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This article discusses in a summary way the many principles of estate planning that the average Canadian should know. The average Canadian is or was married or is living with someone, has children, owns a home, works or is retired and has or will have a family net worth at the time of retirement, with their equity in their home and registered and non registered investments around $500,000. If one has less wealth than that, the principles still apply and can be just as useful. If one’s wealth is more than that, these principles still apply but that person might also benefit from more sophisticated techniques such as trusts, estate freezes, life insurance and charitable donations. Consideration of foreign tax laws would also be necessary for persons with assets outside of Canada. Special planning is also sometimes needed for situations such as a vacation property, a family business or a disabled child.

A Definition of Estate Planning

I have found that there does not seem to be an agreed upon or simple definition of “estate planning”. It is sometimes referred to as “wealth planning”, “tax planning” or “financial planning”. However, I believe estate planning deals with much more than just money, which “wealth”, “tax” and “financial” imply. I suggest that estate planning, no matter what the size of the estate, is a process which is best defined by its goals. The following are my goals of estate planning:

  • one’s assets on death go to the desired and appropriate beneficiaries
  • the appropriate person or person is appointed to look after one’s estate
  • the estate is set up to be administered easily with as few conflicts as possible
  • the amount of payments that the estate has to pay for taxes, costs and fees are minimized; and
  • what the beneficiaries pay for income tax made from their inheritance is minimized.

If one becomes mentally incompetent during one’s lifetime, estate planning allows one’s financial and personal affairs to be managed by the appropriate person or persons in an easy and orderly fashion. My definition does not consider estate planning to be about accumulating wealth during one’s lifetime. That is in the realm of investing, budgeting and tax planning. I am also not including in this article, the tax savings that can be obtained by tax techniques that can be utilized when administering an estate.

Techniques Used in Estate Planning

Though the Will is obviously the cornerstone of an estate plan, many other techniques can and should be used to obtain the estate plan’s goals. I will review these techniques in a very brief way to show how a technique achieves the goals of estate planning. In doing so, I will also discuss when a technique is not appropriate as some techniques improperly used have created more problems than they solve. As this article is simply a brief overview, I will not discuss the specific mechanics of these techniques. Some of that information is found in other articles I have written.

Wills

A Will is a formal written document needed in every estate plan. Unless the Will is in one’s own handwriting it must be executed properly with two witnesses to be valid. The Will accomplishes the major goals of designating who gets all or most of the deceased assets on death and appoints the appropriate person or persons to look after one’s estate. If there is no Will, then the provincial law sets out who would be entitled to apply to look after the estate which may not be the person the deceased wanted. The provincial law will also dictate who the beneficiaries are and at what age they obtain their legacy. Again, people may be surprised at who the law says is entitled to the estate and it might be quite different from what the deceased wanted. A Will can also appoint who will be the custodians of minor children. Including a testamentary trust in a Will can reduce income tax payable by the beneficiaries on an ongoing basis after death. For further information about Wills, please see my article “The Reasons for Having a Will”.

Multiple Wills

The use of multiple Wills is useful when a person has assets in many different jurisdictions. Each Will can be submitted to the proper court in each jurisdiction. However, there is another use for having more than one Will. In Ontario since 1992 the case of “Granovsky vs Ontario” confirmed the legality of the practice in Ontario of having a separate Will for assets that do not need to be probated. That way probate fees could be saved on those non-probatable assets. Two relatively identical Wills are made. One for probatable assets one for non-probatable assets. This could save a substantial amount of money as in the Granovsky case when the assets under the secondary Will, being shares in a private corporation, were worth twenty-five million dollars. The cost of preparing the second Will has to be compared to the probate fees saved to determine whether it is financially worth doing multiple Wills. Real estate, money in the bank and investments are generally probatable so a separate Will is generally used in a case where there are shares in a private corporation.

Will Substitutes

There are a number of techniques used in an estate plan that are sometimes referred to as Will Substitutes because they take effect on death like a Will. They are mainly used to avoid probate fees as they pass assets to designated persons outside the Will. Some, but not all of them, also reduce the size of the estate to avoid paying claims against the estate. They generally speed up the payment to the beneficiary compared to having the asset distributed pursuant to the Will. However care must be given because improperly used, they create extra expenses and problems on death and problems even before death.

Joint Ownership
The most common Will Substitute is joint ownership. Generally the deceased has a bank account (or sometimes even major investments) registered in their name along with name of one of their adult children. Though this is the deceased’s money, this is generally done for three reasons.

Firstly, to make it easier for the children to make payments on behalf of the individual parent during their lifetime. Secondly, to avoid probate fees as probate fees are not paid on joint assets that have a right of survivorship (though joint ownership does not always avoid probate fees). Lastly, the individual wants some ready cash available for the executor to pay funeral bills and other expenses upon their death.

However, I suggest that the joint bank account is not a good idea for many reasons. A Power of Attorney will accomplish the same purpose of allowing the child to use the money of the individual during their lifetime. It does not need to be a joint bank account. Secondly, upon one’s death, though the bank will freeze the bank account until probate is obtained, the banks will allow certain expenses of the estate such as the funeral bills and legal fees to be paid out of the deceased’s bank account and therefore, there is money available without having a joint account.

Probate fees will not be avoided on the joint assets when the money all came from the deceased as the court takes the position that the other joint tenants are really holding the asset in trust for the deceased, and therefore it must be included in probate fees. Joint ownership between spouses however are treated differently and do go by right of survivorship and there are no probate fees. Another major problem that joint ownership causes is that upon death, there is often an argument between the other beneficiaries of the estate and the surviving joint tenant as to what the testator intended with respect to the money in the joint account. Cases have gone to the Supreme Court of Canada arguing whether it is the surviving joint tenant who gets the money or is it really part of the estate. If a joint account is going to be used then the Will must make it clear as to what the intentions of the deceased are.

There are however, other problems that are created by having joint ownership. There is the possibility that the child with whom there is joint ownership, takes the money themselves and uses it for their own benefit. If the child gets divorced, their spouse may argue that the joint account is really their spouse’s and there could be an argument in the divorce proceedings. This is especially common if a cottage is put in joint names with a child. If the child goes bankrupt, the trustee in bankruptcy may argue that the asset is really half owned by the child as opposed to the parent alone.

If a house is put into joint ownership with a child then there are tax issues because one can have only one principal residence. Taxes may have to be paid on the child’s interest in the house from when it was put into joint ownership until it is sold. If property, such as a house, is put into joint names with all the children to save probate fees and the individual sells the house before they die, then there are a lot of extra costs in getting every child to sign the Deed and acknowledge that they have no interest in the property.

Therefore, in conclusion, it is generally not a good idea to put any assets in joint names with one’s children unless it is done properly and all the possible problems are looked at.

Named Beneficiary
One can name a beneficiary to one’s life insurance, RRSP or RRIFs and in some cases for investments. This is always a good idea between spouses but not always such a good idea with one’s child or children. Though the case of Neufield v Neufield said it may be debatable as to whether the estate or the child should be the beneficial owner, generally the beneficiary is the owner. Often the parent will name one child as the beneficiary of life insurance believing that the child will use that money to pay for the funeral expenses and perhaps distribute the balance among their siblings, however, they are under no obligation to do so. Again, care should be taken to determine as to when and if there should be a named beneficiary to life insurance and RRSPs. Another problem with RRSPs is that the tax is paid by the estate, though the money goes directly to the beneficiary without tax being withheld, so there could be an issue as to who is ultimately responsible to pay the tax on the RRSPs.

Gifts
Often one will give away assets to one’s children during their lifetime. However, often after the donor dies, there is an argument whether a gift was actually made. The best way to ensure a substantial gift is made is to document the intention that a gift was made by the donor.

Marriage Contracts

A lawyer will review when doing one’s Will what obligations one has to their dependant children and one’s spouse to ensure that the Will satisfies those obligations. If those obligations are debatable or if one does not intend to live up to their obligations, then there should be a Marriage Contract in place to ensure that there is no claim against the estate when the person dies. For further information please see my article on Marriage Contracts.

Loans

Often a parent gives some or all their children money in advance of their death. It is often assumed it will be paid back when the parent dies, so that in the end all children share equally. If loans are made, it is very important that the Will state whether a loan has been given and how much will be subtracted from a child’s legacy, otherwise there may be an argument whether it was a gift or a loan and there could be enforcement of the loan issues. It is also good to document how much the loan is and how much has been paid back.

Trusts

Though all estate plans will have a Will and a Continuing Power of Attorney, they may or may not have a trust or trusts. Trusts are useful for a wife variety of estate planning purposes for tax and non-tax purposes. The most common non-tax purpose would be to hold assets for minor children until they reach age of majority or even later. The most common tax purpose would be to income split and reduce probate fees. Both the law of trusts and taxation trusts are very complex. I hope to explain the basic concepts in a future article.

Organizing Estate Information and Instructions

There are millions of dollars in the Bank of Canada for unclaimed bank accounts. There are millions of dollars worth of insurance policies that have never been claimed. The reason is that the executors did not find where all of the deceased’s assets and insurance policies were located. Therefore, it is a good idea to have a system which is kept up to date which sets out precisely for the executor, the contents of estate.

Often if the deceased was not organized and did not keep such a list, the knowledge of an asset only comes to light months later when the annual premium or statement comes in, which might mean that the estate has to be reopened. Without a good system of keeping up to date where the assets are, there is also the worry that the executor never found all of the assets. Therefore, I suggest that there be some process to keep an up to date a list of one’s assets for the executor.

Often without clear instructions from the deceased as to the mode of burial, there is an argument among the children as to the funeral and burial arrangements. Again, the best way to avoid this is to preplan one’s funeral or at least there should be a clear process which sets out what one would like one’s funeral and burial to be. Proper instructions should also be given if one wants to donate their organs on death. Please see my article entitled Preparing for an Easier Administration of an Estate.

Powers of Attorney

A person is allowed to appoint another to look after their financial and personal needs if they become incompetent during their lifetime. Financial matters are found in a Continuing Power of Attorney for Property and personal and health matters are dealt with in a Personal Care Power of Attorney. Though a directive about whether a person wants to kept on a life support system if there is no reasonable prospect of regaining consciousness can be a separate document, that directive is usually found in the Personal Care Power of Attorney. Please see my article on Powers of Attorney for more detailed information about both types of Powers of Attorney.

Conclusion

I would suggest that everyone should have a Will and both types of Powers of Attorney. One should plan properly if they use joint ownership, a named beneficiary of a specific asset, gifts, loans and trusts. If they are in a second marriage, they should strongly consider a Marriage Contract, or a Cohabitation Agreement if it is a second relationship. And everyone, to reduce both the financial and emotional costs of administering an estate, should organize their information and instructions that are needed on their death. They should investigate the need in their case for more sophisticated techniques such as multiple Wills, trusts, estate freezes, life insurance and charitable donations. They should also review their estate plan and update it on a regular basis as their factual situation changes and perhaps if the tax laws change.