Estate Planning – Page 3 – Adviceon Library

What insurance planning fits a good Estate Plan?

What are the key insurance components of an Estate Plan?

An estate plan is a singular categorical part within organized financial strategies aimed at achieving financial independence. Life insurance, disability insurance (group or personal), critical illness (CI) insurance and long-term care (LTC) insurance policies are key components of a good estate plan when protecting your family’s financial security.

Keep your documents up to date with your life needs. It is important that an individual maintains and updates a 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.

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 the beneficiaries, where a person needs to be added or removed during an addition to the family; or if you remarry, your existing will may automatically become nullified.

There may be significant changes in your net worth if the value of your residence or investment assets change over time; or your liabilities increase or are paid off. If you have significant assets, have your accountant make sure that the best tax arrangements are in place.

Business owners 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 and segregated funds to circumvent or minimize probate or estate administration tax and/or fees or protect assets from creditors.

Life insurance with named beneficiaries can also be solutions to transfer capital tax-free to heirs outside of probate/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 account and/or tax lawyer.

How can estate planning minimize obstacles for my heirs?

Estate planning provides some ability to minimize the obstacles that loved ones might encounter in the event of an unexpected death such as:

Fear of losing your money by erosion of capital that might come about with poor investments.
Delays during the settling an estate can be a lengthy process.
Legal and accountancy costs, probate fees, and taxes.
Potential liabilities for Executors and Trustees in Ontario re the new administration of probate/EAT in 2013.
Lost privacy due to your will becoming public during the probate process.
Ability of your beneficiaries to handle money as some children are less capable than others of handling large amounts of money

How can the use of Segregated Funds and Term Funds help?

Ability to invest in diversified funds that have professional money management to help your clients preserve their capital.
Segregated funds and Term funds with named beneficiaries can avoid probate, making payout quicker.
By avoiding probate, your wishes are kept private.
There are excellent estate planning concepts such as the Gradual Inheritance concept that can help you better plan the allocation of money to your children (eg., buying an annuity or deferring payout until the child turns a certain age)

Estate Planning empowers your heirs

Estate Planning is a financial planning process that every responsible working person with dependents should accomplish, even if it is preparing a last will and testament and living will for health purposes.

Estate planning can empower your heirs in the following ways:

Plan to reduce taxes in your estate When transferring your assets, including mutual funds, using a will, try to pass as much value as possible 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 the time of your death. For some this could mean a capital gains tax liability.

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

Your spouse and deferred taxes Property willed to your spouse can be rolled over tax-free on your death. Your spouse will actually inherit the assets at the unchanged adjusted cost base (cost amount) of the property. The taxation of the asset will then occur when your spouse disposes of the property or at the death of the spouse. This tax deferral is beneficial especially if you have large 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 recognize the accrued gain or loss.

RRSPs and your children Under the rules proposed in the 1999 Federal Budget, RRSPs can be transferred tax-deferred to your dependent children or grandchildren, even if a spouse survives you. Before the 1999 Federal Budget, a transfer of RRSP funds to dependent children or grandchildren would be taxable if there was a surviving spouse.

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 your tax liabilities with an estate lawyer and/or accountant and make estate plans to determine how to pay them. Consider the use of life insurance where the capital gains tax liabilities are substantial.

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 powers do you assign to an executor?

Consider what is involved before naming or agreeing to act as an executor.

• An executor carries out the instructions in your will. Co-executors can share the task.
• Jurisdictional 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: a funeral home, beneficiaries, past or ongoing taxes, insurance and investment companies, government and business pension departments, real estate agents, lawyers, accountants, appraisers, stock brokers, and business partners.
• They may also 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 in most cases.
• 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 legal and accounting professional.
• Have a clear and objective idea of what will be involved before asking someone to be your executor and agreeing to act as one.

Discuss the parameters of an executor with your lawyer, before enabling one, or taking on the responsibility if given or offered to you.

How do I fairly bequeath real estate to my children?

More than three million Canadian couples will pass on an average of one-quarter million dollars to the next generation over the next 30 years. Consider that 50 percent of all personal assets are owned by people of age 50 or more. A question they will ask themselves is how to transfer this wealth to their families?

Transferring property to your children. Your children will be faced with a host of new responsibilities when they inherit your wealth. They will have to ask themselves: should we sell the house; what assets should we keep or place in storage; which assets should we share and which should we sell? Canadians who own a cottage or second residence used for vacations may require special tax planning because a cottage or vacation condo is considered to be a secondary residence for tax purposes. There may be family quarrels over who will pay for a cottage’s or vacation property’s upkeep and use, once you die. Consider your estate-planning directives before you pass on. This preparation will help to prevent confusion and potential family conflicts.

Utilize legal and/or accounting help. If your estate requires special consideration, discussing estate issues with professionals will provide options and guidance for simple-to-complex estates. If you have a cottage or another secondary residence, be sure to include this in your discussions.

Consider these alternatives:

• Plan to have the cottage/second residence held in a testamentary trust after you die. A trust is a legal document that allows you to determine what property will be provided for specific beneficiaries upon your passing. You may also set certain conditions to the use of the assets by the beneficiaries.

• Maintain control. Set up a living trust, so that the property won’t form part of your estate at death. A living trust is created while you are alive, and your beneficiaries can benefit from your wishes during your lifetime.

• Or, if the children want the cottage/second residence, give or sell the real estate to them while you are alive.

Understand the result – deemed disposition. When the ownership of a cottage/second residence goes directly to beneficiaries or into a trust, a deemed disposition takes place. This means that if the value of the cottage has increased, capital gains tax may have to be paid.

Consult an accountant to help you determine what tax will have to be paid upon the disposition of the cottage. Typically, the fair market value of the property, less its total costs, will result in a capital gain (only half of the gain becomes taxable). However, this gain may result in substantial costs because you could be faced with a higher marginal tax bracket. Tax planning with your accountant is essential.

Advanced estate planning can cover your second residence’s estate tax liability.

So you may ask, how can you pass on the cottage/second residence to your children without a large tax liability? Personal life insurance, purchased with your after-tax dollars, can provide a non-taxable death benefit to pay this tax. For a minimal monthly premium payment, your potential capital gains tax liability on a family cottage/second residence can immediately be covered.

In addition, your life insurance can also pay off any unpaid portion of the mortgage. This can help equalize the estate with other siblings. The person holding the mortgage would be the beneficiary for tax reasons. A joint last-to-die life insurance policy may be the least costly method to resolve the estate inequity. Note: A capital gain is only triggered upon the death of the last spouse, or upon the disposition of the property.

Estate equalization maneuver. In some families, not all children may wish to share in the family cottage/second residence. Where there is one child, who – to the exclusion of others – will receive your cottage/second residence, an inequity may occur. Your estate will pay the applicable capital gains tax on your cottage/second residence, thus lowering the remaining assets in your estate for equal distribution among the other children. Therefore, you may want to plan for estate equalization to the other heirs using an increased amount of life insurance proceeds.

Note: Prior to February 28, 2000, the inclusion rate for tax on capital gains was 75 per cent. From February 28, 2000, to October 17, 2000, the inclusion rate was 66 2/3 per cent. Currently, and as of October 18, 2000, the inclusion rate was further reduced to 50 per cent. You may need to treat your capital gains or losses separately, on the basis of these periods and inclusion rates, relative to the time that you realized your capital gains or losses. Consider consulting an accountant when evaluating your final estate tax liability.

How do I make a claim as an heir to an estate?

If you intend to have control over the distribution of your estate it is important to have a testamentary trust (a will) drawn up by your lawyer.

If you die without a will, the Provincial Court will appoint the estate’s trustee referred to as the Public Guardian and Trustee. Any person claiming a share of your estate will then have to prove that they are entitled to and will have a right to inherit. Your estate will be distributed as follows:

• The largest share goes to the spouse (initial amount differs per province);
• Then the remaining estate value goes equally to the spouse and children, shared according to specific figures;
• If no spouse, to the children and descendants of the deceased, if any;
• To the parents of the deceased if no spouse or descendants;
• If no surviving parents, to brothers and sisters, and children of the deceased brothers and sisters;
• If no brothers and sisters, then to living nieces and nephews;
• When more remote relatives are involved, special instructions may apply.

NOTE: Half-blood relatives share equally with whole-blood relatives. Children include those born outside marriage and adopted ones.
The above is based on Ontario law. The law differs according to your province of residence and current law.

How do I prove that I am an heir of an estate?
You will need evidence to submit to the Public Guardian and Trustee assigned by the Provincial Court. You will need:

• Two sworn statements or affidavits. The first statement must be made by a person claiming a share of the estate (called the claimant). The second corroborates the first and is made by someone who has personal knowledge of the family history, but no monetary interest in the estate.

• A third sworn statement may also be needed from a resident who knew the deceased, stating his/her knowledge of the deceased’s reputation as to marital status and the existence of children born inside or outside marriage or adopted.

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.