What is estate planning? Hint: it’s a lot more than just making a will
Did you know that over half of Canadians don’t have a will? And that number jumps to 70% for younger Canadians (aged 18-34) and 66% for those aged 35-54. This is even more surprising given that almost 60% of Canadians think they have a good level of estate planning in place.
Many Canadians who do have a will are only scratching the surface of truly comprehensive estate planning. So, what is estate planning, exactly? Regardless of your age or financial situation, a key purpose of estate planning is to help ensure that all of your final wishes are carried out, in the most tax-efficient way possible, and that your estate’s value is maximized. A will is only the beginning.
Let’s take a deep dive into the purpose of estate planning, what it entails and how it should be an integral part of your overall financial plan.
Making a comprehensive will, which takes all of your wishes into account, is an essential starting point for good estate planning. Here are some of the most important things to consider:
A list of your valuable asstes and belongings: this should include all properties, valuables, financial accounts, investments (including RRSPs, TFSAs, etc.) and any other belongings you intend to pass on to someone.
Your beneficiaries: it’s important to be careful when naming the people who will receive your gifts and property, to be sure that no one gets left out. Also include details of what should happen to any person’s gifts if they die before you.
Your executor(s): it’s really important to name an executor whom you can trust and who is willing and able to carry out your wishes as laid out in your will. It’s also preferable to name someone who lives in your province, ideally close by (and it’s really important that they’re at least a Canadian resident). Also, you should outline exactly what you expect your executor to do on your behalf.
Care for your children and pets: if the surviving parent or both parents should die, you’ll want to leave instructions for how you would like your dependent children and pets to be looked after. Ideally, you would get agreement from the potential guardians before including them in your will and you may also want to include a financial sum to cover future care expenses, if this should happen. In this case, you may also need to provide instructions to a trustee who would manage the funds to provide for your chidlren’s care.
Online assets: you may also want to include instructions for how your digital assets are managed. These could include social media accounts, cryptocurrencies and rewards points.
Your last wishes: this is where you leave details of the kind of funeral you want and whether you want to be buried or cremated, etc.
Setting up a trust
Another key purpose of estate planning is to ensure that your money is distributed in the most suitable way. For example, leaving a large lump sum of money to your kids may not be the most advisable move — and if any of them are minors, they may not be legally able to accept the gift. Therefore, the idea behind setting up a trust is to have an arrangement for holding your money and distributing it on your behalf, when you feel it’s the best time for it to be handed out. Most trusts are created in the terms of your will.
You will need to appoint a trustee (many people choose their executor), who will distribute the money and assets you include in the trust, as per your instructions. The trustee will also manage any property and assets in the trust until the time comes for them to be handed over to your beneficiaries.
Trusts are very flexible and can be customized to suit your unique needs. For example, you might want your children to receive their inheritance in instalments, so you can provide details of the dates and the amounts that they will receive over the coming years.
You can also limit the uses of the money. For example, you could say that it’s only to be used as a down payment on a home, or to pay for post-secondary education. For the most part, it’s recommended that the terms be quite flexible and allow the trustee to act in the beneficiary’s best interests.
For more complex trusts, it could make sense to hire a trust company to manage it on your behalf.
While you can name beneficiaries of the assets forming part of your estate, there are several other instances where you can also name direct beneficiaries to assets that flow outside of your estate. Certain financial assets, such as life insurance policies and pension plans, may offer the opportunity to undertake this planning. However, in many cases, designating a direct beneficiary is not recommended (this article explains why).
It’s also important to consider how direct beneficiaries are named for each particular asset. For example, if you name a spouse or common-law partner as a successor holder for your Tax-Free Savings Account (TFSA), in most situations the whole amount will go to them, with no tax implications and without reducing their own TFSA contribution room.
Choosing a power of attorney
Less than a third of Canadians have a power of attorney, yet it’s arguably as important as having a will and is certainly an essential part of estate planning.
There are several reasons why you might become incapable of making your own financial and health-care decisions. These include falling ill, being in a serious accident or becoming one of approximately 600,000 Canadians living with dementia. If any of these things happen, your trusted power of attorney will be able to step in and make those important decisions on your behalf.
If you don’t name a power of attorney and become mentally incapable of making your own decisions, it can be a stressful, lengthy and expensive process for your family to get permission from the courts to make them for you.
Making charitable donations
Another key purpose of estate planning is to ensure that your charitable giving is carried out in the most impactful and tax-efficient way. There are considerable tax benefits when making charitable donations, both during your lifetime and afterwards.
For example, if you make a gift in your will of investments that have increased in value, there will be no tax on the capital gains, but you will receive a tax receipt for the full market value of the gift. This will help reduce your estate’s tax bill after your death.
There is also an option to set up a donor-advised fund (such as IG’s Charitable Giving Program), which would allow the capital to grow over the long term, while also allowing you to distribute some of the funds over time.
Estate planning tax efficiencies
One of the key objectives of comprehensive estate planning is to minimize taxes when you pass your wealth on to your loved ones. There are several strategies to consider when doing this, including:
Transferring RRSPs and RRIFs: these can be transferred to your spouse’s (or financially dependent child’s or grandchild’s) registered plan on a tax-deferred basis (this means your estate won’t pay the tax, but your beneficiary may have to when they start withdrawing from their plan). Having said that, you need to be very careful when designating a direct beneficiary, and generally speaking, designating a minor as beneficiary would not be recommended. Speak to your IG Advisor before deciding on who to designate as your benficiary on this type of account.
Transferring TFSAs: you can maintain the account’s tax-free status by naming your spouse or common-law partner as the successor account holder or have a transfer at death of the assets held in the TFSA, to your spouse.
Capital gains tax: for tax purposes, capital property (such as cars, buildings and investments) is considered to be disposed of (sold or given away) when you die, and any capital gains would be included in your final income. However, you can defer these taxes by transferring these assets to your spouse or a qualifying spousal trust.
Life insurance: taking out life insurance can help provide the money your estate might need to cover any tax liabilities. It can also increase the wealth you pass on to your heirs and/or pay for your funeral expenses.
Long-term, thorough estate planning is arguably even more important for business owners. Having spent years or even decades building a valuable business, it requires serious planning to maintain its value as you prepare to pass the business on. These are just some of the estate planning issues you need to consider if you own a business:
Succession planning: it’s important to have the most tax-efficient strategy for passing your business onto your family members (if that’s your plan). A starting point may be seeking guidance in determining whether you qualify for the lifetime capital gains exemption or if an estate freeze might be appropriate.
Power of attorney: if you‘re a business owner, it may make sense to name a separate power of attorney to make business decisions on your behalf. Ideally you would name someone you trust who has a thorough understanding of your business.
Business-owned life insurance: this will help ensure your business continues operating in the event of your unexpected death. It can also protect the business by providing funds to cover any taxes owing and help with a smooth transition of ownership.
Shareholder agreement: if you’re not the only shareholder, it’s essential to have an agreement that outlines the process for the business transition on the death of one of the shareholders. It can help prevent disputes between family members and other shareholders.
Creditor protection strategy: this involves moving excess corporate profit out of the operating company, so as to protect it from unforeseen creditors.
Find out more about tax and estate planning for business owners.
Revisit your estate plan often
As with your financial plan, an estate plan should be constantly evolving, to take into account any changes that need to be made. You should schedule an annual review of your estate plan with your financial advisor to discuss any changes in your personal and financial life, and your business, as well as to discuss any changes in tax laws that could affect your estate planning.
These reviews should prompt a list of tasks (for example, the drawing up and signing of a shareholder agreement), along with details of the timeframe and who is responsible for completing each task. Regularly monitoring its progress will help ensure that nothing essential gets overlooked.
Setting up your estate plan
Estate planning should be an integral part of any financial plan. It’s essential to align your estate plan with your whole financial picture, to ensure that all of your assets are distributed the way you intended. The purpose of good estate planning is to:
- Avoid conflict or legal issues among family members and other beneficiaries.
- Ensure your property, money and belongings are distributed as per your wishes.
- Support your chosen charities.
- Ensure your debts and taxes are covered.
- Be assured that all of your wishes are known.
- Reduce the stress and expense for your loved ones.
By integrating it into your financial plan, you can also help ensure that your estate planning is as tax efficient as possible. When you set up your Living Plan with Bay & Associates, they can build your plan in partnership with IG’s team of tax and estate planning experts.
Collectively, they can build a robust estate plan. Talk to us today to discuss your estate planning needs.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
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