Estate Planning – Page 2 – Adviceon Library

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.

Why is Universal Life Insurance an excellent Estate Planning tool?

There are several reasons why people use Universal Life (UL) for estate planning.

The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect your changing needs. If the death benefit remains level, eventually the major portion of the benefit, over a long period of time, can consist of the cash reserve (CSV). As the need for the insurance shrinks, the cash can increase, providing the insurance cost doesn’t reduce the cash value and its growth. If the death benefit grows, the cost of insurance will increase with age, and continues to be paid from the cash value.
You can insure more than one life in the plan. You have the option of insuring yourself, your spouse, both of you, your children, or business associates using one or more of these policies. In some cases, the ownership can be transferred or lives added and the premiums paid from the original tax advantaged funds. Your death benefit can be payable after the first spouse’s death to provide an income for the surviving spouse. Alternatively, you can arrange to have the benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities.
UL works to protect you from the potential tax liability of your estate. Discuss your estate use of UL with a good tax advisor, CA, or financial advisor specializing in estate taxation. You may also want to seek counsel from an estate-planning lawyer. Make sure you, along with your financial representative, assess the estate’s need for life insurance and the various solutions. The best estate-planning solutions are most often insurance related because life insurance is designed to pay a large capital benefit at precisely the time it is needed.
Mitigate tax erosion of the value of a significant estate. If you own stocks and bonds, equity investment funds, a family cottage, a second residence, or business assets you may face capital gains taxation in your estate. Upon death, taxes will also be due on funds remaining in an RRSP/RRIF (after the death of both spouses in the case of a married couple). One policy can replace or pre-fund such taxes due. With a joint last-to-die policy, the insurance proceeds can be used to cover the estimated estate taxes. The advantage is that one’s entire pre-tax estate valuation can pass, as desired, to the family heirs.
Circumvent probate and/or estate administration tax (EAT). When the tax-free benefit is paid directly to beneficiaries, there is no need to probate this money or have it reviewed by the government. In fact, other beneficiaries have no recourse to complain about monies paid to heirs in this manner. Depending on the province, such legislation may be under review or currently changing.
Business owners can protect their asset value. The death benefit of a UL policy can create immediate capital to take a business through the transition of losing one of its leaders, or key employees, while allowing surviving partners to buy out the outstanding interests via a payout of the share ownership of the deceased partner. This is commonly done within the framework of a well structured buy-sell agreement.
Other tax advantages. A UL policy owner can earn and accumulate tax deferred interest to potentially increase the after-tax yield of your investments and policy cash value over the long term. The UL deposits are protected from secondary annual taxation on interest earnings until withdrawn.

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Why is it necessary to probate an estate?

Careful estate planning can untangle an estate from costly government inspections or the application of their administrative taxes and/or fees. Probate fees are calculated on assets, regardless of liabilities, at predetermined rates by the government. Methods of reducing the need for probate can save you money.

‘Estate’ is the legal term. When used in connection with probate proceedings, the term encompasses the total property that is owned by a deceased person prior to the distribution of that property in accordance with the terms of a will, or when there is no will, by the laws of inheritance in the jurisdiction of residence.

When an individual dies, his or her last will and testament is read. Because financial matters need tending to, your will should outline how you want your assets divided, your debts paid, and where applicable, define the management of these assets using established trusts for your heirs.

Family members may read a will if it is in their possession. Next, the will must go to the executor, who then assesses it, to see if it needs to be probated. Probate is a court assessment that may require government approval to settle your estate and transfer the ownership of your assets.

Probate is generally necessary in cases when:
• A bank, trust company or financial institution insists on the will being probated to prove that the executor has the authority to act.
• The assets include shares owned in a private company.
• The executor needs to sue an individual owing the estate money.
• Creditors are owed money from the estate.
• A will’s terminology is unclear, ambiguous or certain provisions are not stated. (For example, if there is no provision to pass assets to another heir where a spouse has predeceased you).
• A will is improperly witnessed.

Is probating an estate expensive?

It is a significant job for the executor to probate a will. The original will must be submitted with an inventory listing the estate’s assets recorded at their fair market value to the court in the jurisdiction where the deceased last lived. There may be increased fees if a lawyer is retained to cross-examine the asset list or if the executor charges a percentage of the asset base to do the work.

Life Insurance can solve estate tax problems. If you have not paid taxes on your capital gains which have accrued in a business or on an investment asset, or on a cottage, you may face estate taxes that are not affordable for the estate which may minimize the heirs assets or make it impossible to retain an asset such as a cottage. By planning for probate, you can use life insurance to pay off potential estate taxes due in the estate.

Note: In Ontario, the Estate Administrative Tax (EAT) will assume the process of probate. In Quebec, probate is not needed when a notary under seal prepared the will.

Is probating an estate expensive?

Probate fees are paid from an estate to the provincial court. These fees are approximately .5% to 1.5% of the estate’s assets, depending on the size of the estate and the province. Provincial lawyers complete the necessary ‘letters of probate’ or ‘grant of probate document.’ In Ontario, they are now referred to as ‘the certificate of appointment of estate trustee with a will.’

Because probate is calculated on assets, regardless of liabilities, an estate with assets of $1 million and liabilities of $200,000 would pay probate on the entire million. In addition, if these same assets are transferred to your spouse, probate fees may be due again the second time around when these assets are transferred through his or her will. These fees are paid with after-tax dollars, as they are not deductible on the final income tax return. There is no law stating that a simple will and estate needs probating.

How can I minimize the need for estate probate?

There are a few tactics whereby you can reduce the need for an estate to be probated by the government:

Defer possible probate by holding assets jointly. Probate fees may be charged when that asset is transferred later through the will of the second spouse.

Establish a person as a beneficiary on your life insurance policies independent of the estate. This way, all monies pass to the heirs tax-free. If the estate needs probating, this portion of the assets will not be included in the estate, as the death benefit will flow directly to the heirs circumventing scrutiny. Life insurance strategies are excellent financial tools to circumvent probate on larger wealth transfers to heirs. Family wealth can be positioned to pass through life insurance policies, delivering tax-free benefits without probate. This method has frequently been used to transfer inter- generational estate wealth in the millions.

Name your beneficiaries on your RRSPs and RRIFs. Insurance companies’ products will allow you to sidestep probate in this way. To protect themselves, banks and trust companies will probably require probate or a letter of indemnity from the estate’s lawyer if the assets are significant. If your spouse is your beneficiary, consider a secondary beneficiary should your spouse die at the same time you do.

Consider setting up a spousal testamentary trust in your will to avoid double probate. When the second spouse dies, the assets can be distributed via the trust directives as opposed to a will.

With your spouse, set up mutually owned property as ‘joint tenants with rights of survivorship to transfer these assets automatically outside of the will.

Once the will has been probated (if necessary) and the executor confirmed, he or she could start transferring assets as directed by the will. Some assets can be transferred easily within a short period of time. Others have to wait until the estate expenses have been paid, including any final income taxes due to Canada Revenue Agency (CRA), after which they will issue a tax clearance certificate.

Note: The Estate Administration Tax (ETA) in Ontario, will replace some of the previous probate processes, and may add more complexity to the above scenarios. If your estate is large, it would be wise to seek the advice of a good tax accountant.

Life insurance to protect heirs from debt

The expansion in the growth of using credit is partially due to lower interest rates. The paradox is that low-interest rates lessen the interest payments to reduce debt while at the same time motivate people to assume much more debt.

Beware of little expenses; a small leak will sink a great ship. Benjamin Franklin

Debt Affects Family Savings Increased spending is often supported by increasing debt loads. When debt overburdens your resources to repay what you owe, you may need debt counselling that may lead to debt consolidation.

Do Your Math If your expenses exceed your income, you will increase your debt if you rely on credit. Amassed debt can undermine otherwise healthy finances and the ability to invest for retirement. Saving indicates a stewardship that respects the fact that money is the only symbol of trade for a company’s goods and services exchanged for an individual’s energies.

Reduce Debt and Save More The amount of savings often advised is based on the age-old recommendation to save 10-20% of your disposable income.

Interest rates on borrowed money can always increase so it important to realize that low-interest rates do not last forever. Always plan to service the debts that you take on today.

Beware of the potential consequences of taking on significant debt. Life events such as loss of employment or income, a change in family status or a serious illness, can cause a huge drain on finances.

Life insurance protects your heirs It is important to insure all your household debt with life insurance as these liabilities can be paid off tax-free in the event of death. If you are one of the main breadwinners in a family, call your life insurance specialist today.

Talk to your advisor about life insurance to protect your heirs.

Essential Estate Planning protects your financial security

A comprehensive estate plan includes a will, a plan to minimize the capital gains liability and provide for any family income needs. This often involves life insurance which is an effective tool to maximize the size of your estate and pay any tax liability cost effectively. I will design an estate plan tailored specifically for your situation because every person is a unique individual.

Providing both personal and business insurance solutions to protect your financial security.

Business Insurance solutions:

• Partnership insurance
• Buy/Sell agreements
• Key Person insurance
• Business disability insurance
• Business/office overhead
• Collateral loan insurance
• Group health benefits

Personal Insurance solutions to protect you and your family:

• Life Insurance
• Critical Illness Insurance
• Long-term care insurance
• Estate Preservation
• Individual health and dental plans

Considerations when designing an Estate

Estate planning is a process that allows one to determine how their assets will be distributed upon death. As we prepare to pass our lifetime assets to our heirs, there are key components of an estate plan that should be given careful consideration.

The fundamental component of any estate plan is the Last Will and Testament commonly referred to as the will. It is also important that an individual maintains and updates their will and two powers of attorney documents: 1) for property such as real estate, bank accounts, and investment assets, and 2) a power of attorney for personal health care.

Review your estate planning documents

Life changes can affect the integration of each of the above strategic solutions. Therefore, it is important to review the above aspects of an estate plan every three to five years. For example, there may be a change in family structure, so beneficiaries may need to be reviewed. Or, if you remarry, your existing Will may automatically become nullified.

Your net assets can change Keep an eye on your net worth. Other life changes that require updating your estate plan include changes in your net worth, or if the value of your residence or investment changed. If you have significant changes in net worth, have your accountant make sure that the best tax arrangements are in place.

Business strategies to protect your net assets If you are the shareholder of business assets, make sure that a buy-sell agreement is in place in the event of your death or disability, assuring that every owner is covered with life and disability (income replacement) insurance.

An estate plan may benefit from using formal trusts to reduce taxes. Life insurance products such as segregated funds and term funds can also be used to circumvent or minimize probate or government estate administration taxes (EAT) or attending legal fees. In most cases when a beneficiary is named in a life insurance policy, proceeds will pass and the capital in most cases will transfer on a tax-free basis to beneficiaries, thus avoiding probate or EAT scrutiny.

For an estate plan seeking to transfer large capital assets to named heirs, it would be wise to discuss these capital-transfer techniques with an accountant and/or tax lawyer.

How can I minimize the need for estate probate?

There are a few tactics whereby you can reduce the need for an estate to be probated by the government:

• Defer possible probate by holding assets jointly. Probate fees may be charged when that asset is transferred later through the will of the second spouse.
• Establish a person as a beneficiary on your life insurance policies independent of the estate. This way, all monies pass to the heirs tax-free. If the estate needs probating, this portion of the assets will not be included in the estate, as the death benefit will flow directly to the heirs circumventing scrutiny. Life insurance strategies are excellent financial tools to circumvent probate on larger wealth transfers to heirs. Family wealth can be positioned to pass through life insurance policies, delivering tax-free benefits without probate. Any tax due on policy investments will be taxed to the estate of the deceased policy owner. This method has frequently been used to transfer inter-generational estate wealth in the millions. Your advisor can keep you up to date on potential taxes in the estate.
• Name your beneficiaries on your registered investments such as RRSPs and RRIFs. Insurance products may allow you to side-step probate in this way. To protect themselves, banks and trust companies will probably require probate or a letter of indemnity from the estate’s lawyer if the assets are significant. If your spouse is your beneficiary, consider a secondary beneficiary should your spouse die at the same time you do.
• Consider setting up a spousal testamentary trust in your will to avoid double probate. When the second spouse dies, the assets can be distributed via the trust directives as opposed to a will.
• With your spouse, set up mutually-owned property as ‘joint tenants with rights of survivorship’ to transfer these assets automatically outside of the will.

Once a will has been probated paid the estate administrative tax (EAT), the executor can start transferring assets as directed by the will. Some assets can be transferred easily within a short period of time. Others have to wait until the estate expenses have been paid, including any final income taxes due to Canada Revenue Agency (CRA), after which they will issue a tax clearance certificate.

Solving Capital Gains Tax Exposure

Capital gains from a business, cottage, second residence, rental property, or non-registered investment are subject to taxation when the property is disposed of. How and when the property is disposed of requires serious consideration, as the tax implications can be enormous.

Here are some areas where capital gains tax may develop:

If you own a Family Business Many family businesses have accrued large capital gains over time, due of course to the success of the businesses. When sold, the business will incur a taxable disposition that could be subject to high taxable capital gains.
If you own non-registered Investments Any capital asset that is held outside of an RRSP, whether a stock, GIC, or investment fund to name only a few, will be taxed on the difference between its fair market value at time of sale, and the cost of the asset. The difference between the purchase price and the sale price will be either a taxable gain or loss.
If you own a Cottage When you sell your cottage, or you and your spouse die, capital gains tax will be triggered on the difference between the cost and the fair market value at the time of sale. One major consideration is how to keep the cottage in the family.

Assuming the kids want the cottage, how can the tax problem be handled? What if there are not enough assets in the estate to pay the taxman? If there are not enough assets or cash to pay for the tax bill, it may be that the cottage has to be sold.

Can A Solution Cost Pennies on the Dollar?

One solution that can help overcome tax issues, and provide enormous estate savings, is a permanent life insurance policy. A permanent life insurance solution will create a non-taxable death benefit that can pay the capital gains tax on the accrued increase in value of a family business, cottage, second residence, or unregistered investment. The most common form of estate policy purchased is a Joint Last-to-Die Life Insurance contract. These types of policies can insure both spouses’ lives, but only pay out on the last death. The cost of the product is often more affordable than an individual policy since the insurance risk is lessened by insuring two lives.

The problem of Estate Capital Gains Tax

You and your heirs may think that all of your assets will pass over to them tax free. Let’s examine how estate taxation can erode the value of one’s property and cause business succession problems

The Family Business Many successful family businesses have accrued capital gains in the millions, from the time the owner started years ago. The tax payable is so high that the business cannot afford the liability once the owner dies, at least without liquidating. One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, or the money gets used for an emergency or a new opportunity; or if the savings goal is impossible for the company to achieve. A better method might be to simply buy life insurance to immediately cover the entire estimated liability risk, which is due at the same time the benefit is paid upon the owner’s death (or the death of a surviving spouse). A sole owner may buy enough life insurance to add additional capital to offer stability if the company were to be sold, or where a wife, son, or daughter wants to take it over.

Investments Any capital asset that has accrued value over the initial purchase price, will have capital gains (if yet unrealized) taxed in the estate. At that time if there is no surviving spouse or dependent, an RRSP will all be taxed fully as income. Again, life insurance allows the payment of any gains tax and/or a capital replacement of the estate’s lost RRSP value.

The Cottage Perhaps you acquired a cottage that has increased in value from next to nothing, over several years of inflation while people have sought after vacation properties. Just like the business, a cottage can have capital gains growth. Thus, that asset can also later present you with a tax liability. If you die, or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested. Consider passing the cottage on to the children. Personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance for business needs, or create future income for a spouse, or dependent child, if necessary.

Does your family want to keep the cottage after your death? If so, would you want them to inherit the cottage together with a large income tax bill? Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once.

The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a life insurance policy on the owner(s) for the projected amount due in the estate. Purchase a permanent life insurance plan. These plans often offer a competitive rate of return on your investment and the full amount is payable at death entirely tax-free. An additional benefit is that by virtue of the life insurance guarantee, the entire coverage needed is available after the payment of just one monthly premium. If you die, your beneficiaries will have the cash to pay the debt, rather than having to quickly sell the cottage to pay taxes due. Consider taking out a permanent policy on your life (or a joint policy that insures your spouse as well) that will increase in value to meet the tax on the rising capital gain on your cottage property.