Thinking Ahead - Estate Planning Essentials

You know you should do it, but it's a tough reality to face. Estate planning is a process that many people put off, and you're certainly not alone if you have yet to begin. Just over half of Canadians (51 per cent) do not have a will, and a further 15 per cent have a will that is not up to date. Those are surprising numbers when you consider just how much is at stake. When someone dies without a will, they get no say in who receives their assets. Guardians for minor children are chosen by the courts. And in the worst instances, families can be torn apart over inheritance disagreements.

These are not pleasant situations, yet they happen more often than you might think. The good news is, creating a plan ahead of time can ensure your assets are passed on as you wish, your family is cared for and the stress over handling your affairs is reduced during an already difficult time.

The elements of a simple estate plan include:

• Will – tells the executor (liquidator in Quebec) who should receive assets; may also name guardians for children and establish a trust to hold assets for them

• Power of attorney for property – appoints someone to make financial decisions on your behalf if you are living but incapacitated

• Power of attorney for personal care – appoints someone to make health care decisions on your behalf if you are living but incapacitated

• Beneficiary designations – naming beneficiaries directly, particularly on life insurance policies, registered plans and non-registered segregated fund contracts, can simplify and speed up the distribution of assets
  
  

What are probate fees?

When the executor of an estate applies for a will to be probated (approved by the courts), the courts assess fees based on the value of the estate. Probate fees vary across Canada – in some provinces (such as Alberta) they are relatively low, but in other provinces (such as Ontario, British Columbia and Nova Scotia) they can amount to thousands of dollars. Certain assets, such as segregated fund contracts and life insurance policies when there is a named beneficiary, are paid directly to that beneficiary without passing through the estate, so they are not included in the calculation of probate fees.

Meet Sana and Graham

• Married couple, age 30 and 35

• Three children, age 7, 5 and 3

• $20,000 in Sana's TFSA and $12,000 in Graham's TFSA

• $10,000 in a family RESP with Sana and Graham as joint subscribers

• $15,000 in a non-registered account

Items to address:

• Name guardian for children in will

• Arrange for assets to be managed on behalf of children – for example, in a trust by a trustee

• Consider naming a successor subscriber for the RESP

• Consider life insurance for Sana and Graham to protect the family's standard of living

At first glance, Sana and Graham have few assets and may not think it's necessary to create an estate plan just yet – but with three children who are not allowed to manage their own assets until they reach age 18, it's essential they put strategies in place now. Life insurance also offers the option to pay out the proceeds to an insurance trust to provide for minor children, avoiding probate fees and creditor claims.

Meet Irina

• Never married, age 50

• No children

• $1.3 million home with $300,000 mortgage

• $700,000 in an RRSP

• $60,000 in a TFSA

• $250,000 in a non-registered account

Items to address:

• Decide who should inherit assets – perhaps a mix of family members and charities – and create a will

• Establish a power of attorney for property and for personal care

• Consider life insurance to cover the taxes due on the estate

• Consider life insurance to fund a charitable gift

Irina needs to think of people she can trust to be an executor and power of attorney and take the time to write the three basic estate planning documents. She may have relatives or friends to whom she would like to leave her significant assets – but, if she doesn't, she can make a very meaningful charitable gift.

Meet Mateo

• Widower, age 60

• Two children, age 25 (with a disability) and 23 (not responsible with money)

• $900,000 home with no mortgage

• $700,000 in an RRSP

• $50,000 in a non-registered account

• $250,000 life insurance policy

Items to address:

• Set up a Registered Disability Savings Plan (RDSP) for the 25-year-old child

• Plan carefully for the transfer of the home and financial assets, keeping in mind that an RRSP can roll over tax-free to a dependent disabled child

• Consider establishing an absolute discretionary trust (Henson trust) to protect provincial disability benefits

• Consider adding an annuity settlement option to the life insurance policy for the 23-year-old to receive payments as a stream of income
  
  

Meet Wei

• Married, age 71

• Two children from previous marriage, age 36 and 34

• $750,000 home with no mortgage, jointly owned with husband

• $500,000 in a RRIF

• $50,000 in a non-registered account

Planning opportunities:

• Consider investing RRIF assets in a segregated fund contract with Wei as the owner and annuitant, her husband as the successor annuitant, and her children as irrevocable beneficiaries

• Consider life insurance to pay the tax liability on the RRIF when it transfers to the children

Blended families need to build estate plans with care to avoid unintentionally disinheriting anyone. By investing her RRIF assets in a segregated fund contract, Wei can allow the RRIF to transfer to her husband on a tax-deferred basis, but at the same time ensure that her children will have a say in the management of the assets.

Speak with your advisor

Whether or not you see your own situation reflected in these examples, if you don't yet have a comprehensive estate plan in place, speak with your advisor. Request referrals to legal and accounting professionals, as required. Also ask about strategies that are appropriate for your specific circumstances and that may help you save taxes, avoid probate fees, speed up the delivery of bequests and protect vulnerable beneficiaries.

Don't Forget Digital Assets

Digital assets deserve estate planning attention, too. It's important to grant a trusted person the power to access and handle your hardware, data (including music, photos, videos and e-books), email, websites and social media accounts. Digital currency such as PayPal and Bitcoin, as well as gift cards, loyalty points, cash-back rewards and even video games can have significant monetary value.

The first step to getting your digital estate in order is to take inventory. List all your digital assets and how to access them: the physical location or website associated with them, any account numbers or usernames, and your passwords. Next, figure out what you want done with your digital assets and include your instructions in your will.

Note that passwords should not be included as part of your will because, if probated, they become public; make sure, however, that you store passwords in a secure place that your executor can ultimately access, such as a lock box or safety deposit box, or with your lawyer.