Top Ten Tips for Estate Planning
10. Powers of Attorney vs. Wills
What is the difference between a Power of Attorney and a Will? Do I need both? These are questions we often hear when preparing an estate plan. Powers of Attorney and Wills serve very different purposes. A Power of Attorney is a document in which you appoint a person or persons to make decisions on your behalf during your lifetime and a Will is a document whereby you direct what happens to your property and assets after your death.
There are two kinds of Power of Attorney. In the Power of Attorney for Property you appoint a person to make decisions about your bank accounts, financial matters, real property and legal affairs of a financial nature. In a Power of Attorney for Personal Care (sometimes confused with a Living Will) you appoint someone who will give instructions about your personal care, medical treatment and healthcare if you are unable to do so yourself. A Living Will, by comparison, is a set of instructions about the types of care you would like to receive, and in what circumstances care should be administered or withheld. Many Powers of Attorney for Personal Care will include instructions similar to a Living Will.
By contrast, a Will appoints an Executor who will be responsible for administering the assets in your estate, paying any debts and taxes and distributing your estate to the beneficiaries listed in the Will. The authority of an Attorney for Property or an Attorney for Personal Care ends upon death at which time the legal authority is transferred to the Executor. During your lifetime, the person you appoint to act as your Attorney for Property must manage your financial affairs in your best interest and generally must preserve your assets for your use and needs. An Executor is accountable to the beneficiaries of your estate and must manage the estate properly and distribute the assets as instructed by the Will.
Best Practice: Ensure that you have current, valid Powers of Attorney for both Property and Personal Care, as well as a Will.
9. Choosing an Executor
Being an executor is an important job and requires a significant investment of time and knowledge. It is important to appoint an executor and an alternate executor in the event the first named executor passes away, becomes unwilling or unable to act. A spouse, children, other family members, trusted friends and even in some instances professionals may be considered for the role of executor. Executors can refuse to accept the appointment, meaning that these duties will fall to an alternate named executor or even result in the involvement of the Public Guardian and Trustee.
Best Practice: Discuss your plans with your intended executor in advance to ensure that he, she or they are comfortable with the role, have the necessary skills, and are willing and able to accept the appointment when the time comes.
8. What is Probate?
“Probate” is the old term for the process by which the courts examine a will, determine its legitimacy and issue a certificate which formally recognizes the authority of the executor to administer the estate. The current term for this process is an “Application for Certificate of Appointment of Estate Trustee with a Will”, which is why the shorter term “probate” is often still used. It is generally necessary to obtain probate when dealing with assets that, by their nature, require a third party to recognize the executor’s authority, such as financial institutions and the Land Titles Office for real property.
The process of obtaining probate involves a court application the result of which is the issuance of the Certificate of Appointment of Estate Trustee. This may take between two to six weeks. When filing an application for probate, the executor must complete a sworn declaration of the value of the assets in the estate and pay Estate Administration Tax (“probate tax”) on the value of these assets. This tax is calculated as $250 on the first $50,000 of assets, plus $15 per $1,000 of value above $50,000 (roughly 1.5%). This tax can create a cash-flow problem for many estates which may be property-rich and cash-poor, as the tax must be paid before the executor can gain the legal authority to deal with the assets such as by sale or mortgage.
Best Practice: Consult with your lawyer to develop and estate plan that takes into account whether probate will be required, as well as the tax and cash-flow implications for your unique situation.
7. Beneficiary Designations
In this age of increasingly complex life insurance policies, pensions, registered investment accounts, RRSPs/RIFs and TFSAs, beneficiary designations are playing an ever-more-important role in creating a complete estate plan. When a beneficiary is named directly in a policy or investment, the entire value of that asset will pass directly to the named beneficiary therein. This means that, for example, even if a person has a valid will leaving all of the assets to the children, an out-of-date beneficiary designation to a former spouse means that the named beneficiary will inherit that asset, regardless of the terms of the will.
Between spouses, many assets such as RRSPs/RIFs and TFSAs can qualify for a tax-free spousal rollover by which this deemed disposition can be postponed until the death of the surviving spouse.
Beneficiary designations are an effective way of minimizing probate tax as the assets with beneficiary designations do not form part of the legal “estate” for the purposes of a probate application, meaning that probate tax is avoided on these assets.
Best Practice: Ensure that all of your beneficiary designations are up to date, especially if you have experienced a life change such as divorce, re-marriage, the birth or death of a child. Discuss with your lawyer how your assets will pass on your death, both through your will and through any beneficiary designations you have made.
6. Death and Taxes
There is a saying that death and taxes are the two certainties in life. Taxes, debts, funeral and testamentary expenses are the first items to be paid out of an estate before determining what is left over to distribute to the beneficiaries. There are at least four types of taxes to take into account when preparing an estate plan:
Probate Taxes – Discussed above, this is a tax which equals roughly 1.5% of the value of the assets of your estate payable when applying for probate. There are many ways to minimize or delay this tax by careful planning.
Capital Gains – When someone dies, the government deems them to have disposed of all their assets at fair market value on the day prior to their death. Certain types of properties, such as a principal residence and qualified shares of a small business corporation, can qualify for an exemption to this tax, but this can have significant tax consequences for cottage properties, RRSPs/RIFs, and investments when they are not being passed to a spouse. Any capital gains must be declared on the terminal income tax return filed on behalf of the estate and included in income in the year of death.
Income Taxes – An executor should consult an accountant and file a terminal income tax return for the deceased person within certain time frames following death. This tax return declares both the person’s income for the year of death as well as any capital gains or other tax liabilities triggered by death. Generally, an executor should wait to distribute any assets from an estate until this tax return has been filed and a Notice of Assessment is issued confirming the amount of tax liability payable by the estate. The executor can also apply for a Clearance Certificate from CRA, confirming that there are no taxes owing.
Taxation of Testamentary Trusts: If a Will creates one or more trusts for beneficiaries including minors, then the trust will have to file annual tax returns declaring income received by the trust and payments out to the beneficiary in that year. This is a complex area and requires the advice of an accountant and a lawyer.
Best Practice: While it is not possible to avoid all types of tax that may be payable on an estate, your lawyer should be able to create a balanced plan for your estate that respects your intentions for your estate in an as tax-efficient a manner as possible.
5. Marriage, Divorce, and Common Law
Marriage, divorce and common law relationships all have significant implications when preparing a will. In Ontario, marriage has the effect of revoking a prior will, unless the will expressly states that it has been made in contemplation of a pending marriage to the new spouse. As a result, a new will must generally be prepared after one marries.
Divorce, on the other hand, does not revoke a prior will, which means that separated or divorcing spouses need to have new wills prepared to reflect their new wishes. A separation agreement is critical to this process as it sets out the division of assets acquired during the marriage so that each spouse knows the extent of their property which will be subject to his or her will. Good separation agreements will also contain a release of claims against each other’s estates leaving each spouse free to make new wills, as long as they keep in force any provisions such as life insurance policies that may be required by the agreement.
Lastly, estates law is one area where, contrary to popular belief, common-law and married spouses do not have equal legal rights. In a common law relationship, there is no automatic entitlement to share in a partner’s estate. Unless common-law partners make wills specifically leaving assets to each other or hold assets in joint names, there is no presumptive right to a share of the partner’s estate. This often results in costly lawsuits or court applications which can be avoided with proper planning.
Best Practice: It is best to sit down and review your estate plan whenever faced with a change of marital status. Delays put your assets at risk of not going to the people you intend to benefit.
4. Guardianship of Children
If you are the parent or legal guardian of a child, then you should prepare a Will which includes appointment of a guardian for those children. While the courts reserve final jurisdiction to appoint guardians in the best interests of the child, generally the courts will respect wishes expressed by parents in their wills. If no guardian is appointed, then either another family member may have to bring guardianship proceedings seeking custody of the children or, if no such person volunteers, then there is the possibility that your children could become wards of the state. You should also consider who would act to manage the inheritance left to your children in the event of your deaths – whether this would be your executor, the guardian, or another individual who may be suited to the role.
Best Practice: As soon as children are born or adopted, update your will to appoint a guardian. Review this clause every few years to ensure that your choice of guardians is still appropriate and that the guardians are still willing and able to take on the role if necessary.
3. Beyond Post-It Notes: Making Specific Gifts
We’ve all heard stories of post-it notes attached to the back of paintings, but to ensure that those antiques, collectibles, jewelry and tools make it to the intended beneficiary, it is best to make a list as part of your estate plan. To be legally binding on your executor, special gifts must either be made in the will, or set out on a separate list which is in existence as of the date of the will, signed, dated, witnessed and referred to in the body of the will. This is called “incorporation by reference”. A less formal means of expressing these wishes is by preparing such a list, signing and dating it, and filing it with the will. This list can be changed or replaced from time to time without re-signing your will; however, it will not be legally binding on your executor. Rather it will only serve as guidance for your executor as to your wishes.
Best Practice: If you intend to make special gifts from your estate, ask your lawyer about the proper way to make a list and how the list should be referenced in your will. There is no guarantee that a list written and kept at home will be found by your executors when the time comes, and it will not be legally binding unless it forms part of your will.
2. The Will Kit
The Will Kit has become a popular tool for those hoping to save legal fees. No matter how carefully people think they are following the instructions, such kits rarely, if ever, comply with the formal legal requirements necessary for a valid will. What the instructions don’t tell you, for example, are details such as the fact that you can accidentally disinherit a spouse or family member if they witness the will.
In addition, to be accepted by the courts, a will also requires an Affidavit of Execution, which is a sworn statement by the witnesses, made in front of a Commissioner for Taking Oaths, attesting to their presence and witness of the testator’s signature. If this document is not prepared when the will is signed, the witnesses will have to be tracked years after the fact (who by then may themselves be dead) to have them attend at a lawyer to complete this affidavit.
Perhaps just as importantly, only a lawyer can prepare an estate plan that takes into account your wishes, your particular assets, and your tax situation, avoiding pitfalls and unpleasant surprises.
Best Practice: When it comes to making a will, do-it-yourself is a bad idea. Will kits often result in invalid wills, lawsuits among beneficiaries and unintended consequences, costing your estate a great deal of money.
1. What if I die without a Will? The consequences of intestacy.
When a person dies without a valid will (dying intestate), a law called the Succession Law Reform Act sets out which family members or next-of-kin stand to inherit an estate. These rules are based solely on blood relationships and legal marriage – spouse, children, parents, siblings, and more remote next-of-kin. These rules are applied without regard to the relationship you may have had with any of these persons, or any of your other wishes about your personal effects, charitable gifts, or tax planning goals.
As there is no will appointing an executor, a family member must apply to the court to be appointed as executor. This application can be contested by other family members, leading to costly disputes and delays. If no family member is available to step into this role, the Public Guardian and Trustee may have to be appointed.
The legal fees and administrative expenses of dealing with an intestate estate are often much higher than a regular estate, far outstripping the costs “saved” by failing to make a proper will.
Best Practice: For the sake of your own peace of mind, and for the sake of your family, prepare a valid will and update it regularly.
The foregoing is meant to provide information only and does not constitute legal advice. You should always consult with a lawyer prior to signing any contract.