Estate Planning ... Taking Care of Your Heirs

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It's a fact of life that none of us are going to live forever.

Most of us welcome the peace of mind of knowing that our loved ones will be taken care of according to our wishes after we are gone.

Regardless of the amount of assets you have, you should have an estate plan in place to ensure this.

Here is a checklist of some of the important things that should be included in your estate plan:

• Will
• Power of attorney
• Living will
• Insurance
• Tax strategies
• Pre-planned funeral arrangements
• Business succession planning

WILL

Everyone should have a will.

A will is the legal document that ensures your assets will be distributed to your beneficiaries in a timely and efficient manner. It also allows you to use tax saving or deferral strategies to help minimize what the government takes so you can leave more to your heirs.

Here are some things to ask yourself as you are preparing your will:

• What are your assets and liabilities?
• How do you want your assets to be distributed?
• Who will be your executor(s)? An executor should be someone you trust as they will be responsible for dealing with all your legal and financial matters and ensuring the provisions of your will are carried out.
• Who do you want as the guardian(s) of your minor children?
• Do you want to leave anything to charity?
• Should you set up a trust (we'll discuss trusts later)?
• Do you want your executor and trustee to require court approval when managing your estate?

It's a good idea to review the provisions of your will on a regular basis or as your situation changes such as remarriage, divorce, birth of a child, and so on.

What Happens if You Don't Have a Will?

If you don't have a will, any plans you may have are replaced by provincial laws and the provincial government decides.

Dying without a will is called intestate. When you die intestate, legal fees and taxes can take a large portion of your estate which impacts the amount the beneficiaries receive.

Your assets are distributed according to provincial laws and generally divided among your surviving relatives in order of family ties, starting with your current spouse and children. If you want a friend or charity to receive some of your assets rather than a distant relative, if that's all you have, ensure you have a will.

If you have no living relatives, your assets will go to the province.

If you haven't prepared a will, you can see how important it is to take care of it as soon as possible.

POWER OF ATTORNEY

Did you know that any financial accounts that are not jointly held can't be accessed by your spouse if you become mentally or physically incompetent due to an illness or an accident?

It's true. Your spouse or family can't automatically act on your behalf or manage your financial affairs. They need a court order or a power of attorney.

A power of attorney gives any person you designate, such as an attorney, spouse, adult child, friend or trust officer, the authority to manage your affairs. You decide how detailed you want it. It can cover everything you would normally do or it can be narrowed down to managing your bank account and investments only, for example. In addition, it can be temporary if you are going to be away and need things taken care of.

If you do become mentally or physically incompetent and don't have a power of attorney, your family would have to apply to the courts to have someone appointed to manage your affairs. This could be an expensive and lengthy process which can be avoided by having a power of attorney.

LIVING WILL

A living will is a written statement in which you name someone to carry out your wishes regarding your medical and personal care. It becomes effective if you are incapacitated and unable to state your wishes and must depend on others to do so for you.

It could indicate the type of medical treatment you may or may not wish to receive such as being allowed to die naturally and not kept alive by artificial means. It could also specify whether you want to donate your organs when you die.

Knowing your wishes in advance in the form of a living will can remove much of the emotional burden of making critical decisions should a serious medical situation arise.

With the advances in medical care, you should review and update your living will on a regular basis.

INSURANCE

Life insurance is an important component of estate planning.

You want to ensure that your spouse and/or children will have sufficient income should something happen to you.

In addition, if you anticipate that your estate will have a capital gain or a liability, you may want to consider taking out an insurance policy in the amount of the expected liability. This way, your beneficiaries won't have to sell off some assets or take out a loan to pay it.

TAX STRATEGIES

There are two types of taxes you should be aware of:

      1. Income taxes
      2. Probate taxes

Income Taxes

In the year of death, a final tax return must be filed by the estate's executor that includes all income earned by the deceased up to the date of death. All your assets, under the deemed disposition rule of the Income Tax Act, are treated as if they had been sold.

Unless you have named an eligible beneficiary on the account, the government will treat your registered assets such as RRSPs and RRIFs as if you had cashed them in, thus, requiring taxes to be paid upon your death. If your spouse or common-law partner is your beneficiary on these accounts, they can transfer these assets into their own registered plan with no tax consequences. When your spouse or common-law partner starts to withdrawal these assets, they will have to pay tax at that time, the amount of which will be determined by their tax bracket. Alternatively these registered assets can be transferred tax-deferred to a financially-dependent child or grandchild who is under age 18 or who is mentally or physically infirm.

If you have non-registered assets, they are, with the exception of your home, treated as if they had been sold at market value at the time of your death. Your estate would have to pay taxes on any capital gains or claim any capital losses.

Estate planning assists in minimizing and deferring taxes on your estate so that more of your estate can be preserved for your heirs.

Probate Taxes

Probate is the legal process that confirms the appointment of an executor and the validity of the will.

After your death, your executor and your lawyer submit your will and an inventory of your assets to the provincial court. The court verifies the will is valid and confirms the appointment of the executor. Before this happens, though, the executor will have to pay provincial probate fees, which vary from province to province, which are a percentage of the value of your estate. Province-specific probate fees are listed on this webpage.

Here are some strategies to avoid or minimize probate taxes:

• Own assets jointly. When you die, an asset you hold jointly with another person automatically passes to that individual without being subject to probate taxes.
• Name a beneficiary to receive assets such as registered accounts and life insurance. The asset passes directly to your beneficiary, remaining outside the estate.
• Consider transferring assets to a trust. A trust allows you to give up ownership of assets while you're still alive while allowing you to retain control. The trust becomes the legal owner and the trustee, someone who you appoint, becomes responsible for managing them for the benefit of the beneficiaries.

Ownership of the assets within a trust is transferred to the beneficiary upon your death and the assets in trust are not considered part of your estate.

PRE-PLANNED FUNERAL ARRANGEMENTS

The death of a loved one is one of life's most stressful situations.

Preplanning your funeral ensures that it is how you want it and allows you to pre-arrange for payment of funeral services, cemetery, clergy, flowers, etc. It removes the financial and emotional burden from your loved ones so they can mourn without having to make decisions about the details of the funeral.

BUSINESS SUCCESSION PLANNING

If you have a business, you should have a business succession plan.

Your business could be the largest asset in your estate. If you were to die, what would happen to it?

Who would run your business? Would it pass to family members who may be unable or unwilling to continue it?

It makes sense to have these details figured out ahead of time. You will have the comfort in knowing that your business will continue according to your wishes.

Disclaimer: You should always seek the advice of an expert to find out which estate planning strategies may be best for you.

Author: Teena Dawson, RPA www.teenadawson.com