Estate Planning
- What is estate planning?
- Why is estate planning important?
- What is involved in estate planning?
- How to establish your estate plan
- What is a Will?
- What is in a Will?
- What is a probate?
- What is an executor?
- Who should you choose as an executor?
- Why parents of children with disabilities need a Henson Trust in their Wills
What is Estate Planning?
A well-planned estate ensures your assets are transferred to the individuals you wish to provide for in a timely, orderly and tax-efficient manner. On a more practical level, estate planning is often seen as a way to ensure that funds are available to provide for your spouse or other family members in the event of your death.
Each method of passing on assets has advantages and disadvantages. Gifting property during your lifetime may have some tax benefits, but it means relinquishing control over the asset (e.g., family cottage or business). Establishing a Living or Inter vivos Trust, (a Trust which is set up during your lifetime), may enable you to retain some control over the asset, but, unless properly structured by a Trust professional, it could have some unfavourable tax implications.
When developing your estate plan, you should consider all four methods (outlined in the diagram below) of passing on your assets. However, most individuals wish to retain control and direct ownership over their property for as long as possible, and very often want to keep their intentions regarding the disposition of their property confidential until their death. The only way to ensure that this happens is to have a Will prepared.
Why is Estate Planning Important?
Having an up-to-date estate plan with a valid Will is essential to ensuring your wishes are carried out. If you die without a Will, you may leave your heirs with unanticipated legal problems and tax burdens. What's more, your property may not be distributed as you intended. Listed below are some reasons why it is important to get a valid Will.
- Your heirs will be determined by provincial law. Your estate will be distributed according to your province's "intestate succession" laws. These laws provide for the distribution of your property according to a set government formula. Naturally, this may be quite different than what you wanted.
- Distribution to your heirs can be delayed. In the absence of a Will, your estate may be left in a legal tangle. No one is empowered to deal with your estate until an administrator is appointed by the courts. This can delay settlement and cause additional legal fees. Without a Will, the law may prevent the distribution of your estate for up to one year or more from the date of death.
- The Court will appoint a guardian for your minor children. If you and your spouse haven't made legal provisions for someone to care for your minor children and manage their inheritance, it will be up to the courts to name a guardian. The person named may not be the person you would have nominated for the job.
What is Involved in Estate Planning?
Many Canadians mistakenly believe that as long as they have a Will, they have a complete estate plan in place. While an up-to-date Will is probably the most important aspect of an estate plan, it is by no means the only thing to consider. Given the wide range of objectives you may wish to achieve, proper estate planning requires careful consideration of many factors. Often in an effort to minimize taxes or avoid probate fees, another objective is thwarted. That's why it's important to weigh and balance the costs and benefits of different courses of action. The following is a list of some of the considerations to think about when developing your total estate plan.
- Record of personal affairs
- Gifts to family members
- Joint Property
- Life Insurance
- Letter of wishes
- Incapacity:power of attorney, living Wills
- Pre-planned funeral arrangements
- Planned giving to charity
- Living Trusts
- Preparation of a valid Will
- Taxes
How to Establish Your Estate Plan
There are three basic steps to establishing your estate plan:
- Prepare an inventory of your assets and liabilities.
Your assets will include such things as:- RRSP's, RRIF's and pensions
- Personal property such as cars, furniture, jewellery and fine art
- Real estate such as your home and other properties (e.g., cottages, chalets and investment properties)
- Investments such as stocks, bonds, GICs, mutual funds and any interests you have in partnerships
- Identify your estate planning objectives.
Your objectives will depend on a number of factors, including:- Your age
- The ages of your family members and other beneficiaries
- The needs of your beneficiaries
- The current value of your estate
- Your beneficiaries' ability to handle their own financial affairs
- Your tax situation
- Prepare your Will
After reviewing your assets, liabilities, tax and insurance situation, your most important step is to have a Will prepared that takes your wishes and objectives into consideration. If you already have a Will, you should have it professionally reviewed regularly to ensure that changes in government legislation, or your personal situation, have not adversely affected your plans.
What is a Will?
A Will is a legal document, signed in accordance with specific rules, that is essential to ensuring your wishes are carried out with minimum expense and delay. Your Will won't become effective, or public, until your death. Until then, you can change the terms or revoke it completely, as long as you are mentally competent. Your Will should be reviewed at least once every three years to ensure that it has not been impacted by changes in government legislation or your personal family situation. In some situations, a badly out-of-date Will can be worse than no Will at all.
Why is a Will important?
- A Will is essential to ensure that your property will be distributed according to your wishes. If you die without a Will your assets will be distributed according to a government formula.
- A Will names your executor, who is the individual or institution who will act on your behalf and carry out your wishes. Without a Will, the courts will appoint an administrator, who may not be the individual of your choice.
- In your Will, your choice of guardian for minor children can be clearly stated and considered by the provincial courts, who make the ultimate decision based on the best interest of the children.
- A Will helps ensure that sufficient income is provided for your spouse and children.
- A Will helps ensure that tax saving strategies are considered which can be implemented by your executor.
- Furthermore, a Will with a Henson Trust allows parents to leave disabled children an inheritance without costing their children ODSP benefits.
Types of Wills
Formal Will. A formal Will is typed and signed by you in the presence of at least two witnesses. These witnesses cannot be your beneficiaries or their spouses. Most formal Wills are drafted by lawyers as they are qualified and trained to ensure that your Will is legally valid and meets your needs.
Holograph Will. A holograph Will is written entirely in your own handwriting and signed by you. No witnesses are necessary. This type of Will in NOT recommended as it may leave your family with a legal minefield to negotiate, as the interpretation of how you expressed your wishes may well differ from what you had in mind. If your holograph Will is ambiguous or capable of more than one interpretation, or if you neglect to dispose of a portion of your estate in the Will, the Will may be partly or entirely ineffective. These are very common mistakes in holograph Wills. Some provinces do not even recognize a Will of this kind.
What is in a Will?
A Will requires careful planning to ensure that all essential matters are covered. The list below outlines the contents of a basic Will, clearly demonstrating this point.
Common Clause |
Purpose of the Clause |
|---|---|
Identification and Revocation Clause |
Identifies you and your residence. Declares that this is your last Will which revokes all prior Wills and codicils. |
Appointment of |
Designates the individual or institution you appoint as your executor. |
Payment of Debts |
Directs your executor to pay all debts such as mortgages, loans and funeral and estate administration expenses. |
Payment of Taxes and Fees |
Authorizes your executor to pay income taxes or probate fees that may be due. |
RRSP Designation |
Designates a beneficiary of your RRSPs and RRIFs. |
Specific Bequests |
Outlines the distribution of specific personal property such as furniture, jewellery, cars. |
Legacies |
Directs specific cash amounts to be paid. |
Residual Estate |
Outlines the distribution of your remaining property after all the specific bequests have been made and legacies paid. |
Trusts/Henson Trusts |
Sets out the terms of any Trust or Henson Trust created by your Will. |
Power Clauses |
Enables your executor to exercise various powers in the management of your estate without approval of the court. |
Life Interest Clause |
Used when you want to leave someone the income or the enjoyment of the asset, rather than the asset itself. |
Encroachment Clause |
Used in a Trust when you want the Trustee to be able to give the life tenant or a capital beneficiary additional funds for special circumstances or needs. |
Common Disaster Clause |
Outlines the distribution of your assets if an intended beneficiary dies at the same time as you do. |
Survival Clause |
States that a beneficiary must survive you for a set period of time (often 30 days) before they can benefit from your estate. |
Guardian Appointment |
Names the individual(s) who would be appointed guardian of your minor children. |
Testimonium and Attestation Clauses |
These clauses are found at the end or your Will. They ensure the legal requirements for a validly executed Will are met. |
What is Probate?
Probate is the process of legally establishing the validity of a Will before a judicial authority.
Upon your death, normally your executor, in conjunction with a lawyer, will file for probate with your provincial court. When your Will has been probated, the court will issue a Grant of Probate, which essentially confirms the appointment of the executor and that the Will is your last Will. Financial Institutions will often not release assets of an estate to an executor unless they receive a Grant of Probate, so it is likely your executor will have to go thorough the probate process.
What is an Executor?
An executor (executrix, if female) is the individual or institution you name in your Will who is responsible for administrating your estate. Your executor will act on your behalf to carry out your wishes as stated in your Will. It is possible to name more than one executor. Co-executors are often appointed when a testator (person making the Will) wants to combine professional estate administration expertise with an individual (e.g., spouse or adult child). Before choosing an executor, it is important to understand their duties and responsibilities, so you can accurately determine if they have the necessary time and skills to look after your affairs.
Who your executor has to deal with. The chart below outlines the many different people and companies the executor as to deal with in order to complete their duties.
- Investment Companies
- Insurance Companies
- Stock Brokers
- Business Partners
- Auctioneers and Appraisers
- Company Pension Departments
- Beneficiaries
- Lawyers
- Revenue Canada
- Financial Institutions
- Real Estate Agents
- Mortgage Lenders
- Government Pension Departments
- Accountant
Who Should You Choose as Executor?
There are two types of executors: professionals, such as Trust companies or lawyers, and individuals, such as family members or close friends.
Reasons to choose a professional Executor:
- You do not wish to burden family members or friends.
- You do not have immediate family members living close by, or do not wish to have them involved.
- The family members you would consider do not have the time or expertise to administer your estate.
- The individual you are considering may predecease you.
- You are concerned family members appointed as Co-executors would not get along and would have difficulty making decisions.
- You are in a second marriage and you want an impartial executor who will balance the different needs of your second spouse and the children from your first marriage.
- Your Will provides for the establishment of a Trust which requires professional management by a permanent trustee.
Problems non-professional Executors may encounter
- Personal liability for mistakes made while administering the estate. For example, if executors distribute proceeds of the estate and then find out a creditor has a legal claim, the executors may be personally liable to the creditor.
- Personal criticism from family members and friends who disapprove of how things have been handled, no matter how well intended the executor's actions were.
- Challenges from family members excluded under the Will.
- Conflict of interest as a result of being appointed executor and also being a beneficiary or business partner.
- Difficulty in administering the estate due to location, lack of time or ability.
- Difficulty handling financial matters at such an emotional time.
Why parents of children with disabilities need a Henson Trust in their wills
As a parent of a child with a disability, you must have a Henson Trust in your Will to protect your child's inheritance and Ontario Disability Support Program (ODSP) benefits. If you have no Will containing a Henson Trust, your child with a disability may have to set-up an ODSP Inheritance Trust.
