Estate Planning in Canada: How to Protect Your Legacy


Michael Trigg

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There are three avenues you can choose from when preparing for your inevitable demise. Yes; demise! It is not a pleasant subject, but unfortunately it is a fact that everyone has to deal with sooner or later. In the interests of protecting your family assets in the event of your death, creating an estate plan is best done sooner rather than later.

The three avenues mentioned in the opening line that you can choose from – taking into account I am being a little facetious – are:

  1. You can leave a good portion of your hard-earned assets to the tax department.
  2. You can attempt to spend all your money before you die.
  3. You can leave a healthy estate for your heirs in a tax-managed manner.

Obviously, number 3 is the obvious choice if you are serious about estate planning.

There are a number of important steps to take that include anticipating and arranging during your life for the management and disposal of your estate after death. Also important is making arrangements to minimize taxes that may be payable on gifts, your estate assets, generation skipping transfers and income on your final tax return.

Planning for the inevitable

As some wit in the distant past said; there are only two certainties in life – death and taxes. The latter can be dealt with to varying degrees but the former is inevitable.

Many Canadians prefer to pretend death is not going to happen to them. This is the reason why so many have not carried out any estate planning. Many do not have a will or if they do have a will, it is not current. According to a recent poll, 51% of Canadians do not have a will, least of all carried out any estate planning.

Now assuming you are serious about estate planning, your first step is:

Creating a will

Consider doing it yourself

If your estate will involve just a few beneficiaries and few assets and cost is a consideration, you could consider a “do it yourself” will. There are many Canadian websites where it is possible to buy and download a legal will template.

Once downloaded, it is just a matter of filling in the blanks. A will is not a legal requirement in any province or territory in Canada. If you don’t have a will however, courts in your province or territory will have the right to decide how your estate is disposed of.

Make a list of assets

Before you rush into this chore, sit down, with your spouse if applicable, and make a list of all your assets such as bank accounts, real estate, collections (art, coins, collecting cards for example) and other valuables and how you plan on leaving what to whom.

If you are using the services of an estate lawyer, having all this information laid out in a document will make it easier for the lawyer to draft your will and will keep the cost down.

If you have substantial assets and a multitude of beneficiaries, it is important to get professional legal help with your will. It is important to ensure all your documents are prepared and witnessed according to the law of the province or territory you reside in. It is always a good idea to shop around for a lawyer who specializes in will and estate planning, as costs vary.

Life insurance options

Term life insurance

A “term” life insurance policy is usually taken out for a ten year or twenty-year period or term, with the premium set to a predetermined rate. At the end of the term, the policy renews but with a higher premium as you are now older. The big issue with term insurance is that for most Canadians, it becomes unaffordable when reaching the seventies and beyond.

Coming from the insurance business, I always told prospective clients the following: you buy life insurance with your good health and pay for it with money. Insurance companies charge higher premiums as you get older and if your health is not great when you first apply, the company may rate your premiums. This means you would pay a higher monthly premium than an equivalent healthy person of the same age and gender.

Universal life insurance

Universal life insurance (UL) is a popular type of insurance policy that incorporates a saving aspect and is known as permanent life insurance. A UL policy has an tax sheltered investment savings element in addition to the life insurance benefit. The growth in the funds remains tax sheltered until withdrawn.

The monthly premium includes the cost of the insurance and an amount that is deposited into the savings account that is invested in certain funds. The policyholder can withdraw money from the savings account but will pay income tax on any withdrawals.

With a UL policy, if taken out early enough, therefore a younger age, the growth in the investment fund can actually pay the monthly premium at a certain point in the life of the policy. In most cases, the benefit amount of  the UL policy and the value of the cash fund are paid out tax free upon the death of the policy holder. Your situation however, should be discussed with an insurance advisor.

Most UL policies offer flexible premium options that work well with estate planning. 

Whole life and term to 100 insurance

Whole life and term to 100 are two other common types of permanent life insurance. The great advantage of permanent life insurance is if the policy benefit is substantial enough, it can cover any tax due on an estate assets, keeping the value of the estate intact.

Taxation

Reducing tax on an estate is a major part of any estate planning and is not just a concern of the wealthy but for every Canadian with assets. The tax owing on your death will be the last tax bill you will pay. But, just because you will be dead and gone and the tax bill is therefore no longer your problem, you do not want to leave any complicated tax issues for the executor and your heirs.

In Canada, there is no inheritance tax and technically no estate tax. However, there is income tax based on the final tax return of the deceased filed by the executor as well as probate fees (if applicable) determined by each of the provinces and territories. There could also be capital gains tax and some other forms of taxation that vary, province to province and territory to territory.

This is where a couple of hours of a tax accountant’s time is well worth the money.

Outliving your estate

Item number 2 in the above list may seem a silly choice to some, but many people do consider this option. The problem is however, with the exception of assisted death, no one knows when they are going to die. Therefore how can you possibly spend all your money before you die?

Leaving a tax reduced legacy

A good tax accountant is worth the money if you have a substantial estate. More so if you have a member of your family who will inherit the family business or if there is a great deal of real estate, commercial holdings or a stock portfolio involved. This is where permanent life insurance can play an important role. What better way to have any capital gains taxes paid than through a tax-exempt life insurance policy?

An executor

If you are making a will, you need an executor. The executor is responsible for filing taxes on behalf of the deceased estate. This includes income tax and any miscellaneous taxes. Once the executor has obtained official authority to distribute the estate, he or she must pay all outstanding debts and expenses, including funeral expenses and all taxes.

Who should the executor be? This can be a family member or a good friend. You and the potential executor should have a lengthy and frank discussion about your assets and the contents of your will. There are legal responsibilities that go with being an executor and it is not a position to be entered into lightly.

Probate fees

Probate is the legal process in finalizing a deceased’s estate. It involves collecting, accounting for and distributing a deceased person’s assets. As legal fees, court costs, probate fees and taxes can be substantial, it is important to plan your estate in order to avoid probate.

To prevent assets from becoming a part of your estate and to avoid probate in Canada, it’s very important to obtain expert legal and accounting advice, more so if you are leaving a substantial estate.

Power of attorney

A Power of Attorney agreement is a very necessary legal document in estate planning. This document provides another person with the authority to handle your personal matters and to make decisions on your behalf in the event you are unable to act for yourself, either due to illness or serious accident.

In estate planning, if a husband and wife are both of sound mind, they will each have a power of attorney for the other. If a person or a couple are elderly and incapacitated in some way, a power of attorney may be provided to a trusted family member, family friend or the estate executor.

A power of attorney does not survive death. After death, the executor of an estate handles the disposition of an estate according to the provisions of the will. 

There are a number of websites in Canada where you can download a power of attorney template. As this document is legal and binding upon execution, it is best not to go the low cost route but to have the document drawn up by a lawyer specializing in wills and estate planning. 

Family trusts

Last but not least in estate planning is the function of trusts. Incorporating a trust into your estate planning is not to be taken lightly and should be discussed with a lawyer experienced in this field. There are two common trusts that can be used in estate planning in Canada.

Testamentary trusts are created as part of a will and only take effect after the testator or person the trust was created for, dies. 

An inter-vivos trust is a living trust and is an estate planning vehicle that can own the estate assets during the trustor’s lifetime and is generally revocable. This means any provisions and designations in the trust can be changed while the trustor or trust owner is alive. However, it becomes irrevocable after the death of the trustor.

Very simply, a trust is a legal arrangement that will benefit people who need to privately structure their affairs or who want to control assets without actually owning them. In some circumstances, a trust can take advantage of certain tax-planning opportunities. Keep in mind, a family trust is considered a taxpayer for Canadian income tax purposes. It pays income tax at the top marginal tax rates. The main tax benefits of a family trust are gaining access to other family member capital gains exemptions (“CGE”).

A frequently asked question in the matter of estate planning is: when is the best time to begin? The answer?  Today!

References

Over to you

We’re interested to know: What are your thoughts about estate planning? Do you have questions we did not cover? Do you plan to create a will, select an executor or create a trust? Please let us know by leaving a comment below.

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