estate planningIN THIS SECTION:

You have worked hard all your life to build up a nest egg. You probably want to leave at least some of it to your family, and maybe others. You would not deliberately throw this money away. But that’s what can happen if you don’t do everything you can to make sure that your hard earned money and property go to the people who matter most to you.

WHAT IS AN ESTATE?

An estate is all of the possessions and investments that a person owns at the time they pass away. Examples include vehicles, clothing, jewelry, art, accumulated points (e.g. air miles or grocery points), real estate, cash in the bank, stocks, mutual funds, shares in private companies, and so on.

With a couple of exceptions, contrary to popular belief, anything that a person owns jointly with another person is considered to be part of the deceased person’s estate. The exceptions are, for example, where the deceased person has written a Will which stipulates that jointly held assets are intended to be a gift to the surviving account/asset holder, or where the surviving account/asset holder is the surviving spouse – but this is only a presumption, and not a hard and fast rule! Each situation turns on its own facts and depends upon what the deceased person intended and how well they communicated that intention.

If a person had a Registered Retirement Income Fund or Registered Retirement Savings Plan or a Tax-free Savings Account, where a beneficiary was named, the value of that fund, plan or account is not part of the estate. It goes directly to the beneficiary.

If a person had a policy of life insurance and named a beneficiary, the proceeds of that policy are not part of the estate, unless the beneficiary has already died and no substitute beneficiary was named. If no beneficiary was named or if the estate was named as the beneficiary, then the proceeds are part of the estate.

When a person dies, her or his estate remains available to pay any outstanding bills, taxes, and after those are dealt with, any legacies or bequests named in the person’s Will are paid; if there is no Will, then the balance of the estate is paid to the person’s next of kin. Please read the section entitled Estate Planning for more information.

WHAT YOU CAN DO NOW

Remember: if you fail to plan, then you plan to fail. The big winner will be Canada Revenue Agency, lawyers, accountants and maybe a surprise beneficiary or two. Most people can do a number of things to reduce or defer taxes by structuring their affairs before death. Several things can be done, even if your estate is not large:

  • You can designate a beneficiary of your RRSPs, RRIFs, life insurance and pension plans. If you have a tax-free savings account (TFSA), you can designate either (i) a beneficiary or (ii) a successor holder. Where a beneficiary is named, the TFSA is collapsed on your death and the entire plan value is transferred to a beneficiary. In the case of a successor holder, the plan is not collapsed on death, but instead it gets transferred to the person you have named without cashing in any investments in the plan. In each case, the value of the TFSA is not part of your estate.
  • Give your property away. For the most part, there is no tax on gifts, to either party. The overall value of your estate is lowered so the estate administration tax is reduced.
  • Freeze the value of your business using the rollover and deferral rules in the Income Tax Act, withdraw its current value for your own use, and give the growth value to a child or other family member who may wish to carry on the business. I strongly suggest that you not try this yourself.
  • Transfer ownership of assets such as bank accounts into joint names with the intended recipient. On death, the asset is not part of your estate so there is no estate administration tax on its value. Beware: there are several tax pitfalls to trap the unwary. Be sure to get expert advice before doing this.
  • Farmers can transfer title to the farm to children or grandchildren and there will be no capital gains tax on the transfer until they sell it. Although they do not have to farm it, you must be farming the land before the transfer. Not surprisingly, there are certain rules, which must be followed in order to qualify.

WHAT HAPPENS IF I DON’T MAKE A WILL?

Who gets your estate if you do not have a Will?

Contrary to popular belief, the government does not grab everything, but they have written a Will for you. It goes like this:

  • If you leave a surviving spouse, but no children, your spouse gets it all.
  • If you leave a surviving spouse and one child, your spouse gets the first $200,000.00, and shares the remainder equally with your child.
  • If you leave a surviving spouse and more than one child, your spouse gets the first $200,000.00 and one third of the remainder. The children share the other two thirds equally. Grandchildren of a child who died before you did will share their parent’s share.
  • If you leave surviving children but no spouse, your children share the estate equally, again with grandchildren of a deceased child getting that child’s share.
  • If only more remote relatives outlive you, then there is a set of rules which states which level of family will be entitled to share in your estate.

There are no opportunities for tax deferrals if there is no will. Valuable family heirlooms may have to be sold to generate cash to satisfy the succession requirements. There may be severe tax penalties imposed if you do nothing.

WHY DO I NEED A WILL?

A Will lets you get the most money and property where it is intended. For example, you can:

  • Make charitable gifts, tax deductible to your estate if they are done correctly.
  • Create trusts for spouse or underage kids.
  • Defer capital gains tax by establishing a spousal trust.
  • Choose the timing of when people receive their bequest.
  • You can insist that a child reach a mature age before getting their money, although you cannot tie the estate up indefinitely.
  • You can control who will be in charge of dealing with your debts and your assets.
  • You can select more than one estate trustee (executor) so that both sides of the family can be represented, or more than one area of expertise is represented.
  • You can select back up choices.
  • You can give specific things to specific people, such as jewellery, business assets.

You can have a Will that deals with only the assets which cannot be transferred to your family, or liquidated, without a Certificate of Appointment of Estate Trustee (which used to be called “probate” –see below), and a second Will for the other assets which do not require this procedure.  This may lower the amount of Estate Administration Tax (which used to be called probate fees) that your estate must pay.

You can write a list of things you want to leave to people and attach it as a schedule to the Will. Beware of changes to the list later – for them to be effective, you have to re-sign the Will.

REMEMBER: If you marry after making your Will, your Will is revoked unless it says that you are making it intending to marry your spouse (you have to name them). If you divorce after making your Will, all references in your Will to your spouse are automatically deleted, but your Will is otherwise left intact. Your Will is read

WHAT IS PROBATE?

Letters Probate used to be issued by the Court when a person passed away, leaving assets which could not be transferred to the beneficiaries without this official sanction of the Will and the appointment of an Executor. It was not always necessary to go through this procedure and pay the probate fees.

The process is a bit different now. The person named in the Will as Executor (now called an Estate Trustee) may still have to apply to the Court, but the application is now for a Certificate of Appointment of Estate Trustee. In some cases, you still do not have to go to court.

You will have to apply for a Certificate of Appointment of Estate Trustee if the estate contains:

  • Real estate worth more than $15,000.00
  • Canada Savings Bonds
  • Stocks (including mutual funds)
  • Large bank investments (the amount depends on bank policy – usually anything over $10,000.00)

The Estate Administration tax is calculated on the value of the estate, subject to some reductions, such as the value of the mortgage on your real estate. The tax is $5.00 per thousand on the first $50,000.00, and $15.00 per thousand (or part of a thousand) on the balance. There is no upper limit. This tax replaced the former probate fees, which were declared unconstitutional by the Ontario Court of Appeal in the fall of 1998 in the case of Re Eurig. The rates are exactly the same as before, however.

POWERS OF ATTORNEY

If you get sick or suffer an injury, and you aren’t able to make decisions about managing your money, your property or your personal well-being, the Ontario government automatically becomes your legal guardian unless you take steps to prevent this from happening. The way to do this is to sign a Power of Attorney for Property before you are incapable of doing so.

An attorney is simply a person who is given the power to act in the place of another person.

A Power of Attorney can be revoked if you have the mental and legal capacity to do this. For example, signing a new Power of Attorney will revoke any previous one unless you make it clear that earlier ones are to remain in place.

Powers of Attorney are valid only while the person giving them is alive or until they are revoked.

An attorney under a Power of Attorney is a fiduciary, meaning that he or she must act in your interests only. An attorney is not allowed to use his power to benefit himself.

You should consider specifying a back up choice of attorney if your first choice is unable or unwilling to carry out this responsibility. You should also make sure that your chosen attorney is comfortable with your decision.

There are two kinds of Power of Attorney under Ontario law:

  • Continuing Power of Attorney for Property:
    • delegates decision-making authority over asset management, investments, business decisions, anything a person can sign their name to, short of a new Will or a Power of Attorney
    • can be limited in its duration, when it begins, what it covers
    • usually stays operative even after you have lost mental capacity to manage your own property
  • Continuing Power of Attorney for Personal Care:
    • Gives authority to make decisions about surgery, medication, long-term care, when to withdraw life support, etc.
    • is not operative unless you have lost the mental capacity to make personal care decisions
    • the attorney must make the decisions that you would have made
    • does not usually give guidelines for how this authority is to be exercised

LIVING WILLS

Living Wills are also known as advance health care directives. They are a set of instructions or guidelines for making decisions about health care once you have become unable to instruct your health care givers as to your preferences. They tell your Attorney for Personal Care how you want the Power of Attorney for Personal Care to be used.

Some people include these instructions in the Power of Attorney for Personal Care itself. However, since there are certain requirements for signing and witnessing a Power of Attorney, it is sometimes more difficult to make changes in the contents of a Living Will if it is contained in a Power of Attorney. My preference is that a Living Will be a separate document.

Please feel free to contact me.