Enhance your legacy

Estate planning starts with a will, but there’s more to it than that.

After reaching a certain station in life, almost everyone has an “estate” that consists of some money and other assets that can be passed along to the next generation. However, few people have a written estate plan that specifically outlines who will get what and when. Even fewer remember to update their estate plan after a significant life event, such as marriage, divorce, the birth of a child or the death of a beneficiary.

How few? The Manulife State of Estate Planning Survey found that only 13 per cent of Canadians have a financial advisor, a written financial plan and a formal estate plan.

Are those estate plans up to date? When another survey asked people if they had a will – a critical component of an estate plan – approximately 58 per cent said no, 10 per cent said their will is out of date, and just 33 per cent said they have an up-to-date will.

Without a written and current estate plan, you have no say in who receives your legacy. There may be lengthy delays as the courts decide how to distribute your assets. You may also miss out on the chance to minimize probate fees (where applicable) and save tax. 

On the other hand, when you work with your advisor to create and regularly update an estate plan, you have an opportunity to tailor some strategies to suit your circumstances and wishes.

Start with the basics

A legal will is the cornerstone of every estate plan. Its primary purpose is to outline how you want your assets transferred to your beneficiaries after your death. It also names the executor of your estate and grants that person the authority to carry out the instructions laid out in the will. If you have children under the age of majority, a will can name legal guardians for them.

Passing away without a will is called dying intestate. When that happens, the estate is distributed in accordance with provincial legislation. Usually, if you have a spouse and/or children, they’ll get the assets. But what if you want another relative to receive a particular piece of jewellery or a friend to have the stamp collection you started together as children? What if you’re separated but not legally divorced and would prefer that your estranged spouse not receive a big portion of your estate? Or what if your children are minors and you want a say in when they’ll receive their inheritance and who will raise them?

Creating a will, and updating it from time to time, lets you plan for any of these situations and more, and gives your executor a clear roadmap to follow while carrying out your wishes.

In addition to your will, it’s a good idea to prepare two documents that empower someone to act on your behalf in case you become incapacitated during your lifetime. The first document is a power of attorney for property, which names someone to make financial decisions on your behalf. The second is a power of attorney for personal care, which identifies the person who will make health care decisions on your behalf.

Streamline the transfer of assets

Now turn your focus to a range of strategies that can make transferring your assets a smoother and more tax-efficient process.

In every province except Quebec, estates may have to pass through probate – a process the courts use to validate a will. Probate fees are generally based on the size of the estate and can become costly. In addition, the process can move slowly over many months – especially if there’s any confusion over which version of the will is the latest, or if someone steps forward to challenge the will’s intent.

Certain assets can bypass probate, and the associated fees and delays, when you name one or more beneficiaries on the asset itself. You can name a beneficiary on:

• Registered accounts, including Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs) and pension plans (note that in Quebec, you can only name a beneficiary on pension plans, other registered accounts if held with a life insurance company and term certain annuities issued by a trust company)
• Insurance products, including life insurance policies, segregated funds, annuities and guaranteed investment accounts (GIAs)

Other non-registered assets, including bank products like guaranteed investment certificates (GICs), mutual funds and stock portfolios, do not offer the option of naming a beneficiary. However, you can name a joint owner to ensure the asset goes directly to that person after your death, potentially avoiding probate. You can also transfer these types of assets to a trust.

A trust is a legal entity that holds assets managed by a trustee for the benefit of the trust’s beneficiaries. Beyond bypassing probate, trusts can be used to:

• Simplify the transfer of wealth
• Provide more specific instructions
• Reduce taxes payable on death
• Manage money for children

It’s important to note that there are fees associated with setting up and maintaining a trust. To keep some control over how much money your beneficiaries can access without setting up a trust, you can consider an annuity settlement option added to a segregated fund contract or GIA. Instead of paying your beneficiaries a lump sum after your death, this directs the funds into a term or life annuity that makes instalment payments to the beneficiaries over time. The insurance company sets everything up and there are no administration costs.

In more general terms, segregated funds can be an efficient wealth-transfer tool. When you name a beneficiary on a segregated fund contract, the death benefit payout happens quicky and more privately, outside the will. This is another way to skip the legal, accounting and administrative fees associated with settling an estate and to avoid probate. The death benefit is also usually protected from challenges by creditors, though there are some exceptions.

Consider the impact of taxes

As you develop your estate plan, an important consideration is the after-tax amount each beneficiary will receive. Various types of assets are taxed differently, but what matters to your beneficiaries is what they receive after taxes are factored in.

For example, say one child is named as beneficiary of an RRSP valued at $1 million, through a will a home valued at $1 million is left to another child, and the rest of the estate in the form of a non-registered investment account valued at $1 million passes to a third child. The children will ultimately receive unequal bequests because the tax rules that apply to each asset differ. Here’s what could happen:

• The first child receives the $1 million RRSP as a lump sum (taxes due on the RRSP are paid out of the estate)
• The second child receives a $1 million home thanks to a tax-free transfer using the principal residence exemption
• The third child receives just $600,000 – $400,000 less because that money had to pay the estate’s taxes on the RRSP and the capital gains in the non-registered account

Your advisor can help you calculate an equitable division of assets to be shared among your heirs.

That said, don’t worry about every last cent in your estate plan. Get the broad strokes right, but stay flexible and accept that you may have to adjust your strategies based on changes to your family’s circumstances or to legislation. The key is to create an estate plan that you’re happy with and to review it every few years with your advisor.

Peace of mind can come from knowing you’ve put your wishes in writing, made it as simple as possible for your assets to pass on to loved ones and considered the impacts of taxes. Work out the details with your advisor, lawyer and accountant and move forward with creating or updating your estate plan – and leave an intentional, thoughtful legacy to those near and dear in your life.

More information on estate planning can be found in the following links:

Solutions to go podcast 

Estate planning for digital assets

Executor responsibilities

Power of attorney

Other estate planning topics

Giving an early inheritance

Watching younger generations struggle to afford homes, start businesses, pay for their children’s education and build their own nest eggs, you may want to step in and help. One way to do this is to provide your heirs with an inheritance before you pass away. Benefits may include:

• The joy of seeing your gift make a difference in loved ones’ lives right away
• Savings on future tax and probate fees since you’re reducing the size of your estate
• Reducing work for your executor by leaving less to distribute after death
• Taking the opportunity to explain gifts to all family members to reduce potential conflicts after you’re gone

It’s critical to work with your advisor to make sure you aren’t giving away too much. You need to make sure you’ll still have enough income for your own life. Also, there may be tax consequences if the gift requires you to sell certain non-registered assets or withdraw from a RRSP or RRIF. On the other hand, there can be tax advantages to transferring the ownership of some investable assets to a family member in a lower tax bracket.

Your advisor can help you work out the pros and cons and recommend an approach that makes the most sense for your situation.

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