Estate Planning

A simple guide to estate planning

Planning your estate matters is first and foremost about having a will. But it can also be much more. A well-thought-out estate plan ensures that your family is cared for should something happen to you, and that your money goes where you want it to. It’s an important pillar of managing your wealth.

Individual requirements range from drafting a simple will and enduring power of attorney to a complex estate plan that includes an estate freeze. This guide is meant to get you thinking about your situation.

When I first sit down with clients, I start with this question: “What is important to you about planning your estate?”

There are many possible answers. For some people, preserving the family wealth is top of mind. For others, providing for a spouse and children. Transferring the reins of the family business. Minimizing probate fees. Funding educational pursuits for children and grandchildren. Perhaps, leaving a legacy to a charitable cause.

Pay close attention to one caution. Developing your estate plan can can be difficult because it requires facing your own mortality. Talking openly about it with family members helps.

1. Getting started

If you die without a will, your assets are distributed according to provincial legislation. This may result in a loss of control. It may also necessitate additional time and legal fees to settle your estate issues. Anyone getting married, separated, divorced, remarried or having children should revisit their current will.

Make a detailed list of your assets and liabilities. Consider your tax positions and desires for the disposition of each asset. Pay special attention to a family business and cottage.

Review your family’s needs and ability to maintain their lifestyle if something happens to you. Check the beneficiary designations for accounts such as your RRSP, RRIF, RESP, DPSP (deferred profit-sharing plan), pension plans, and life insurance policies.

2. Consider your options

Beware of how provincial legislation — such as B.C.’s Representation Agreement Act or Wills, Estates and Succession Act — may affect your desires. Particularly, if you’re governed by two or more provinces or countries. You want to appoint someone who can make health and personal care decisions on your behalf if you are not able.

Examine whether to leave your estate to the beneficiaries either outright or through trusts. Think about whether a portion of your wealth should be dealt with while you are living. A family business succession plan may should tie into your estate plan.

3. Appoint representatives

Take great care in appointing capable representatives, powers of attorney, executors and trustees for your estate. They have similar powers as you do in dealing with your accumulated wealth

Choosing the right guardians for minor children is vital. Your guardians and trustees may have duties lasting up to 18 years, or longer, depending on the children’s ages and the life of the trust you create.

Appoint two qualified people for every position. Ideally, one should be younger than you and live in the same province. Grant them sufficient powers to perform their duties as you would.

Be certain each appointee wants the often thankless job. Understand that being an executor is no picnic. I also counsel clients to provide their appointees a detailed letter of instruction to make their tasks easier. They will likely encounter some family dynamics in need of attention and resolve.

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4. Use of trusts

Trusts may often be useful in providing income for family members. They are part of the process to transfer assets and ensure your beneficiaries are cared for. However, they don’t fit every situation

Generally, there are two types of trusts: A “testamentary trust” is established when you die. An “inter vivos trust” is set up while you’re alive.

For example, some goals while living may benefit with an alter-ego trust or joint spousal trust. A spouse, child or other dependent may have special needs and care to be addressed.

5. Jointly-owned assets

A popular estate-planning strategy is for a parent to register an asset, such as an investment account or residence, in joint name with an adult child. Joint ownership is generally set up for convenience and to minimize probate fees.

While joint ownership can accomplish both objectives, complications may arise. Placing an asset in joint name with an adult child can result in unintended and unhappy consequences.

The implications of individual or joint ownership of assets need assessment for both income tax and probate purposes. Sometimes they are at odds.

6. Estate freezing

You may decide to freeze the growth for your account of some or all of the assets now owned. The family business or farm often comes up. The expected future growth on the selected assets can then be passed to the benefit of other family members, such as a child or grandchild.

One method to carry out an estate freeze uses the share structure of a private company. The general concept is for an individual to transfer certain assets at today’s fair market value for shares of equal value in the private company.

An estate freeze should be considered as non-reversible. I focus on the adequacy of the assets remaining in the individual’s hands before any transfers take place.

7. U.S. assets

U.S. citizens living in Canada and Canadians who own property in the U.S. should review the American estate tax treatment they face upon death. Unlike Canada, the U.S. imposes a tax on estates.

Generally, American citizens and residents are subject to an estate tax based on the value of their worldwide estate. If you are not a U.S. citizen or resident, you may have to pay U.S. estate taxes based on property value located in the U.S.

8. Cottages

Simply said, beware of cottages. They are full of wonderful memories but can cause plenty of headaches. For example, squabbles may arise among family members who have differing views on what to do with them and who picks up the expenses

Special attention is often required for cottages, particularly those that are not principal residences. They may have been bought long ago and could trigger substantial capital gains if sold today.

9. Getting it done

Don’t just think about putting together an estate plan – get it done. Make sure your professional team, which could include an investment adviser, tax practitioner or a lawyer, clearly understands your objectives. Then instruct them to put the best personal plan in place that reflects your wishes.

The cornerstone of your estate plan is a well-crafted will. Review your will every two to five years. Legislative changes and life events may both alter your objectives.

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What is Estate Planning?

Estate planning is the process of planning what will happen to your assets at the time of your death. Estate planning is not always an easy topic to deal with, but having a thought-out plan in place is important for not only you but your beneficiaries.

Every adult should have an up-to-date estate plan that outlines:

    • Who is responsible for distributing your assets?

    • Who gets what and when will they get it?

    • Who will take care of your children?

    • Who will manage any trust accounts?

    • Who will make financial and medical decisions if you are incapacitated?

Why is it important? Controlling your legacy

Having a plan in place for your estate is an integral part of any good financial plan. The best way to ensure your wishes are carried out after your death is having a legal up-to-date will. Without careful planning, your estate could be tied up in the courts for months or even years and the government could end up collecting more taxes than is necessary.

When dealing with something as important as your estate, you don’t want to leave anything open to interpretation especially around how your estate will be divided up between family members.

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

    1. Determine your estate planning goals.

    1. Consider which estate planning tools fit your situation best.

    1. Choose the people you would like to speak for you.

    1. Start raising estate-planning issues with your family.

    1. Keep your estate plan up to date.

Why Use Testamentary Trusts in Estate Planning?

Testamentary Trusts have been a popular and favored estate planning tool for a variety of reasons, one of which was tax benefits.  A testamentary trust is a trust established by a person as a result of his or her death for the benefit of another person.  If you are new to trusts, and would like to read information about the legal requirements to establish a trust and why you might consider using a trust, see our introductory article about trusts.

Changes to the Taxation of Trusts

Prior to January,1, 2016, a testamentary trust was treated by the Income Tax Act (Canada)  as a separate taxpayer from the deceased’s estate and from the trust’s beneficiaries.  Testamentary Trusts did have the benefit of graduated income tax rates applicable to individuals generally.  The federal government has recently made amendments to the Income Tax Act effective January 1, 2016 changing tax rules for certain trusts, including testamentary trusts, including:

    1. a process to eliminate the graduated income tax rates for the taxation of testamentary trusts;

    1. taxing accrued capital gains of in spousal, alter ego and joint partner trusts in a deceased beneficiary’s hands instead of in the trust itself (which puts the assets of the trust in the hands of the beneficiaries of the trust while leaving the tax liability in the hands of the deceased’s estate); and

    1. allowing a charitable donation in an estate plan to be allocated between the deceased and their estate.

The federal government’s explanation for these amendments is to perceived estate planning “abuses” through the creation of multiple testamentary trusts, and to combat tax-motivated delays completing estate administration. The new rules do allow an estate or trust to file an election with Canada Revenue Agency to claim “Graduated Rate Estate” status.  This will entitle the estate to the benefit of graduated income tax rates for three years from the terminal date of death tax return.  A person can only have one graduated rate estate and an election must be filed with CRA to claim that status.

In addition to losing graduated tax rate treatment, the new rules require affected trusts and a graduated rate estates (i.e. an existing testamentary trust) to select a December 31 year-end and to lose other benefits, such as:

    1. quarterly tax installments must now be made;

    1. the exemption from Canadian capital gain allocated to non-resident beneficiaries is eliminated;

    1. the trust cannot allocate investment tax credits to beneficiaries;

    1. shortening the time to file a notice of objection to an assessment to the regular 90 days applicable to other taxpayers; and

    1. Eliminating the ability for the trust and a beneficiary to split income earned by a trust.

Clients have asked if the first two changes have made their testamentary trust planning obsolete.   The answer to this question is for the most part “no”.   While these Income Tax Act amendments do eliminate the tax advantages previously enjoyed by using testamentary trusts, they do not eliminate the other legal and estate planning objectives accomplished using trusts and those objectives often are the main reason people use testamentary trusts in their estate planning.

The person making the trust should consider whether special authority should be put into the terms of the trust to address whether having the assets of the trust in the hands of the beneficiaries of the trust while having the tax liability in the hands of the deceased’s estate is a problem.  The Income Tax Act does provide that a trust or beneficiary and a person’s estate can be jointly and severally liable for this tax liability, to ensure Canada Revenue Agency can follow the money if the estate has no money to pay the tax owing by it.  This can be used to draft the documents to clearly impose responsibility to pay tax payable on the deemed disposition of assets in a trust to the trust or it’s beneficiaries.  This is done by providing in the documents that the estate not pay tax on assets in the trust and that the trust be charged with liability to pay that tax on the trustee of the trust, or even the beneficiaries of the trust.

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Trusts for Disabled Beneficiaries Can Still Benefit from Graduated Income Tax Rates

Thankfully, testamentary trusts established for disabled beneficiaries (known as a “Qualified Disability Trust”) will continue to be eligible for graduated income tax rates.   A Qualified Disability Trust is a testamentary trust that is considered resident in Canada (i.e. it is managed by a trustee resident in Canada) with one or more beneficiaries who qualify under the Income Tax Act for a disability tax credit certificate.

Importantly,  a regular testamentary trust which will no longer has the benefit of graduated tax rates, can later become a Qualified Disability Trust if the capital beneficiary of the trust subsequently becomes disabled and become eligible for the disability tax credit.

The benefits of Charitable Giving are Preserved

Planned giving, or charitable giving in estate planning continues to be promoted under the Income Tax Act.  Beginning on January 1, 2016, a donation can be allocated between the deceased (on his or her terminal tax return) and his or her estate. The deceased’s tax filers may also apply the donation credit in the year of death or in the immediately preceding year. Alternatively, the graduated rate estate may use the donation in the year of the donation, or carry it back to any of its prior taxation years, or carry it forward for up to five years.

The avoidance of capital gains tax on the charitable donation of publicly traded securities remains in place; however timing and valuation variables remain.   Depending on your anticipated tax position at your death, a properly planned charitable gift included in your estate plan can effectively avoid the payment of tax and set aside that money for a desired charitable purpose.  That provides many clients with a good feeling of accomplishment.

Why Trusts Remain Useful

Regardless of the changes to the taxation of trusts, they remain useful and should still be considered for estate planning for other reasons which have not changed by these amendments.  The remaining purposes or advantages of using a trust include:

    1. If the beneficiary of the trust becomes disabled in the future, then the trust can become a Qualified Disability Trust and benefit annually from graduated income tax rates.

    1. Providing for or benefit and improve the quality of life of a beneficiary who is either too young to have access to such money.

    1. Providing effective financial management for the benefit of someone who cannot be trusted to manage the money wisely or responsibly for any other reason.

    1. Providing for more than one generation in the family in circumstances when you might want to preserve capital for the benefit of future generations.

    1. Establishing an endowment for a charity or for a charitable purpose dear to your heart, especially when you cannot count on your other beneficiaries to do so.

    1. Protecting capital you leave behind from your beneficiary’s creditors and even their own spousal claims.

    1. Providing for a subsequent spouse or partner while preserving capital remaining for children of a prior relationship.

    1. Preserving and distributing your wealth (using family trust, alter-ego trust or joint partner trust) outside your personal estate to avoid probate fees and the probate process.

    1. Avoiding wills variation claims which can potentially be made against your estate by a spouse or child who may be unhappy with your estate planning for them.

    1. Using Trusts as an incapacity planning tool that cannot be overridden by a Committee application under the Patients Property Act.

The loss of the previously described tax benefits for these trusts makes the process of assessing whether the benefits of doing so outweigh the ongoing costs to administer the trust more challenging; however, important benefits can still be achieved from the use of trusts in estate and incapacity planning, making their use worthwhile.

An executor cannot create a testamentary trust from a simple bequest in a Will or a simple beneficiary designation in a life insurance policy or registered account.  If however the Will or beneficiary designation includes a testamentary trust, it can be used to take advantage of the benefits of a trust and it can be overridden if there is any change in circumstances which make the trust not worthwhile to have or maintain.  If a testamentary trust is well drafted it will provide the trustee with the discretionary authority to end or wind up the trust if the trustee determines the administrative effort and cost of a testamentary is not worth the effort.  That way, there can be an ongoing assessment of the benefits and costs of the trust and the trust will be able to exist if the need justifies it and the trust can be brought to an end if the trustee determines the disadvantages of having or maintaining the trust outweigh the advantages of doing so.

If you have any further questions about the effect of these tax rule changes concerning trusts, or regarding the use of trusts generally in your estate planning or incapacity  planning, please contact us.