The term “estate planning” means different things to different people, and this is just as it should be: a good estate plan reflects the uniqueness of the individual creating it. In its broadest sense, however, estate planning covers the process of accumulating, managing and distributing property over the course of a lifetime.
An organized approach to estate planning can bring order to what may otherwise be an overwhelming task. You can begin by focusing your planning on four elements:
- The people in your life.
- The property you own.
- Your plans for the future.
- The person who will assist you in achieving your goals.
After you have given due consideration to the people in your life, your property, your plans, and the planners you wish to involve, it is time to begin implementing your plan. Like a building project, you will start with a blueprint. Then, with the help of your advisors, you can begin to shape your plan. Your professional advisors can help you explore the advantages of one or more estate planning tools.
Why A Will?
For years Jane pestered her husband Dick to get his Will prepared. Dick would agree, but somehow he never got around to it. He was never quite sure what to do for the grandchildren. There was usually a more interesting project that needed his attention right now. There were certainly more entertaining ways to spend money than on trips to the lawyer. Besides, there was always lots of time to think about his Will, right?
The day after Dick’s funeral, Jane went to see the family lawyer. Although grieving over the loss of her husband, she was not especially worried about her financial future. She had her own pension income and Dick’s pension would continue to help her out. There was a substantial investment portfolio. Of course the house was fully paid off, as was the cottage. With the money in the bank, the investments and the real estate she knew that the capital assets were over $500,000.
Jane wanted to learn the steps she needed to take to start getting the affairs in order. She was surprised by the look of concern on the lawyer’s face when she said Dick had never made a will.
When Jane left the office two hours later, she felt as though her world had shaken for a second time in the same week. She knew she would have to cope with the emotional loss of her life companion. She had no idea that the lack of a Will could result in serious legal and financial issues to compound her problems.
To her dismay, Jane had learned that she did not even stand to inherit all of Dick’s estate. She was allowed the first $200,000, but after that the children were entitled by law to share.
Unfortunately for Jane, the bad news did not end with the visit to the lawyer’s office. When she contacted their tax preparer, her woes increased. She had estimated how much of the stock portfolio needed to be sold to raise the necessary funds for the children’s legal portions. She was pleased that the investments had done so well. Her tax preparer was pleased too, but pointed out that this meant there was a substantial capital gains tax liability. The sale of the stocks would trigger payment of thousands of dollars in extra tax that year. To add insult to injury, because of the way the capital gains tax is calculated, Dick’s Old Age Pension would be “clawed back” by the government for that year. This took thousands more out of the nest egg.
Pity poor Jane. It was emotionally devastating to lose her husband, but tragic when that was compounded by the loss of tens of thousands of dollars otherwise available for her future care. Had Dick followed some simple estate planning advice and signed a Will, Jane could have saved probate taxes and brokerage commissions, reduced legal costs, deferred the payment of capital gains taxes, and avoided the clawback of Old Age Pension.
In addition to the very significant financial losses, Jane will also have to struggle through a far more difficult administration process. As if this was not bad enough, her lawyer had warned her that the absence of a Will often results in increased strife and dissension within a family, just at the time when all should be pulling together. Jane thought if there was justice, Dick would have survived her. Then he could deal with the whole mess.
If asked, people who admit to having no Will can provide a variety of excuses. One might dismiss the need altogether, because he or she anticipates the estate will be modest. Another may laughingly say that it doesn’t worry him, because he won’t be around then anyway. Others may simply be intimidated by the challenges of planning the Will. The cold, hard fact is that all of these rationalizations would disappear in a moment if the legal, financial and family consequences of not bothering to make a will were known in advance.
What are some of the consequences? Let’s start with the financial ones. The first is usually called the probate process. When someone dies owning an asset, our property laws require that another be authorized to transfer it to the appropriate beneficiary. This means someone else must be legally appointed to do so. In most cases the beneficiaries will be forced to commence this process to obtain court authority to manage the assets. If the court process is invoked then the value of all assets passing through the estate must be disclosed. This triggers the payment of probate taxes.
In addition to the fees paid directly to the government, almost always the probate process requires the assistance of a lawyer. Legal fees, disbursements and court costs add up in a hurry.
As if the financial costs were not enough, the lack of a Will may result in family strife. If both parents of minor children die, or if the custodial parent dies, without a Will there is no opportunity to name a guardian in a legally effective manner. This uncertainty adds to the kids’ worries as to their fate. The lack of immediate guidance and structure in the crisis also often leads to polarizing disputes among family members contesting for guardianship. Even if there is no court battle or open fight, the eventual guardian may not have been the true preference of the parent Whatever the result this is a sorry legacy to leave to a child.
Similar divisive problems can arise even if the children are fully adult. When the surviving parent dies without a Will, no executor is named. Children may well dispute among themselves as to who is best suited to administer the estate. Old grievances may rear their ugly heads, with injured feelings and mutual mistrust not far behind.. The existence of a Will does not guarantee that family members will all live happily ever after. A Will does ensure that gross injustices and obvious inequities do not explode like time bombs in the faces of loved ones.
Quite apart from the financial and family problems there can be serious legal consequences that follow from the lack of a Will. One is the arbitrary determination of the beneficiaries by provincial legislation.. We have Jane’s example when the law dictates that the surviving spouse may only inherit part of the estate, with the balance diverted to children.
Another potential legal disaster can arise because without a Will, trust provisions cannot be applied to an inheritance. With fully adult beneficiaries, this is usually not a concern. However, if the beneficiaries are minors as soon as a child reaches the age of majority (18 years) the child receives the inheritance with no strings attached. At that age, most children are still in school. How many kids, without money management experience or the comfort of parental advice would squander the legacy, perhaps even drop out of school?
It is critically important to have a Will. You should be aware of the consequences to the estate and the family of failing to have one. The risks of financial cost, family strife and legal troubles can be minimized or avoided entirely with thoughtful and timely Will planning. Remember, the price of having no will is always paid by those left behind. That price is often paid in tears as well as dollars.
Condensed from a Good Times magazine article by Peter Lillico, with permission
Power of Attorney
Estate Planned Wills
By Peter Lillico
When times were simpler, people made do with simple Wills. Now our children and grandchildren face tremendous challenges of financial security, risk of marital breakdown and governmental tax grabs. Relying upon simple or outdated Wills these days may be leaving a time bomb as a legacy to our loved ones.
A modern Will is an essential part of proper estate planning. Every Will should contain the following provisions, to ensure a safe and effective inheritance:
1 FAMILY LAW PROTECTION
We all hope our children will stay happily married ever after, but Statistics Canada reports that for every 100 marriages there are 38 separations or divorces. Parents cannot protect their children from all of the consequences of a marriage breakdown, but they can ensure that the inheritance received by a married child is protected. The Ontario Family Law Act provides that, if the appropriate clause is included in the parents’ Will, the inheritance of a married child is exempt from claims by a divorcing in-law. This protection applies not just to the value of the original inheritance, but also to increases in value during the marriage. Only Wills made or updated since 1986 can provide this vital protection.
2 MULTIPLE EXECUTORS
All Wills should appoint an executor to administer the estate after death and carry out the wishes and instructions of the deceased. Serious problems arise if the executor named has died, or is in poor health, or is mentally incapable, or has moved to another jurisdiction. It is critically important to ensure that there is provisions for a substitutionary or back up executor, in case the primary executor cannot act. Special concerns arise if there are several children who could be executors. Your lawyer can identify these and recommend solutions that will work best in your family situation.
3 DOUBLE PROBATE AVOIDANCE
Tragically, common disasters can befall a family. A car accident may take the lives of both husband and wife. It is then doubly unfortunate if the death of both results in the doubling of the Estate Administration Tax (usually referred to as the probate tax). This occurs when all of the legal fees and probate taxes are paid on one spouse’s estate, simply to transfer the assets to the estate of the second spouse to die. The legal and probate costs are then duplicated before the assets can be passed on to the children or other heirs. A properly drafted Will can reduce or avoid this costly and unnecessary risk.
If you have children under 18, it is essential to name a guardian in your Will. The guardian will act as a substitute parent if both mother and father have died. The age, marital status, place of residence and relationship with the children are critical matters to be considered and balanced in the selection of a guardian. If you do not provide for a guardian in your Will, you put your minor children at serious risk. If a tragedy results in the loss of both parents, you have lost any input as to who will raise your child. If no family member comes forward, your child may grow up in an orphanage. If a family member does apply to Court to be appointed guardian, there is no guarantee that he or she would be your first choice, or even your second or third choice.
5 TRUST PROVISIONS
Spousal trusts in Wills have the potential to save the surviving spouse thousands of dollars in income tax and thousands of dollars of Old Age Security claw backs, every year the survivor outlives the first spouse to die. In the right circumstances similar trusts for children can save tens or hundreds of thousands of dollars of income tax during the lifetime of the children. Trust protection for minor or young adult beneficiaries is also crucial. Consider what would happen if a child or grandchild received the inheritance at 18, when the law deems them to be adult. He or she may well drop out of school and live off the money until nothing is left. It is vital that all Wills, even those of parents with fully adult children, contain carefully drafted trust provisions. These will ensure that the inheritance is available for legitimate needs such as education and support, but prevents uncontrolled access by young beneficiaries until they have time to learn money management and life skills. Close attention must be given to the timing of the payment of capital and income, or your bequest may well have the effect of harming the future of the young person. Your lawyer must ensure that the protections cannot be defeated by application to the Court.
6 OTHER PROVISIONS
With a well planned Will, executors will usually have little difficulty administering the estate, selling the house, paying the debts and distributing the inheritance shares among your beneficiaries. When trouble does arise, it is often because of confusion or disputes among family members about heirlooms or items of sentimental value. Your Will can make reference to a note of guidance, which identifies the special assets you want kept in the family, and clearly indicates your preferences as to which child is to receive them. This simple step can avoid serious family heartbreak and hard feelings.