Planning the Estate

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Without careful planning, your estate may be tied up in the courts for months or even years. The government could end up collecting more taxes than necessary. And, most importantly, how your legacy is disbursed may be decided for you.

Every Canadian adult — regardless of your financial situation — should have an up-to-date estate plan that outlines the following:

  • Who is responsible for distributing your assets;
  • Who gets what and when they get it;
  • Who will take care of your children;
  • Who will manage any trust accounts; and
  • Who will make financial and medical decisions if you’re incapacitated.

To take control of your estate, we suggest the following five steps:

  1. Determine your estate planning goals.
  2. Consider which estate planning tools fit your situation best.
  3. Choose the people you would like to speak for you.
  4. Start raising estate-planning issues with your family.
  5. Keep your estate plan up to date.

Depending on the complexity of your estate, you may require the services of a lawyer or notary, a Rothenberg financial advisor, an accountant, a Rothenberg insurance agent or a trust officer.

Developing a complete estate will require much more than a will. Depending on your personal situation, you will need to consider a combination of the following components:

Will: the core document in your estate that identifies an executor distributes your assets and names a guardian for your children if they are still minors.

Trust: is established to take care of assets you don’t want transferred immediately after your death or to manage investments for beneficiaries who are incapable of doing so themselves.

Life insurance: can ensure that there is sufficient funds to pay funeral expenses and final income taxes. You might also wish to leave something to your heirs.

Power of attorney for finances (“Mandate” in Quebec): allows a trusted family member or friend to make financial decisions for you should you become incapacitated – but only while you’re alive.

Power of attorney for health care (“Mandate” in Quebec): allows someone close to you to make medical decisions based on your own previously expressed wishes.

Living will: sets out your preferences for medical care if you’re unable to express them yourself. This concerns continuing life support and similar important decisions.

Organ donor cards: is an official statement of whether you would like your organs to be salvaged for someone who would benefit from a transplant. You will also need to discuss this with your family as doctors may need their consent as well.

Funeral arrangements: helps decide how you would like to be remembered.

Business succession plan: decides what will happen with a business you own in part or whole. There are complex rules regarding selling a business or passing it to heirs.

In Canada there are no “estate taxes” – taxes owed on the entire value of an estate. However, your estate may be subject to probate or income taxes. These are paid out of your estate, reducing the amount paid to your heirs. Taxes are important considerations when planning your estate.

Unless your situation is extremely simple, your executor may have to probate your will. This means they must seek court certification that it is legally valid. This can be costly and delay your heirs’ access to your legacy.

When planning your estate, discuss the following issues surrounding probate:

  • Whether or not your will requires probate.
  • How to name a beneficiary other than your estate to receive your RRSP or RRIF, pension plans and life insurance policies.
  • How owning assets jointly will mean they don’t have to pass through your will.
  • Who will manage any trust accounts; and
  • How transferring your assets to a living trust can avoid probate.

Your executor is required to file a “terminal tax return” that declares all of the income you earned in the year up to your death. Any investments not left to your spouse or common-law spouse are treated as if they had been sold the day of your death. In both of these scenarios, capital gains can be onerous.

When planning your estate, discuss the following issues surrounding taxes:

  • How naming your spouse or common-law spouse as the beneficiary on your RRSP or RRIF can lead to a preferable tax situation?
  • Who you should bequeath assets with capital gains to, and who should receive assets without capital gains?
  • How authorizing your executor to make one final investment into your spousal RRSP can benefit your estate?
  • How charitable donations of cash or other assets can lessen your final payable taxes?

Choosing your executor, also known as a trustee or the administrator of your estate, is one of the most critical decisions you have to make when you draw up your will. The person you select is responsible for managing your estate and carrying out your wishes. It’s an important job – both an honor and a lot of hard work.

How do you pick the person you want to speak for you?

Choose someone you trust completely, who is comfortable working with financial information and patient in dealing with administrative details. Your executor must be able to act impartially on behalf of all your beneficiaries. He or she must also have the presence of mind to take care of many tasks very soon after your death.

You also want to select someone who will likely survive you. In any event, it’s a good idea to name a back-up executor in case your executor predeceases you.

Strength in number?
You can choose two or more executors if you feel your estate is complex and would be best served by people acting as a team. If you name co-executors, make sure you pick people who can work together effectively. The last thing you – or your beneficiaries – want is your executors arguing about the best way to proceed with your estate.

What happens if you die without a will?
If you don’t have a will, an administrator will be appointed for you by the courts to settle your estate.


What does an executor do?

Arrange the funeral
The executor must obtain the death certificate and make funeral arrangements.

Locate the most current will
After your executor finds and reviews your will, he or she may need to meet with a lawyer to apply for probate, which confirms an executor ‘s authority to act on behalf of the estate. Probate is not required in Quebec or for very simple estates.

Inform beneficiaries
As soon as possible, your executor must let beneficiaries know they were included in your will. As the process moves forward, the executor should keep everyone informed about the progress, as well as any delays, and when heirs might expect to receive their inheritance.

Notify organizations and business associates
All the financial institutions and organizations you dealt with must be informed of your death. This includes banks, credit card companies, investment companies, insurance companies and landlords. Any pre-authorized payments will have to be stopped. Your executor will generally open a bank account for the estate so any credits made payable to the estate can be easily accounted for.

Claim benefits
The executor must apply for life insurance benefits and the Canada Pension Plan death benefit, if applicable.

Compile a comprehensive list of estate assets
One of the most potentially time-consuming tasks an executor must complete is to create a list of all your assets – every bank account, registered plan, investment, pension, property and other items of value you owned. Then he or she must locate each asset, secure, value and insure it, if appropriate. Your executor will manage the assets in the estate until they are disbursed; according to the latitude you assign him or her in your will. Your executor must keep detailed records of anything that is bought or sold on behalf of your estate, for the courts and your beneficiaries.

Pay estate debts and expenses
Your executor is responsible for paying all debts and expenses owed by your estate, including funeral bills and taxes. Generally, the money to pay these costs comes from your estate. However, if an executor distributes all the assets of an estate and then discovers an unpaid bill, he or she can be personally liable for the expense.

File the final tax return
Revenue Canada requires the executor to file outstanding tax returns from past years and a final return for the year of death. In addition, each year the estate retains any assets, an estate tax return must be filed.

Administer trusts set up in the will
If you leave any assets in trust for a beneficiary – for example, until a child turns 18 – and appoint your executor as trustee, he or she must manage the assets for as long as the trust exists.

Distribute bequests
The most obvious task of an executor is to distribute your bequests.

How is the executor compensated?
Fulfilling all the responsibilities of an executor can be difficult and time-consuming. In many cases, an estate will not be settled for many months or even years, during which time the person you have selected to carry out your wishes could spend hundreds of hours working out all the details. Legally, an executor is entitled to compensation from your estate, even though friends and family often forego payment.

Receiving an inheritance stirs mixed emotions. Part of you may be looking forward to paying off bills, investing a bigger nest egg for your future, or buying that big screen TV you’ve been eyeing. Part of you will be mourning the loss of a loved one and perhaps feeling guilty about benefiting from the inheritance.

Consider how you can make the most meaningful use out of the gift. Whatever your decision, remember that someone you loved wanted you to benefit from your inheritance.

How long does it take to receive an inheritance?

Depending on the complexity of the estate, it may take anywhere from a few weeks to over a year for the executor to pay all outstanding debts and settle the estate.

However, disbursement of assets to beneficiaries may be delayed where:

  • Your benefactor died without a will.
  • The will is disputed
  • The courts do not approve the will or parts of the will.

These delays can be avoided with an up-to-date will prepared by a lawyer or notary, who will make sure the wording is legally binding. If you expect to receive an inheritance, talk to your benefactor and find out if he or she has a current, legal will. These conversations can be difficult to start, but will help ensure that your benefactor’s wishes are carried out.

Will I be taxed on my inheritance?
Before you receive your inheritance, the executor ensures the taxes have been paid on the assets up to the date of death unless they are left to a spouse or common-law spouse. RRSPs and RRIFs are taxed as if they had been cashed in and assets with capital gains are taxed as if they had been sold on the date of death. After you receive the inheritance, you will be responsible for paying tax on any income (including interest, capital gains and dividends) earned in the future.

IN THE SHORT TERM
While you are developing a plan for your inheritance, it’s a good idea to maximize your short-term earnings by investing in a money market mutual fund or high yielding savings account.

IN THE LONG TERM
When you’re ready to invest part or all of your inheritance for the long term, your selection of securities will depend on your risk tolerance and the length of time before you need the money. Generally, a low-risk investment has lower potential for growth. A more volatile investment has a higher potential for growth.

An independent financial advisor can help
Managing your investments effectively is the key to building your inheritance so it can benefit you or your children in the future. An independent financial advisor can guide you through your choices, pointing out the advantages and disadvantages of various strategies.

Give your inheritance the attention it deserves
Receiving an inheritance is an honor, a responsibility and an opportunity. Take the time you need to plan and resist making emotional decisions. It will allow you to make the most sensible choices for the long term.

CONTROLLING YOUR LEGACY

A legal, up-to-date will makes sure your estate passes smoothly to your beneficiaries. It’s the best way to help your family cope during an exceptionally difficult time and allow them to take advantage of the available tax-saving opportunities.

There are three basic types of will: a holograph will is an unwitnessed document that’s entirely in your handwriting and signed by you; a form will is one you complete from a do-it-yourself kit; and, a formal will is drawn up by a professional lawyer or notary. Both a form will and a formal will must be witnessed by two competent adults who are not either beneficiaries or the spouses of beneficiaries.

The chief advantage of drawing up a formal will is that it’s designed to stand up in court under various challenges. It is your lawyer’s or notary’s responsibility to make sure the wording in your will is absolutely clear and legally binding. When dealing with something as important as your estate, you don’t want to leave anything open to interpretation.

How often can I change my will?
You can change or revoke your will at any time, as long as you remain mentally competent.

What instructions should I include in my will?
Your will allows you to make certain critical decisions regarding your estate and your family. Some of the most significant choices you can make in a will are outlined below.

NAMING AN EXECUTOR

GIVING THE EXECUTOR SPECIFIC POWERS

NAMING A GUARDIAN

NAMING A TRUSTEE

LISTING YOUR BEQUESTS

INCLUDING CONTINGENCY PLANS

WHAT WILL YOUR LAWYER NEED?
Before you meet with your lawyer to discuss your will, consider how you would like to distribute your assets and assemble the following information:

  • the full legal name and address of your executor(s)
  • the full legal name and address of guardian(s), if applicable
  • the full legal name and address of trustee(s), if applicable
  • the full legal names and addresses of your beneficiaries
  • a complete list of the beneficiaries named on your Registered Retirement Savings Plan, Registered Retirement Income Fund, pension plans and insurance policies
  • a complete list of your assets and where they can be found

OTHER DOCUMENTS
A will only takes effect after you die. To appoint a close friend, family member or professional to make financial and medical decisions for you should you become incapacitated, you need a power of attorney for finances and a power of attorney for health care (both known as mandates in Quebec). Talk to your financial advisor or lawyer for more information.

KEEP YOUR WILL UP TO DATE

PROTECTING YOUR ASSET FOR THE FUTURE

Trusts can have many uses; including helping you preserve your assets by providing a trustee who will manage them on behalf of your beneficiaries. While there are many types of trusts, there are two which are often used a part of an estate plan. An inter vivos trust takes effect while you are alive as soon as you transfer assets to the trust. The testamentary trust doesn’t take effect until after your death and your estate is settled.

With a trust, you as the settlor transfer your assets to the trust, where they are managed by a trustee. The trustee manages these assets according to the instructions in the trust document, on behalf of your beneficiaries.

Your beneficiaries might benefit from the trust on an on-going basis, for example by receiving regular income from the trust. Or they might benefit at a time you specify, such as when they turn 21, when they might receive a lump-sum payment from the trust for some or all of the remaining assets in the trust.

There are many reasons why you might want your assets to be managed in a trust:

  • if you have minor children who cannot legally manage assets
  • if you have older children who may not be ready to handle a large lump sum responsibly
  • if you have relatives who are incapacitated by illness or age and may not be able to take care of their own financial affairs
  • if you want to earmark certain assets for a specific purpose, such as your children’s education
  • as a tax planning tool, either for income splitting or for reducing income and/or probate taxes on death
  • as a creditor protection tool
  • as a way to structure a gift to charity Unlike wills, trusts are private documents so they can also be used to transfer assets without them becoming a matter of public record.

To offset the fees associated with trusts, a minimum of $150,000 is generally recommended.

Inter vivos trusts
When you set up an inter vivos trust, or living trust, assets are transferred immediately to the trust and the trustee becomes responsible for managing the assets and investments within it. Inter vivos trusts can be useful if:

  • you want to limit final taxes on your estate, since a trust freezes the value of assets at the time it is established
  • you want to minimize probate taxes, as an inter vivos trust’s assets do not pass through your will
  • you need a more detailed document than a power of attorney or mandate to specify how your assets are to be managed if you become incapacitated
  • you do not currently owe money to creditors but are interested in creditor protection
  • you want a beneficiary (such as a spouse) to enjoy steady income from the assets put into a trust during his or her lifetime, then have the remaining assets transferred to a charity

An inter vivos trust can be established as a revocable or irrevocable trust. With a revocable trust, you have the power to dissolve the trust at any time and have all assets returned to you. With an irrevocable trust, you should not count on being able to change your mind.

Tips on Tax
When you transfer assets into an inter vivos trust, you may have to settle up with the Canada Revenue Agency for the taxes due on any taxable capital gains as of the date of transfer. If you are 65 or older, assets transferred to an alter ego trust are a notable exception.

The inter vivos trust pays tax each year at the top marginal rate on any income that remains in the trust. However, income paid out to beneficiaries is taxed in their hands at their personal tax rate. Every 21 years, assets that remain in an inter vivos trust are taxed as if they had been sold at fair market value. Assets transferred to an alter ego trust continue to be taxed at the settlor’s personal tax rate.

Deciding on a trustee
You can choose one or two trusted friends or family members to act as trustee or co-trustees. If your situation is complex or you expect the trust to be in existence for many years, you may want to select a professional trustee, such as a trust company. Whichever route you take, you should pick a trustee who will act impartially, in the best interests of all beneficiaries.

Your trustee or co-trustees must:

  • manage the assets in the trust, investing the money according to the rules in the trust agreement
  • make payments to your beneficiaries, as specified by the trust agreement
  • file annual income tax returns for the trust and make arrangements to pay any taxes due

If a trustee neglects any of the duties associated with the trust, he or she can be held personally liable for the resulting financial loss.

Testamentary trusts
Testamentary trust agreements are incorporated into your will, and the fee for preparing them is included in your lawyer’s fee for drawing up the will. Your assets remain under your control during your lifetime. Only after your death are they transferred into the testamentary trust. To change the terms of a testamentary trust at any time while you are alive you simply revise your will.

Testamentary trusts can be used to:

  • arrange for assets to be managed on behalf of minor children
  • appoint a trustee to handle assets for a beneficiary who does not have the financial knowledge or capacity to invest for himself or herself
  • provide on-going support to one beneficiary (such as a spouse) during his or her lifetime, then have your assets pass to another beneficiary (such as your children from an earlier marriage) rather than leaving them outright to that beneficiary and then having the ultimate distribution of those assets be subject to the terms of the first beneficiary’s will.

Tips on Tax
Any taxes due on the assets will be settled up on the deceased’s final tax return before the assets are transferred to the testamentary trust. The trust then pays tax annually on the interest and dividend income it earns; on capital gains, at least every 21 years with few exceptions. However, unlike an inter vivos trust, a testamentary trust’s income is taxed on a graduated scale so it pays lower rates when its income is low, and higher rates when its income is high.

As well, setting up a testamentary trust can reduce the taxes paid after your death by using the tax bracket of the trust as well as the beneficiary’s own personal tax bracket. Suppose you transfer $200,000 earning $20,000 a year into a testamentary trust on behalf of a beneficiary who already has an independent annual income of $60,000. Assuming the beneficiary doesn’t need the trust income in one year, it can remain in the trust where it will be taxed at a lower tax rate than would be charged if the $20,000 was taxed in the beneficiary’s hands on top of their own $60,000.

You can transfer any assets to a trust, including stocks, bonds, mutual fund units, real estate and private businesses.

How do I establish trust?
To set up a trust, you must consult a lawyer, preferably one who specializes in tax and estate planning. You can also speak to your financial advisor about the tax implications of both inter vivos and testamentary trusts.

Most trust agreements contain the following information:

  • an explanation of why you are setting up the trust
  • a list of assets to be placed in the trust
  • the names of the beneficiaries, trustee or co-trustees, and back-up trustees
  • the specific powers of the trustee or co-trustees
  • what benefits the beneficiaries will receive
  • when the beneficiaries will receive income and/or capital from the assets in the trust
  • when and how the trust will be wound down

Anything you don’t specify in your trust agreement will be determined by the courts according to your province’s trustee act, or if you live in Quebec, the Quebec Civil Code.

What’s the cost?
Trusts are an important estate planning tool, allowing you to specify how and when your beneficiaries can access certain assets. However, the costs of setting up and maintaining a trust should be estimated in advance. They include set-up fees, legal fees, administration fees for as long as the trust is in existence, and fees when a trust is wound up. If you’re appointing a professional trustee, make sure you ask for a list of all the fees that will be charged annually for the management of the trust and distribution of assets to beneficiaries.