What is an estate plan?
An estate plan is simply a checklist that ensures your personal belongings and finances are easy to manage and distribute, exactly how you want them to be, when you die. It also makes sure your estate doesn’t pay more tax or legal fees than it needs to and perhaps most importantly, it makes things so much easier for your loved ones.
While the word “estate” is often associated with large properties and the wealthy, in this case, it only refers to your assets and liabilities, no matter what that amounts to.
People also mistakenly think an estate plan is for the elderly. This is also not true. An estate plan is critical for anyone who owns assets with any value or has a spouse/partner or children. Without one, your loved ones will be faced with a long, drawn out estate settlement, with more paperwork, lawyer’s fees and probate fees than is needed. Often this can take several years to complete and it’s likely never executed the way the deceased would have wanted.
What does an estate plan include?
A will, power of attorney for health care and power of attorney for property are all familiar pieces of an estate plan. What many don’t realize, is that having a will is not enough. There are rules around distributing finances and paying tax on one’s estate that can greatly impact the financial legacy left behind.
Here are some of the common estate planning mistakes people make:
- A spouse/partner is named as a beneficiary but not a successor annuitant on a RRSP/RRIF/LIRA/LIF. In this case, the investments will be collapsed before they can be rolled over to the spouse/partner, causing a lot of unnecessary work and expense.
- When a spouse/partner passes away, the beneficiary of one’s investments must be updated, since presumably the spouse/partner is the current named beneficiary/successor holder. If this doesn’t happen, it can create a lot of confusion and funds may be distributed differently than what was intended.
- An individual keeps a large amount of cash in a savings or chequing account, instead of TFSA making it subject to probate tax. If the money was in a TFSA, it would be exempt from tax and pass directly to the beneficiary(ies)/successor holder.
- Real estate is in the name of only one spouse/partner instead of both names. In this case, if the surviving spouse/partner is not the owner, the deceased’s estate would need to pay probate tax on the value of the property or make a special application, which can take years to arrange.
- A RESP does not have a named successor holder in their will, so the RESP is collapsed, all the government grants need to be repaid and the remaining funds would be subject to probate tax before being distributed. It is not enough to have named beneficiaries.
- A will is made leaving an RRSP/RRIF to one beneficiary and equivalent cash to another. Unfortunately, before any funds can be distributed, probate tax must be paid on the estate and there is an order to how this is done. The result is that one beneficiary ends up getting more than another. This can easily be avoided with a good will and appropriate estate planning.
- The deceased did not have life insurance and leaves the burden of their debt (mortgage, loans) to his/her spouse/partner or beneficiaries.
- A cottage is left to adult children but there is no plan in place to cover the capital gains and as a result, it is often the case that the property must be sold because the estate nor the children have enough cash to cover the cost.
These are just a FEW common issues that arise around estate planning. With some simple planning, all these things can be avoided. Not only does this ensure the estate pays less tax and legal fees, leaving more money in the hands of their beneficiaries, it makes life a whole lot easier for the loved ones left behind.
Estate Plan Checklist
Here’s a basic checklist for you:
- Make a will, name a power of attorney for health care and a power of attorney for property.
- Check named beneficiaries on all your investments and ensure your spouse/partner is a successor holder.
- Ensure a successor holder is listed in yours & your spouses will for your RESP. (Make sure you understand the implications of naming a successor holder. A testamentary trust in another option).
- Make sure real estate (especially primary residence) is in the name of both spouses/partners.
- Ensure you have enough life insurance to cover major debt and future living expenses for your family.
- Ensure funds are held within a TFSA to protect it from probate fees when possible. This is especially important for older parents and grandparents who often keep lots of cash sitting in a bank account, making it subject to probate tax.
- If you have a cottage or vacation property, speak to a financial advisor about the best way to ensure your estate can cover the capital gains, so that your beneficiaries can afford to inherit it.
- If a TFSA is maxed out, there are other options to bypass probate. Speak to a professional.
- If someone’s death is anticipated soon, speak to a financial advisor about additional ways to bypass probate, like segregated funds.