| Quebec | No probate fee. $45 for English Form wills. |
| Ontario | $5 per $1,000 for first $50,000, $15 per $1,000 thereafter. No maximum. |
| Manitoba | $20 for first $5,000, $5 per $1,000 thereafter. No maximum. |
| Saskatchewan | $7 per $1,000. No maximum |
| Alberta | Progressive rates. $25 for first $10,000, increasing to maximum of $6,000 for estates in excess of $1,000,000. |
| British Columbia | Estates of $10,000 to $25,000 = $200
Estates of $25,000 to $50,000 = $6 for every $1,000 (full or part)
Estates over $50,000 = $14 for every $1,000 (full or part) |
Strategies for Minimizing Probate Fees
There are a number of methods you can use to decrease probate fees on your estate. Since probate fees are assessed based on the value of your estate, most methods involve passing assets directly to others without them having been included in your estate.
Some examples include:
- making your spouse the beneficiary of your RRSP or RRIF
- naming beneficiaries of life insurance policies
- holding certain assets jointly
- setting up trusts
- Life Insurance Policies
Often people make their estate beneficiary of their insurance policy, but doing so leaves the proceeds subject to probate fees. It is better to name an adult person beneficiary so the proceeds do not pass through your estate but go directly to that person.
Registered Plans (RRSPs)
If your spouse is named as beneficiary of your RRSP or RRIF, the proceeds can be rolled over to them directly without going through probate.
Joint Accounts
Hold your bank accounts and investment portfolios jointly with your spouse or other beneficiary so assets will automatically pass to the survivor. The status of your accounts should be: Joint tenancy with right of survivorship.
Joint Tenancy
If you own your home jointly, it will pass directly to the surviving partner without probate.
Trusts
Consider transferring assets to a trust while you are alive. Assets held in a living trust are not included in your estate because they are no longer your property.
Assets bequeathed to your spouse will be subject to probate fees when he or she dies. To avoid paying probate fees twice, you may want to set up a spousal trust in your will so the assets pass directly to your children when your spouse dies.
Life insurance can be useful in planning your estate. There are no inheritance taxes in Canada, but when you die your estate executor must file a final tax return. Normally at this time, all accrued gains on assets like stocks and real estate, and the proceeds of all registered plans (RSPs, RRIFs, LIFs, and certain pensions) become taxable all at once. On large estates the result could be a tax bill close to half the total value of the estate.
Various strategies can be used to reduce the impact of this inevitable tax bill, including life insurance. For example, say you own a cottage and want to leave it to your children. Accrued gains on the property may give rise to such a large tax bill that they are forced to sell it. Tax-free life insurance proceeds could be used to cover the taxes instead, so your children can keep the cottage.
Or, say you want to divide your estate equally between three children, but it consists of a $200,000 house and a $200,000 RRSP. Rather than selling the house to accommodate a three-way split, life insurance can be used to pay all taxes and provide another $200,000 bequest. Business assets can also be preserved using life insurance.
You may reduce the value of your probatable estate by making gifts while you are alive. There is no gift tax in Canada although there may be income tax consequences. The tax rules state that if you dispose of any property (by selling or giving it away) and there are no proceeds, or the proceeds are less than the fair market value of the property, you will be deemed to have received an amount equal to the fair market value of the disposed property. This means that if you give away your assets, you may have to report a capital gain on the property. If you are considering gifting property, talk to your advisor to make sure you understand the legal and tax implications of this strategy.
If you have had a cottage in the family for many years and want to keep it in the family for future generations, careful planning is essential.
Consideration #1: Taxes
As most cottages are not usually the principal residence of the owner, any transfer of ownership may result in substantial capital gains taxes. Let's consider an example: a property with an adjusted cost base of $100,000 (in this example, the adjusted cost base is the price that was originally paid for the cottage). The cottage is now valued at $400,000. Such a value increase would not be unusual in today's real estate market. In this example, the capital gain is $300,000 of which half, or $150,000, is subject to income tax.
When the owner of this cottage passes away, the estate must pay this tax. The question is: will the estate be able to absorb the expense without the cottage having to be sold? Transferring ownership to children before death does not avoid the liability, since the tax rules say only transfers to a spouse can be made tax-free.
Consideration #2: Insurance may be the solution
As we saw from the above, the tax liability could be substantial and there may not be liquid resources readily available from the estate of the deceased. Insurance could be one solution. A policy with a death benefit equal to the expected tax bill can provide the cash for this expense. The proceeds will normally flow to the beneficiary(s) tax-free and will also avoid probate fees. What many families do is have the insurance premiums shared by the beneficiaries.
Seek Advice
Passing on a cottage can be a complex matter and structuring the effective transfer deserves your detailed attention. Every family situation is different and it is important to assess your own case carefully. Don't assume that your situation is not significant or that your family members will never fight over your assets. Discuss your situation beforehand with your family members and seek advice from experienced estate planners and other professionals whom you trust.
When you die, Canada Revenue Agency (CRA) will tax your estate as if you had sold all your capital property - stocks, business and real estate, excluding your family home. As a result, your estate may end up with such a big tax bill that some valued assets may have to be sold to pay the taxes.
Planning can help reduce these taxes. Here are some things to consider:
Principal Residence
Your primary residence is exempt from capital gains tax and can be transferred to any beneficiary tax-free. It is usually better to hold your principal residence jointly with your spouse or partner so it will bypass your estate and go directly to him or her, thereby avoiding probate fees.
Spousal Transfer
If you are married, identify your spouse as beneficiary of your RRSPs and RRIFs. This way, the money can be transferred to your survivor's plan and tax will be deferred until your spouse either withdraws the money or dies. (If you die with unused RRSP contribution room, your executor can make a final contribution to your RRSP on your behalf before it is rolled over.)
Alternatively, you can name a minor child or grandchild who is financially dependent on you as the beneficiary of your registered savings plan. Your executor can use the money to buy an annuity for the child until he or she reaches 18, thereby spreading the tax over several years.
If you leave assets in an RRSP or RRIF to a child or grandchild who was financially dependent on you at the time of your death and who is mentally or physically disabled, the assets can be transferred tax-free to an RRSP in their name. In this case, there is no age restriction.
Non-registered assets can be rolled over to your spouse at no cost and any capital gains tax deferred until your spouse dies.
Estate Freezing
Estate freezing is often used when a person owns a business that is growing and wants his or her children to eventually take it over. Estate freezing fixes the value of an asset at its present level so that future capital gains are taxed in the hands of your heirs. An estate freeze can be done by issuing shares, setting up a holding company, or creating a family trust.
Life Insurance
As life insurance payouts are not taxable, often people will purchase life insurance to offset the taxes that will be payable on their estate, thus preserving the value of the assets for their heirs.
Charitable Gifts and Bequests
You can receive a tax credit for charitable donations made through your will of up to 100 per cent of your net income. The credit is claimed on your final tax return.
Trusts
Trusts can be a tax-effective way to provide for your heirs. When you transfer assets to a trust, the income is taxed in the hands of the trust or its beneficiary. For example, living trusts, or trusts that come into effect while you are alive, let you split income with family members who are in a lower tax bracket.
Power of Attorney
A power of attorney authorizes someone to make important health and financial decisions on your behalf should you become unable to do so because of physical or mental problems.
You may think your spouse or another family member could automatically step in and take care of your finances, but this is not the case. Unless you draw up what is called an enduring power of attorney - which means it continues even if you become mentally incompetent - you and your family could be in for an unpleasant experience.
What happens if you don't have an enduring power of attorney is that the government, through the public trustee, could take over your bank account, investment portfolio, and other assets without consulting your family, although rules vary from province to province. The government's duty is to protect your interests, even though its decisions may not be what you want.
What Does a Power of Attorney Do?
A power of attorney gives someone you trust the power to make decisions for you - except change your will. Ideally, you should have your lawyer draw one up when you are preparing your will. The cost is minimal and well worth it.
A power of attorney is automatically revoked when you die, at which time the person you appoint as executor in your will takes over. You can revoke a power of attorney by advising your appointee in writing.
You should also have your lawyer prepare a power of attorney for personal care, also known as a "living will". Depending on your province, you can designate someone to make medical decisions on your behalf and outline the type and extent of medical treatment you desire under different circumstances. As with a financial power of attorney, the person you appoint to make such important decisions should be someone you trust and who knows what you would want done.
Trusts can be a tax-effective way of providing for your dependents both while you are living and after you die.
You should know that when you create a trust, you are giving away the assets in it. Any income is taxed in the hands of the trust or its beneficiary. Trusts are of two types - those that form part of your will and come into effect when you die, and those that take effect while you are alive.
Trusts set up under a will are called testamentary trusts and can be used in different ways:
Spousal trusts
This type of trust may be suitable if your estate is large or complicated and your spouse lacks the necessary expertise to manage it. Spousal trusts can also be used to preserve the assets for your children in the event that your spouse remarries.
Trusts for children under 18
Rather than having your children receive their inheritance in a lump sum when they reach 18, you can space it out over several years. You can also give the trustee discretion to release funds in advance for a child's schooling.
Trusts for dependents with special needs
Trusts can be set up to provide lifetime income for dependents who are mentally or physically handicapped.
Living Trusts
Living trusts can be put to effective use in a number of situations including:
- Second marriages
With a living trust, you can provide for your current spouse during his or her lifetime, after which the money passes to the children from your first marriage. - Supporting children, dependent parents, or children who are mentally or physically handicapped
Rather than using after-tax income to support adult children who return home, you can set up a living trust, the income from which is taxed in their hands - at a lower tax rate. The same strategy can be used to provide for dependent parents or children with special needs. - Estate freezes
Proprietors of family businesses can use a living trust to freeze the value of the business for tax purposes. In effect, you can pass the business on to your children while still maintaining some control. Future capital gains will be taxed in the hands of your children. - Discreetly providing for someone special to you
Bequests in wills are made public when you die, but living trusts remain confidential. - Providing for yourself
You may become too old or sick to manage your own affairs. You can set up a trust to care for you and your spouse during your lifetime with the remaining capital passing to your children when you die.
Your will is a statement of what you want done with your property when you die. It is also the document that designates someone to raise your children if you and your spouse die together. If you have dependent children, it could be the most important document you'll ever sign.
Your will protects your family in the short term by giving them the money they need to pay immediate bills should you die. A properly drafted will goes much further, anticipating future needs such as your children's or grandchildren's schooling. It can also greatly reduce the income taxes your estate must pay.
Everyone over the age of 18 with assets of any kind should have a will.
Some pointers to consider in preparing your Will:
Because a will is a legal document, it is best prepared by a lawyer. Indeed, some provinces do not recognize handwritten, or holograph, wills. Do-it-yourself wills, such as those prepared on forms from a stationery store, can end up costing your estate many times more than you save.
The cost of having a will drawn up depends on the size and complexity of your estate. A typical fee for a straightforward will is $200 to $300; someone who has married for a second time, owns a family business or has property offshore, can expect to pay more.
If you are married, sit down with your spouse and discuss how you want your assets to be managed and distributed. You may decide to leave everything to each other, but what if you both die at the same time? How will your property be handled? What if your children die before you?
Decide who you would like to raise your children should both you and your spouse die. Consider a potential guardian's age, other children, professional responsibilities, and location. Discuss your wishes with your top candidate and be sure they are willing to accept the responsibility. Obtain their full address and full legal name.
Ensure you have arranged your affairs to keep income taxes and probate fees to a minimum; for example, name your spouse beneficiary of your RRSP or RRIF to take advantage of the tax-deferred rollover. Determine whether you will have enough cash in your estate to pay your final tax bill - which could be much larger than you think - or if assets will have to be sold to achieve this.
Give careful consideration to choosing your executor. Ideally, the person will be trustworthy, have good business sense, be able to handle the paperwork, and be living nearby. Choose an alternative executor in case the first one cannot do the job. If your estate is substantial, you may want to appoint your spouse and a trust company as co-executors.
Although you do not need an inventory of everything you own, it will be helpful to list assets such as your home, cottage, rental properties, business interests, life insurance, and registered savings plans such as RRSPs and RRIFs. You will also need to mention special gifts - such as a stamp collection or your grandfather's gold watch.
- List Your Assets' Beneficiaries
o If you intend to bequeath property, make sure you own it outright and not jointly. Jointly held property automatically goes to the surviving partner when you die.
o If you plan to leave money to a charity, make sure you have its proper name.
o Check whom you have named as beneficiary of your RRSP, RRIF and life insurance policies.
o Will trusts be needed to provide for your dependents? If so, who will act as trustee? Do you have dependents with special needs?
o If you have children from a previous marriage, will they be provided for if you leave everything to your current spouse? What will happen to your children's inheritance if your spouse remarries?
o What if your children divorce? Do you want to include a special clause to prevent their former spouses from claiming a share of the income earned on their inheritance?
If your estate is large or complicated – or if you have a family business – it would be prudent to get specialized tax and legal advice.
Wills and Marital Status
If your family situation changes, you must review your will.
Marriage
In most provinces, if you get married, your existing will is automatically revoked. The only time this isn't true is if you state in your will that it was drawn up in contemplation of marriage. If your will becomes invalid due to marriage and you die, unless you make a new will, the court will rule that you died intestate, with all the negative consequences that brings.
Divorce
If you divorce, any bequests to your former spouse will be revoked, and your former spouse will not be able to act as your executor. This is not the case if you are separated.
If you are making child support payments, you may want to revise your will to set aside assets or take out an insurance policy to cover the payments after your death.
People who are separated should revise their wills if they start living in a common-law relationship. Otherwise, you run the risk of your entire estate going to your estranged spouse – and your current partner being left out in the cold.
Dying Without a Will
If you die intestate (without a will), the provincial government will step in and appoint someone to distribute your assets.
The rules vary from province to province. Generally speaking, your children's share of the estate will be held in trust until they are 18. While they will receive the entire amount at 18, the question you must ask yourself is: Will they be mature enough to manage it?
A will is the only place where you can elect who you would like to be the guardian of your children. Without a will, the courts will decide who raises them.
Dying without a will can also seriously affect the value of your estate. For example, your estate may have to pay income taxes that could have been avoided. Further, taxes due as a result of your death may force the sale of the family cottage – or even the family business.
In short, the distribution of your assets may not reflect what your beneficiaries need or what you would have wanted.
The message is clear – a will is one of the cornerstones of financial planning. If you have a family, or have accumulated any assets, have one prepared - and soon.
Your executor is the person you appoint in your will to carry out your wishes. Ideally, he or she will be someone who is trustworthy, knowledgeable about financial matters, and who lives nearby.
You can generally choose anyone you wish to be your executor. Many people name their spouse, especially if he or she is the main beneficiary of their estate. You can also choose to have more than one executor. This is often a wise decision.
Being an executor takes more time and skill than many people realize. Before you name someone as an executor, be sure to discuss it with him or her. It's also a good idea to choose an alternative executor in case the first one is unwilling or unable to act when the time comes.
Duties of an Executor
Your executor may have to deal with an array of third parties, including lawyers, accountants, Revenue Canada, insurance companies, banks, business partners and your beneficiaries. Depending on the complexity of your estate, your executor's duties will include:
- Reading and interpreting the will and meeting with your family.
- Becoming familiar with your financial affairs.
- Safeguarding your assets.
- Dealing with financial institutions.
- Assembling an inventory and valuing your assets.
- Hiring a lawyer to apply for probate.
- Arranging for the sale of real estate if required.
- Converting assets to cash to pay debts and taxes if necessary.
- Preparing your final tax returns and getting tax clearance from the Canada Customs and Revenue Agency.
- Distributing assets to your beneficiaries.
Bear in mind that your beneficiaries may hold your executor liable if the estate is not managed effectively, so it is important to give your executor the powers necessary to do the job. These powers must be detailed out in the will. For example, your affairs may be better managed if your executor has the power to invest, buy and sell assets, or borrow money on behalf of the estate.
Compensation
Because of the amount of work involved, you may want to compensate your executor; a rule of thumb is 5 per cent of the value of the estate. Trust companies usually charge from 5 per cent for small estates to 10 per cent for large ones.
Making Your Executor's Job Easier
You can make the task of settling your affairs a much easier process by keeping your files and records up to date and easy to locate. Give your executor a copy of your will along with a list of your financial advisers, insurance policies and other important documents. You may also want to discuss funeral arrangements in advance.