Estate Planning – Beneficiary Designations

October 19, 2016

Estate Planning isn’t brain surgery – but it’s getting closer!

Estate planning is a completely selfless act – in planning our estates, we acknowledge that we won’t live forever and are taking steps to pass along the assets left in our estate, which we likely have worked hard to acquire, to our beneficiaries in the least painful and most efficient way.

Recent changes to provincial estate settlement laws and the strategies involved make estate planning complex.

There are primarily two reasons why, despite the challenges of estate planning, it’s important;

1 – It can preserve your estate – your estate may pay less tax or be passed along in a way that it’s not wasted. You worked a lifetime to build it – take a little time to consider how it will be passed along.

2 – If you pass your assets along responsibly, they just may enhance the lives of your beneficiaries rather than destroy them – it’s the right thing to do.

Completing a Will is really putting the strategy of planning ones estate into a legal document and there are a number of other things that need to be done in conjunction with a will to minimize the difficulty and costs of settling an estate. These strategies do not apply to everyone – who our beneficiaries are, their capacity and how well they get along may be more important than simplifying the estate or reducing costs.

Your home, if registered jointly with your spouse or partner will pass probate free. However, upon last death, will have to be probated to pass to whomever was named as beneficiary in the Will. Probate is a tax of approximately 1.5% (in Ontario) each provincial ministry charges to review the Will and authorize the trustee to manage the distribution of the assets. On a $500,000 home, this amounts to $7,500. One strategy to avoid this is to re-register the home as joint with right of survivorship with the beneficiary before death. The cost to do this is less than $1,000. A great idea if there is only one beneficiary who is financially responsible – but still a partial risk because any creditors of that beneficiary could come after the house. This is best done with some consultation with an estate lawyer.

For a couple with children under 18 who own real estate, investments and have life insurance policies, a Will with a trust clause is critical. After both deaths considerable assets are involved and a plan including a primary and alternate or even a private co-trustee should be considered. In this case all assets (RSP’s, TFSA, life policies etc) should name the estate as secondary beneficiary after the primary beneficiary. The Will should name a private trustee or co-trustee who could manage the assets for the under age children until an appropriate age. This is not a job for a friend to do – it needs professional management and yes it comes at a cost. Once again – this requires consultation with an estate lawyer

If you are married or in a common law relationship it’s generally tax efficient to name your spouse as the primary beneficiary for registered plans (RRSP, RIF,LIF, SpRSP, and TFSA’s etc). These plans roll over to your spouse tax deferred and probate free. If you hold investments in open or non-registered investments, naming your spouse as a joint registrant will allow these assets to pass probate and tax free. If you don’t name your spouse as a joint registrant – she/he may get the assets tax free but they will be probated and held up until probate is complete. Along with joint assets, consider naming your significant other as a joint account holder on your bank account – it can cause significant difficulty if your significant other cannot get at assets in your bank account after your passing.

It may make sense to name your children (if under 18) as secondary beneficiaries of a portion of your registered accounts. An income splitting opportunity exists, if you have children under the age of 18, for which you have claimed the child tax benefit and are therefore considered financially dependent on you. The benefit of this approach is the proceeds of the registered plan would be de-registered and sent to the trustee – tax free! The trustee must purchase an annuity naming the child as the beneficiary and the first payment must begin within one year with the final payment when the child reaches 18 years. The trustee can open an informal “in trust” account for the child and deposit the annual annuity payments into that account. The trustee is also responsible for filing a tax return for the child and treating the entire payment as taxable income. A $20,000 annual payment requires a tax payment of about $2,800 in Ontario. Significantly lower than what would have been paid in tax if the RSP was redeemed in its entirety by the Estate at death.

Note that if you specifically name other individuals as beneficiaries of your registered accounts in your Will and its completed after naming them as beneficiaries in the account documents, your Will takes precedence! This is why it’s called estate planning – a lot of pieces need to be considered.

Use of trusts

If your beneficiaries are too young, financially or mentally incapable, you need to consider some form of a trust to be created upon your death for your assets. Current laws allow for preferred tax treatment for trusts only for the first 36 months – then trusts must pay the highest tax on any income they retain and do not pay out to beneficiaries.
As trusts are put in place so money can be managed as you would have should you have lived, this cost is well worth it. In blended families spousal or life interest trusts need to be considered – again consultation with an appropriate estate lawyer recommended.

Last thoughts (Pun intended!)

Estate planning takes work, is complex and requires us to acknowledge we are not getting out of this life alive so we do this work for our loved ones! It is well worth the effort if you feel responsible for how the assets you took a life time to build are passed along and benefit the next generation.

The Big Mistake

The memory of the last financial crisis (2008-2009) may have faded for you – if you didn’t make the big mistake. At the time, we all felt the short term pain of the 30%+ decline in our portfolio’s and the agony of the following 18 month up and down grind. Those that made the big mistake and sold – continue to pay as the markets continue their upward trajectory.

The grinding market incline from the last bottom in March of 2009 has felt agonizingly slow at the time but in retrospect has recovered relatively quickly. We all lived through the so called experts predicting immediate recessions, wild inflation and deflation. Through out that period I preached faith, patience and discipline – because history told me everything I needed to know. This had happened before and has always turned out the same – the equity market recovers and goes on to new highs.

I have met a few people who lost significantly during that period. They made the big and fatal mistake – they sold at the bottom. With the media screaming economic apocalypse and never having gone through a period like this and with no one to guide and support them – their error caused a tremendous loss in their savings – never to be recovered in this lifetime.

As a financial advisor guiding my clients in their financial affairs I see my duty as preventing them from making the big mistake. Anything that risks a significant portion of my clients assets – buying or selling at the wrong time, too much invested in one asset, over spending. A level and cautioned approach is what I offer. My clients financial success and a life well lived is the reward.

Executor Liability Insurance

August 4, 2016

The changes to estate settlements as of January 1 of this year place a greater liability on the executor of an estate. The executor is liable for reporting of all assets and for filing the appropriate documents. The liability is not transferred to any professional the executor hires to assist in the settling of the estate. Advocis, the Financial Advisors Association of Canada, offers ERAssure – Executor Liability Insurance to protect both the executor and the estate from potential legal liabilities. If this is of interest, please give me a call.

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Do you know where your Will and Powers of Attorney are?

June 7, 2016

I was visiting my older sister in Toronto – it was both a personal and professional visit as I am her financial advisor as well. As her Financial Advisor I review her portfolio, taxes and estate documents. Every year we do a physical and mental check on her important documents.

Like most people, my sister doesn’t give much thought to her Powers of Attorney and her Will, unless we discuss them. When we do I ask two questions:

1 – Where are the original documents?

You can only have one original of a Will but you can have multiple originals of a Power of Attorney for both Property and Health. In my sisters’ case, we had a lawyer certify a copy of the Will so we confirmed she has the original in her safe and I have a certified true copy in my safe.

We confirmed that I have one original of a Power of Attorney for Property in my safe but the Powers of Attorney for Healthcare was nowhere to be found so we actioned that item.  We also agreed that since we are going through this we might as well get another original of a Powers of Attorney for Property and give it to my younger sister.

As an additional check we confirmed that she had her original title to her home and originals of estate documents for which she was executor.

2 – Has anything changed that would require an update to any of these documents?

Nothing had changed and both my younger sister and I are executors (either/or) and younger by 14 years so we felt this was fine.

Lastly, when I returned to our office I dug out an old Estate Document Summary I had and updated it and committed to complete it so it could be with our important documents.

Estate Document Summary