A Primer on Estate Planning for Canadians
Estate planning involves preparing for the tasks that must be undertaken in the event of your death or incapacity. While death is inevitable regardless of your preparation or lack thereof, preparation in the form of a well-considered will can make life for your survivors much easier to cope with. Similarly, preparation for potential incapacity, irrespective of the duration or severity, can make the situation much more tolerable for everyone involved, whether you as the person who has lost capacity, or the people who have been tasked with acting on your behalf.
In today’s blog post, I will review the documents associated with estate planning, strategies to address estate planning needs, and some of the tax implications that are associated with estate planning.
Estate Planning Documents
Estate planning is a process. A will is one legal document that reflects the outcome of the process. A will leaves instructions on how your property is to be handled after your death. If you have minor children, the will should also express your wishes concerning their custody and care in your absence.
Parties in a Will
You can write a holographic will, that is, one in your handwriting, if you are exercising some foresight and going about this process in a planned way, you usually want to hire a professional. I grew up in British Columbia where many people will hire a notary public to draft a will, but if there is any sort of complexity, you may want to hire a lawyer who has special expertise in wills, trusts and estates. Another less costly option, which I would again limit to simpler estate planning needs, is to use an online will service.
The person who writes the will is known as the testator (or possibly, testatrix if a woman). You may recognize the word from the term, Last Will and Testament.
Except in the case of a holographic will, most wills written with the aid of a professional must be witnessed, usually by two people who do not have a personal stake in the terms of the will.
Those who will receive a “benefit” from the will are known as beneficiaries. Typical beneficiaries are family members, such as a surviving spouse and children. Charities may also be named as beneficiaries of a will. Not all property owned by a testator necessarily passes through the will for the benefit of another. For example, insurance policies, RRSPs, TFSAs, etc., can name beneficiaries (or an equivalent term) directly in the documents of the policy or account. Joint property owned by spouses continues under the ownership of the survivor without going through the estate.
If a testator has minor children, it is appropriate to name a guardian in the will. It sometimes occurs that a guardian is uninformed about being named in the will by the testator. If that has been done, the named guardian should be informed as soon as possible. Note that despite any decision that the testator has made, depending on the jurisdiction, the courts may have the final say in determining who will care for the surviving children.
Along with naming a guardian to care for the testator’s minor children, the testator may also leave substantial financial assets for them to inherit. The testator may choose to establish a trust at the time of death – a “testamentary” trust – that would be managed by a trustee named in the will to distribute the property to the children over several years, perhaps well into the children’s adulthood. The trustee may be the guardian or the executor but could also be someone else.
There are variations across Canada for the correct term to use to identify the person responsible for executing the terms of the will once the testator has died. Executor (or executrix if female) is the most familiar term, but depending on where you live, other terms may include personal representative, estate trustee, liquidator, or estate administrator.
Why is a Will Important?
Consider the consequences of dying “intestate,” i.e., without a will. If you die without a will, your assets will be distributed according to the rules of the province or territory where you live. You will have no say in the matter, and neither your circumstances nor the particular circumstances of your heirs will be taken into consideration. The process will inevitably require more intervention by the courts and may mean your “legacy” will be tinged with bitterness on the part of your heirs. While you will not be around to be aware of that unfortunate situation, does anyone really want to be remembered as inconsiderate?
Power of Attorney
While a will takes care of your estate after you die, a power of attorney is a document that appoints someone to take care of your property while you are alive but unable to manage it on your own. A will and a power of attorney (POA) should not be confused. One cannot substitute for the other. One could argue that obtaining a POA is more urgent than getting a will in place as the likelihood of a period of incapacity is greater than a premature death.
Reasons for appointing an attorney may not always include incapacity in the sense of a disability that results in impairment; it could include a circumstance when the donor is simply unavailable, perhaps due to an extended absence from home. However, the more common reason for appointing an attorney is incapacity due to illness or some other event that causes the donor of the power to become unable to manage their affairs.
Types of Power of Attorney
Enduring (Continuing) Power of Attorney
This form of POA is effective immediately and endures or continues throughout incapacity. To say it is effective immediately does not necessarily mean that it will be used immediately; rather, it can be presented to a financial institution and invoked without further validation by a physician.
Springing Power of Attorney
The Springing POA only becomes effective once certain events have occurred. For example, if you have appointed someone to be your POA, you may restrict their ability to act on your behalf until two physicians have certified in writing that you have lost the capacity to manage your finances. Only then will the POA “spring” into effect. Although this may seem like a reasonable and cautious approach to take, it is generally not recommended because the attorney’s urgent need to act on behalf of the donor may run into the challenge of finding two physicians who are willing to certify the donor’s incapacity.
Health Care Directive
This goes by many names: Power of Attorney for Personal Care, Personal Directive, Representation Agreement, Health Care Directive, Advance Health Care Directive, and Advance Directive.
Similar to the Power of Attorney above, which deals with financial and property matters, this document also gives the appointee authority to make decisions on your behalf regarding health care when you are unable to decide on your own. If you are gravely ill and quite possibly die without medical intervention, the person who holds this directive has the authority to represent your wishes at this most crucial of times.
If your health care directive includes a clause that refers to withholding or withdrawing life-sustaining measures, the parameters of this clause must be thoroughly discussed in advance with the person holding this authority.
Estate Planning Strategies
As indicated above in the discussion concerning the parties named in a will, if you have minor children, you may wish your will to establish a trust and name a trustee. The trust will set out specific parameters for how the assets in the trust are to be handled. For example, if both you and your spouse die leaving behind minor children in the care of a guardian, the trust may facilitate providing money regularly to help the guardian with costs, may release more money to support post-secondary education, and fully distribute the balance over the next several years.
Trusts can vary in complexity and desired outcomes and can come into force by other means than a will. As with most issues in estate planning, a lawyer who is an expert in trusts should be consulted.
Married couples often own assets jointly. Houses, bank accounts, investment accounts, etc., are common examples. There are issues here, however, especially with investment accounts that were funded entirely by the contributions of one spouse but reported to the CRA as owned 50/50 when it comes to interest, dividends, or capital gains generated from those accounts.
Even worse is when one spouse has died, and the surviving spouse has subsequently added the name of one or more of the adult children to the title of an asset. In the case of a house, this may be perceived by the CRA as a disposition of 50% of the value of the home, may make the house subject to a claim by the separated spouse of the child in the case of divorce proceedings, and, if the child already has a principal residence, may result in problems related to the principal residence exemption.
Bank accounts can also be an issue if only one of several children, for example, the eldest daughter, is added to the title of the account. At the time of death of the surviving parent, the child on title may assert that the money belongs to her, while the siblings argue that she was only on the title for the sake of convenience in managing the surviving parent’s financial affairs.
If an older person wants to use a joint account strategically to distribute those assets outside of the estate process, it is necessary to document this carefully. Otherwise, the courts are likely to find that the sibling named as a joint account holder was acting only as a trustee.
Another strategy in estate planning is to use a life insurance policy. One approach might be to buy a joint last-to-die policy, in which upon the last death of a married couple, the life insurance policy would pay out to the children as beneficiaries. This would bypass the estate and the costs associated with probate and would also be paid out tax-free. Alternatively, the policy could also be used to pay off taxes that might result from considerable capital gains upon the deemed disposition of the property at death.
This type of policy would be a form of permanent insurance as it is meant to be in force until death. A term insurance policy, which is purchased to cover a particular need for a required period, would not be applicable in this case.
Tax Planning in Estate Planning
Many Canadians assume that there is an estate tax, but that is not the case. Rather, there is a final tax return that your executor must file. Depending on your circumstances, more than one return could be filed to effectively reduce the amount of tax payable. At the time of death, tax legislation deems you to have fully withdrawn your RRIF (or RRSP if you died before it was converted) and disposed of any non-registered assets. While you may have been able to distribute the proceeds of your RRIF directly to your beneficiaries, the tax obligation remains with the estate. Assets in the TFSA are tax-free, but only until the holder dies. After the date of death, a potential tax liability begins to accrue. In the case of a non-registered account, there may be capital gains, but these can be offset by capital losses if applicable.
Other measures one can take to reduce taxes, assuming there is not a surviving spouse who holds joint ownership or qualifies for a tax-free rollover, include charitable contributions, the designation of direct beneficiaries for insurance policies and TFSAs, and gifts to adult children before death. In other words, reduce your estate before you die. If you are unsure about the adequacy of your assets to support you in your later years, this last option may not be very appealing. However, it has been observed that many senior citizens with sizeable estates often find themselves with as much or more money at death than when they retired. It is often too difficult to break that lifetime habit of saving.
There is a great deal more that could be written about estate planning. Some lawyers spend their entire careers in this field. A designation you may wish to look out for is the Trust and Estate Practitioner or TEP, which signifies special training in the field. Those with particularly complex estates may wish to engage a lawyer, accountant, and/or financial planner with that designation.
This is the 192nd blog post for Russ Writes, first published on 2023-04-10
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.