Wills & Estate Planning – Adviceon Library

How do you deal with RRSP transfers upon death?

When RRSP assets are present in an estate, there are a few steps to follow to assist transferal in the event of inheritance, death or separation.

A surviving spouse can transfer the full amount of a spouse’s RRSP as a refund of premium by rolling it into his or her RRSP or RRIF, life annuity or term annuity depending on age. Preferably, name your spouse as the beneficiary under all RRSP plans when you set them up, or make this provision in your will. Note: Your advisor will be able to look at your situation and advise you.

If you leave no surviving spouse but there is an adult child or grandchild who is ‘financially dependent’ upon the deceased at the time of death, the full RRSP can be transferred tax-free to the child’s RRSP or used to buy an annuity or RRIF. Minors, however, must use the funds to purchase an annuity with payments to age 18. Note: Your advisor should be consulted to determine if an individual is ‘financially dependent’.

In most cases outside of financial dependency, the funds are taxed in the hands of the deceased on his or her last tax return. Life insurance strategies can offset the large tax liabilities associated with RRSP/RRIF assets that seniors will face, thus increasing inheritances.

Parents: Do not make this mistake in your will

How does the Guardian Clause in your will protect children?

Caring for your priceless assets – your children.

Very few Canadians have a will, fewer have a currently updated will. Without a will, you cannot outline directives regarding your most priceless asset – your children. A will allow you to clarify your selection of a legal guardian for your children. Here are some steps to take in preparing for the transfer of parental responsibility while planning your will with your lawyer.

Choose an individual to be the guardian

Perhaps your parents, a brother, a sister, or a friend could assume the appropriate parental role in your absence. Consider living quarters, age, health, their ethics, financial means, and their current family stress load. Talk to them and get their approval first. Do not simply assume your parents or siblings will take the children.
Select a contingent guardian in case the first choice denies the guardianship, takes ill, or dies.
Ensure that the guardian will have sufficient capital to provide for the children, which may include the need for life insurance. Know your current financial net worth and how much income it can generate for your children.

The guardian clause is only an interim appointment.

In your will, you can insert a provision that you are appointing someone as your child’s guardian (which most lawyers do). It is important to remember that any such appointment is only good for 90 days as it is an interim appointment only. Therefore, it allows all interested people to get before the court (which makes the final decision about who will be the guardian). Why include the guardianship clause if it is only an interim appointment? Because it is strong evidence of who the parents wanted the guardian to be, though it is not determinative. That is up to the court.

Include these parameters in your will.

Choose a trustee to invest and manage any money that your children may inherit
- Consider having adequate life insurance to cover the children’s financial needs so as not to burden the new guardian.
Express your financial directives regarding the maintenance and education of your children, and the age when they may personally receive the balance of the inheritance.
Update your directives when your circumstances change, reflecting for example, changes in your net worth; a new child in the family; a deceased beneficiary or desired guardian; or special wishes regarding the transfer of certain assets to specific children.
Choose a competent, informed, and trustworthy executor with the patience to follow time-consuming legal detail.

Should every adult have a Living Will?

The Living Will (or Advance Medical Directive) is a document in which you state your wishes regarding the continuance or refusal of extreme medical care. It comes into play only if and when you cannot make those decisions yourself. If you become incapacitated, with no possibility of recovery from mental or physical disability, would you prefer to live or die? This hard question, once answered, will determine the directives you set forth in your Living Will.

Consider the following:

The same person may not be able to make both financial and health care-related decisions.
Decide what medical treatments and care are acceptable and for how long.
If you heart stops or you stop breathing do you want to be resuscitated?
If terminally ill, do you prefer to stay at home or be hospitalized?
Is special care affordable? Do you own Long-Term Care (LTC) or Critical Illness insurance?

Many government jurisdictions are writing new laws recognizing Living Wills. Even if not yet legally binding, a Living Will allows you to indicate your wishes providing guidelines for your family physician, family members and friends—those who would be asked to make health care decisions on your behalf.

Formulate your Living Will with a lawyer (or on your own) and discuss it with your potential decision-makers. Give each of them a copy, updated when necessary, for reference. Have at least two of them witness each copy.

The Living Will alleviates the heavy burden of deciding to allow a loved one to die. By setting forth your request in advance with a clear mind, you intentionally share in that great responsibility, thus lessening any feelings of fear, guilt or indecision that these people may have to face.

Estate planning with the right insurance protection

A proper estate plan will include an updated Will and a plan to avoid paying too much tax on investment assets such as stocks, bonds, mutual funds, and other properties that may have accrued capital gains. It will seek to minimise probate, pay off debts and prepare to meet specific family income needs. Estate planning often includes detailed life insurance planning designed to pay out a benefit upon the death of one whose estate is about to wind down.

When transferring your assets, including mutual funds, using a Will (also referred to as a Testamentary Trust), the key is to position as much of your wealth as possible to pass to your heirs. If you hold equity mutual funds that buy and hold stocks, they may have accrued capital gains. There will be a deemed disposition of all your property at fair market value at your death. For some, this could mean that there may be an existing capital gains tax liability. There are a few things to assess as you begin an estate plan.

Assess your tax liability. List each separate asset you own, the purchase price and date, and its current value. Include your non-registered investments in stocks, bonds, and mutual funds. Have your accountant assess what the tax liability will be.

Assess how you and your spouse can defer taxes Property willed to your spouse can be rolled over tax-free on your death. Your spouse will inherit the assets at the property’s entire adjusted cost base (cost amount). The taxation of the investment will then occur when your spouse disposes of the property or at the spouse’s death. This tax deferral is beneficial, especially if you have significant holdings in equity mutual funds invested for value as in large-cap or blue-chip stocks. Alternatively, you can choose to transfer any asset to your spouse at fair market value on death and recognise the accrued gain or loss.

Assess RRSPs if you have dependent children RRSPs can be transferred tax-deferred to your dependent children or grandchildren, even if a spouse survives you.

Assess income splitting using a testamentary trust By establishing a testamentary trust in your will, you will be able to maintain control during your lifetime over the use of your assets such as a mutual fund investment portfolio. The trust can provide guidelines for the treatment of these assets after your death. The trust document can specify the split of income among heirs. Carefully planned income splitting may allow for significant tax savings.

Assess insurance solutions There are estate planning solutions that only insurance can offer, providing both personal and business solutions to ensure you have financial security. First, assess your tax liabilities with an estate lawyer and/or accountant and make estate plans to determine how to pay them. Consider the following various insurance plans, such as life insurance where the capital gains tax liabilities are substantial.

Personal insurance solutions to protect you and your family include:

• Life Insurance
• Critical Illness Insurance (CI)
• Long Term Care Insurance (LTC)
• Estate Preservation
• Individual Health and Dental plans

If you own a business, insurance solutions include:

• Partnership Insurance
• Buy/Sell Agreements
• Key Person Insurance
• Business Disability Insurance
• Business Office Overhead
• Collateral Loan Insurance
• Group Health Benefits

8 mistakes not to make in your estate plan

What is estate planning? The nature and extent of the rights to asset ownership with respect to land, property, and financial assets and/or life insurance benefits can be given over to heirs using documents referred to as the Last Will and Testament, drawn up by a lawyer.

It is important to plan the most efficient manner of leaving hard-earned assets to heirs. Try to avoid the following mistakes:

The testamentary trust (the will) is not updated. There are many phases in life, and each brings change that can definitely necessitate a change in a will. Without an updated will, deceased heirs may be named, or monies in trust may conflict with your current situation. Make sure your will is updated.
- If there is no will, the government will decide who gets what and the estate may be subject to increased probate fees. Your estate may be deemed intestate, and your provincial government can appoint trustees who may then divide the estate according to legislation, not your wishes.
There is no guardian directive. If there are young children, and no will, who will take care of the children if both parents die? It is very important that a directive in the will establishes who will be the children’s prearranged guardian.
Specific assets for the heirs are not articulated. Even in a simple estate, it may be unwise to generalize—such as “I leave all my household items to my children”—not selecting specific heirs for certain assets. In this case, a dominant child-executor may rummage alone through the house pre-selecting, removing, and even selling heirlooms other siblings may be attached to.
Proper beneficiaries have not been named. You will also need to assure that your beneficiaries are updated on your various investment accounts (such as segregated funds) to allow passing these assets directly to named beneficiaries. Life insurance can also state specific beneficiaries helping you to achieve estate equalization. The proceeds from life insurance can be divided proportionately as you chose. Beneficiaries of your assets may need to be changed over time to coincide with your wishes.
The estate is not equalized. In situations where one child inherits the family cottage or business, consider leaving equivalent cash assets to other siblings. If there will not be enough cash in the estate, life insurance can be purchased to create proceeds to divide up among siblings not inheriting a significant family asset. Also, life insurance benefits can be assigned to beneficiaries outside of the will.
Allowing the estate to be eroded by taxation.
- RRSPs and estate taxation Where there is a surviving spouse, RRSPs/RRIFs can rollover free of taxation. If not, registered money will be taxed as income in the final tax return of your estate.
- Capital gains taxation Taxation on capital gains can erode bequeathed assets such as a cottage, home, or business shares left to adult children. Such assets are deemed to be disposed of at death where there is no spouse or dependent, in most cases creating taxable capital gains on the difference of the current asset value minus the purchase price. Life insurance can help pay capital gains taxes, for example, to keep a cottage or business in the family.
Debts may not be addressed. Many people miss covering all personal and business debts with life insurance. Thus, they can saddle their heirs with the estate debt if there is a lien on business or personal assets. By paying off some or all of these debts tied to assets with life insurance, you can free up much more of your estate value.
The immediate family’s provision was unaccounted for. Some people never chose to provide a nest egg (upon their decease) from which the family can invest to create an income for dependents such as a spouse, children, and/or ageing parents who may need long-term care. In these cases, there may be no savings set aside for a rainy day—for emergency or retirement. Life insurance may be the easiest solution to this problem.

How does life insurance benefit a Testamentary Trust?

A testamentary trust is established using a will when someone dies, including the following types which direct a named trustee to manage and distribute assets and income to named beneficiaries of the trust.

You can designate the number of years it will survive, within permissible, legal limits. The trust becomes effective at the time the will is probated. The assets undergo the probate process and are therefore, exposed to creditors’ claims. Note: If your intent is to avoid probate, a living trust would be a more suitable alternative especially adapting the use of life insurance. However the potentially lower marginal tax rates allowed with the testamentary trust, needs to be weighed against potentially higher future income tax payable. When using a testamentary trust (versus an inter vivos trust) make sure your beneficiaries are properly specified to work according to your trust directives. A qualified tax advisor should assist you as you make these decisions.

Individuals commonly choose between two types of trusts: family and spousal.

Family trusts

Minor Trust This trust protects the interests of underage children.

Protective Trust This trust protects any family member with special needs such as:

• Safeguards adult children’s assets from creditors or divorce settlements.

• Manages funds for spendthrift adult children.

• Minimizes disclosure of small business assets that could be susceptible to lawsuits or creditors.

Spousal trusts are established to provide your spouse with funds.

• Protects the testator’s children’s assets should your spouse remarry or can assure the inheritance of children from a previous marriage.

• Reduces income tax through income splitting.

How are trusts funded?

If an estate will have significant capital gains tax due and/or debts, consider using life insurance to cover all liabilities. You can also increase the death benefit to pay off business agreement liabilities (if any) and provide specific trusts with the necessary cash.

How do you establish a Testamentary Trust?

You establish a testamentary trust in a Will. It directs a named trustee to manage and distribute assets and income to designated beneficiaries of the trust.

You can designate the number of years it will survive, within permissible, legal limits. The trust becomes active at the time the will enters probate. The assets undergo the probate process and are, therefore, exposed to creditors’ claims. If you intend to avoid probate, a living trust would be a more suitable alternative. Individuals commonly choose between two types of trusts: family and spousal.

Trusts re carefully designed estate planning tools and will need the guidance of a good tax lawyer.

The purpose of a Family Trust is to:

• Protect the interests of underage children and any family member with special needs
• Safeguard adult children’s assets from creditors or divorce settlements
• Manage funds for spendthrift adult children
• Minimize disclosure of small business assets that could be susceptible to lawsuits or creditors

Spousal Trusts are established to provide your spouse with funds. These trusts also:

• Protect your children’s assets should your spouse remarry. It can assure the inheritance of children from a previous marriage
• Reduce income tax through income splitting

Funding trusts

If an estate will have significant capital gains tax due and/or debts, consider using life insurance to cover all liabilities. You can also increase the death benefit to pay off business agreement liabilities (if any) and provide specific trusts with the necessary cash.

What special powers do executors have?

Before naming or agreeing to act as an executor, be sure to consider what is involved. Naming co-executors, one of whom is a professional in the field, can be a wise decision.

• An executor carries out the instructions in your will. Co-executors can share the task.

• Provincial laws define what the executor must do, whether they are a friend, relative, professional, or a trust company—however, the will can specify even more extensive powers.

• The executor may have to deal with some or all of the following at an emotional time: funeral homes, beneficiaries, Canada Revenue Agency (CRA), insurance and investment companies, government and business pension departments, real estate agents, lawyers, accountants, appraisers, stock brokers, and business partners.

• They can be empowered to convert the estate to cash or divide assets equally among beneficiaries. They can also make payments to the parent/guardian of a beneficiary under the age of 18.

Where there is life insurance with beneficiaries assigned, monies must be directed as defined in the life insurance contract.

•The executor (especially if inexperienced in legal or financial matters) should know how complex the estate is before agreeing to the task. If necessary, appoint a co-executor who is a professional in this field.

• Have a clear, objective idea of what will be involved before asking someone to be your executor and before agreeing to act as one.

What are the key reasons to review your Will?

Keeping your Will up-to-date is just as important as having a Will. Consider updating your Will for the following reasons.

• Marriage. You recently married, or a marriage ended since you made out a reciprocal (joint) Will. Your Will may be revoked upon marriage, unless it specifically states it was created in contemplation of marriage.

• A change of executor, lawyer, accountant, or guardian. If one of these key players die, or becomes incapacitated, or is replaced regarding your estate plan.

• You want to establish planned giving. You desire to leave monies, for example, to a charity, an art gallery, a religious organization, or a school.

• Birth of children and grandchildren. You want to ensure that they are provided for, perhaps through life insurance.

• Divorce. If your Will has previously named a ex-spouse as executor, this appointment is nullified upon divorce.

• Separation. If you die before a divorce becomes final, your spouse may retain access to your estate assets.

• Change in wealth. If you inherit money, or inherit life insurance proceeds, or your assets decline, consider altering your bequests.

• Special care is needed. A spouse, parent, or child has become disabled and needs future care.

• Change in health. If you anticipate requiring costly long-term health care, you may want to alter the specific bequests in your Will to reflect this new reality.

• Death of executor or beneficiary. Appoint a new executor or revoke a previous beneficiary directive or review your beneficiary designations.

• Sale of business. If your assets become more liquid upon the sale of a business, you may want to pass that benefit along to beneficiaries or charities. If a partner has bought or is buying your business previously bequeathed in your Will you may need to adjust your estate planning.

• When you want to change your trustee, or trust institution. You want to assign others to be in charge of investments within a testamentary trust directive.

• Legislation changes. Federal or provincial budgets have changed legislation affecting your estate planning. The validity of your Will may be affected by changes to laws.

• Taxation of the capital gains on a major asset. When you own an asset that has appreciated in value, such as a cottage or business, make sure the tax payable, will not decimate the estate. Life insurance solutions to pay off your estate liabilities after death, may be a more affordable option.

The Guardian Clause: Protect your children

A will can protect your children’s financial future

Very few Canadians have a will, and fewer have a currently updated will. Without a will, you cannot outline directives regarding your most “priceless asset” – your children. A will allows you to clarify your selection of a legal guardian for your children. Here are some steps to take to prepare for the transfer of parental responsibility when planning your will with your lawyer.

Choose an individual. Perhaps your parents, a brother, a sister or a friend could assume the appropriate parental role in your absence. Consider their living quarters, age, health, ethics, financial means and current family stress load. More importantly, talk to them and get their approval first. Do not simply assume that your parents or siblings will take care of the children.

• Select a contingent guardian in case the first choice refuses the guardianship, takes ill or passes away.

• Ensure that the guardian will have sufficient capital to provide for the children, which may include the need for life insurance. Know your current financial net worth and how much income it can generate for your children.

The guardian clause is only an interim appointment. In your Will you can insert a provision that you are appointing someone as your child’s guardian – which most lawyers do. It is important to remember that any such appointment is only good for 90 days, because it is an interim appointment only. It therefore allows all interested people to appear before the court, and the court will make the final decision about who will be the guardian. Why include the guardianship clause if it is only an interim appointment? You should include it, because the guardianship clause provides strong evidence of the parents’ choice of guardian, although it is not determinative.

Include the following parameters in your will:

• Choose a trustee to invest and manage any money that your children may inherit.

• Express your financial directives regarding the maintenance and education of your children and the age when they may personally receive the balance of the inheritance.

• Update your directives when your circumstances change, reflecting for example, changes in your net worth; a new child in the family; a deceased beneficiary or desired guardian; or special wishes regarding the transfer of certain assets to specific children.

• Choose a competent, informed, and trustworthy executor with the patience to follow time-consuming legal detail.