Estate Planning – Page 4 – Adviceon Library

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.

How can Life Insurance insure Estate Planning tactics?

A testamentary trust is established in a will. It directs 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. If your intent is to avoid probate, a living trust would be a more suitable alternative.

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

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.

What is an Estate Bond?

Life insurance can ensure estate-planning tactics

Prominent in the ’90s, the term “estate bond” is an old concept of the life insurance industry that mathematically proves how life insurance can protect and transfer certain assets that may otherwise be left vulnerable to market-related erosion or taxation.

Although investment assets and life insurance are indeed different parts of your strategic financial goal-setting. They can work in unison to create wealth. How they work together goes far beyond the adage “buy term and invest the difference,” which simply uses term insurance at the level of basic financial protection, unlike the alternative, advanced features of the estate bond, built right into a tax-planning manoeuvre.

How does an estate bond help to defer taxes?

This concept is an estate’s all-encompassing wealth preservation strategy because it is designed to work upon the death of the insured. Although an estate bond is not an investment designed for short-term financial planning, it can increase the tax-free wealth that you pass on to heirs.

The estate bond is ideal for the investor who has already maximized his or her tax benefits using an RRSP or has significant investments in vehicles to defer capital gains tax. This investor may enjoy a thriving business enterprise, hold a large fund or stock portfolio, and want to maximize some of the capital that will be left to heirs.

Consider a situation in which a couple of age 65 would like to leave funds to their grandchildren to help them purchase their first homes as well as enhance their future.

How does it work? For example, with an initial investment of $150,000, you can acquire a joint last-to-die life annuity. This life annuity will pay $7,000 per year after tax (after the marginal tax rate is paid). This $7,000 payment is then used to purchase a permanent joint last-to-die life insurance contract – on either one spouse’s life or both spouses’ lives – with a face value of $350,000. At this stage of the financial planning, the $150,000 of estate value grows to $350,000, which will one day pass to the estate tax-free! Note: The figures vary based on circumstances and interest rates.

Note: Note: Joint last-to-die Life Annuity based on a male, age 65; female, age 65, single premium non-registered deposit of $150,000, joint survivor annuity. Life insurance is based on a male age 65, non-smoker, female 65, non-smoker, joint last to die for $350,000 death benefit (with a level cost of insurance, and increasing death benefit). Ask your financial advisor to compare the projected growth of permanent life insurance (some use tax-sheltered GICs and tax-advantaged segregated funds to enhance the face-value growth) versus taxable investments (such as equity investment funds and/or GICs). In most cases, the estate bond, along with certain guaranteed benefits, will far outperform the initial capital invested with respect to the after-tax value passed on to the estate.

The estate bond is definitely an estate-planning tool to maximize wealth payable to heirs after death. It is true that there is far less liquidity in the life insurance contract. Therefore, consider this advanced planning concept if you have already amassed enough money to guarantee a good retirement lifestyle. Because life insurance proceeds are paid to your beneficiaries tax-free, you can be assured that the government can’t take any tax bite out of this wealth bequeathed to your loved ones.

What is taxable in my final tax return?

Taxation in your final return.

In the year of death, the deceased’s executor must submit a final tax return (also known as the terminal return) to the Canada Revenue Agency (CRA).

All income that dates from your last tax return to the day of your death must be reported, such as:

• Gains on Capital Property Where your property has increased in value above what you paid for it, that gain needs to be reported. In the year of death, one-half of the combined capital gains or losses from capital properties is a net taxable capital gain or a net capital loss. A net capital gain is taxed in the year of death. A net capital loss can be applied against the taxable capital gains of the three immediately preceding years. The balance of the net capital loss can then be applied to reduce any other income in the year of death and/or the immediately preceding year.

• RRSPs and RRIFs If you intended to pass all the remaining value in RRSP/RRIF holdings to your heirs, think again. The entire amount left in your RRSP or RRIF will be classified as fully taxable income. If your spouse or common-law partner survives you, the money will be rolled over to him/her and later taxed as it is withdrawn or after his or her death. Contributions made prior to death are deductible in the year of death. An executor can contribute to an RRSP of the surviving spouse within the allowable limits and within 60 days of the calendar year-end, and get a deduction against the income of the deceased in the terminal tax return.

• Registered Pension Plans (RPPs) A death benefit of an RPP is fully taxable as income of the recipient estate or beneficiary, subject to rollovers to plans for the deceased’s spouse, common-law partner, or dependent children under the age of 18.

• Regular Income All taxable income from employment, a business, or investments must be included in the terminal return. This will include any accrued income not received prior to death, such as holiday pay from an employer.

• Investment Income This will include interest on term deposits, interest due on money you have out on loan, interest on bonds, and the taxable portion of annuity income accrued to the date of death.

What tax advantage does life insurance offer to my estate?

There are certain life insurance policies offered with interesting tax-planning advantages. Legal tax exempt rights are allowed in our tax legislation in relation to life insurers, which allows the possibility to accomplish the following:

• Premiums over and above the associated costs of insurance, can be invested and accumulate tax-deferred within certain plans.

• Tax-deferral of the investments continues until such time that withdrawals are taken from the policy.

• Tax is avoided on both the face amount of the insurance, plus any ongoing cash accumulation in the policy, when paid out to the beneficiaries on the death of the insured. Thus, tax is permanently avoided.

Note: Talk to your advisor about historic or current legislation that may or may not affect your province.

How do you transfer a family cottage to the children?

If you want your heirs to inherit the family cottage, rather than a capital gains tax bill, examine the benefits of life insurance. Only your principal residence can accrue capital gains without capital gains coming due in the estate.

Where the cottage has increased in value If the cottage has gone up considerably in value, would you want your heirs 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. However, once it passes to the next generation, a nasty tax liability is finally due all at once.

Life insurance solution The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a permanent life insurance policy on the owner(s) for the projected amount due in the estate. These plans often offer a competitive rate of return on your investment and the full benefit is payable as cash at death, entirely tax-free.

The solution is immediate 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. Once the policy is in force; 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.

What final expenses occur after my death?

Many watch their parents grow older, and some are passing away. Children of aging parents could face the unpleasant task of last minute planning and subsequently receiving invoices for large funeral and burial expenses.

It is wise to plan your burial ahead—even if you are in great health—by establishing dialogue with everyone concerned. In addition, make sure that you have a will in place that reflects your wishes. Funeral and burial expenses can be expensive. Think over some planning questions now to evaluate your options such as:

• Should the service be in a religious sanctuary? Some people are very committed to their religious affiliation. Often in these cases, the service is held in a sanctuary where the congregation is present.

• What funeral home should be selected? Usually people select one that has been used for other family members over time.

• How do I make arrangements with the funeral director? They are professionals who take care of the many details of the services. Your loved ones will appreciate this preparation.

• Has my burial option been selected? The common burial methods are: earth (and should the plot be near other family members?), cremation, or mausoleum.

• Who shall speak on your behalf at the service? Often your religious leader or someone close to you will say a few words at your service, working with the funeral director.

• Should you request a donation to a charity in lieu of flowers? The immediate family can buy flowers, working with the florist and funeral director. Others might want to donate to a charity of your choice.

• How can you get the best value for services rendered? Each funeral director will have various packages and prices to offer.

• At what location will the after-service (with food, coffee, tea, etc.) be held? Typically, they are held at the home of the deceased or a relative, a religious sanctuary’s social hall, or at the funeral home.

Methods of payment for these expenses. You can prepay your funeral package all at once or by making installments, or you can use life insurance to pay for it later with a tax-free benefit, specifically when needed at death, thus freeing up more cash for retirement. By making these decisions now, the pre-arrangements can save your family a lot of last minute stress and money.

Using life insurance for funeral and burial expenses. The timing of a life insurance benefit payouts is specifically designed to cover cash needs at death, one of which includes final expenses. Consider purchasing a life insurance policy to cover any amounts in excess of your pre-arranged funeral expenses. If it amounts to $50,000, buy a permanent policy for that amount (such as whole life, or term-to-age100).

Life Insurance for parents’ funeral expense. Often children will work to share the premium with siblings for a life insurance policy on the lives of one or both parents to cover their last expenses. This is preferred to the children needing to come up with the cash all at once. Additionally, it allows all the children paying the premium together, to help mom and/or dad. Life insurance works to solve these problems, while creating new cash right when it is needed.

How do you insure your estate taxes?

Your heirs will inherit certain assets tax-free, but not all. Life insurance can cover estate liabilities which would otherwise leave your beneficiaries with debts rather than an inheritance.

“Are you kidding? I thought I would inherit.” Hopefully your children won’t need to utter these words upon your death. Cash bequests, the house, life insurance proceeds, and heirlooms generally pass to the heirs tax-free. However, capital assets are assumed to have been sold at fair market value immediately before death. Each of these deemed dispositions of capital assets such as a cottage occur even if the asset is willed directly to an heir. But the tax liability remains in the deceased’s final tax return and reduces the value of the estate.

Here is the downside. If there is insufficient cash to pay the taxes due, assets your heirs may expect to inherit must be sold. After the death of a second spouse this can include assets such as: an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares.

Consider taking out life insurance to cover any estate liabilities that could reduce the value of bequests that you want to make to your loved ones. A death benefit is paid out tax-free. Life insurance proceeds can circumvent probate if they are payable directly to a named beneficiary. If the estate is the beneficiary, the life insurance coverage should be raised to cover any probate fees.

How can I make my Will Planning more effective?

Have you decided what will happen to your property after you die? Without a last will and testament (commonly called a ‘will’) the law decides exactly how your estate (the things you own) will be divided among your surviving spouse, children, siblings and parents. When you have your lawyer draft a will, you can make certain your priorities are set forth as directives to be achieved.

• Choose a competent executor. An executor is appointed with the task of administering your will, or carrying out your wishes. You may also want to choose a contingent executor, just in case the first decides not to follow through or is unable to for any reason.

• Incorporate your will with your spouse’s will. This is referred to as a “reciprocal will”. It looks at various potential occurrences such as: “What if my spouse and I die at the same time?”

• Give instructions regarding the type of funeral you desire. Talk with others while living. It is important to visit with your Funeral Director and express to him or her clearly if you would like to be cremated or not, and/or interned at a cemetery, and where (is a plot chosen in advance, say beside a loved one).

• Divide assets specifically amongst chosen heirs. Should you wish to leave specific items to a certain person, make sure this is written in your will. This will avoid confusion amongst your beneficiaries.

• Establish contingent beneficiaries. This can ensure heirlooms pass on to other friends or relatives in the event that current beneficiaries have died.

• Where children are concerned, define legal guardians, and contingent guardians. A will can allow you to choose who will care for your children if both you and your spouse die.

• Outline financial arrangements for your dependents. Review life insurance policies to ensure that they provide adequate capital protection for your loved ones.

• Pre-establish special trust funds, and trustees for dependents, where necessary. Consider how monies are to be invested, and at what age each child should receive his or her share of any monies left to them.

• If divorce is imminent, have your lawyer explain your responsibilities in the Family Law Act and how the law may relate to you and your will. This will define who has a right to financial support after you die. You may want to leave certain assets to the children in trust if a divorce occurs. If you own a life insurance policy, you may be able to change the beneficiary to pass the death benefit to any party tax free, or perhaps pass the funds to your estate and let the will define the beneficiaries of the life insurance.

• Where a spouse is concerned, be careful not to direct a disposition of RRSP assets. Under Canadian Tax Law, RRSP assets are allowed to rollover to a spouse on a tax-free basis. By naming your spouse as your beneficiary, you can ensure that your RRSP assets roll over to your spouse without any complications.

• Consider bequests to charity. Assets such as property or life insurance proceeds can be left to a charity via your will.

Can life insurance solve tax liabilities in my estate?

There are many ways to reduce your estate liabilities. You work hard to earn a living, save for retirement, and own property. It is important to know what your estate liabilities are in relation to: capital gains, mortgage debt, car loans, unpaid taxes, and business-related liabilities. Consider reducing these liabilities:

Reduce the impact of income taxes. Here are some methods to reduce taxes due upon your death:

Use the spousal (and disabled child) rollover provisions of RRSPs or RRIFs.
Leave assets that have accrued capital gains to your spouse to defer tax.
Leave assets without capital gains to other (non-spouse) family members.
While you are alive, gradually sell assets having capital gains, to avoid dealing with the gains all at once in your estate.
Purchase life insurance to cover capital gains taxation in the estate.
Taxes may be payable on gains in relation to:
º income-producing real estate, a second residence, or cottage.
º any other assets left to surviving family members, such as shares of a business.
Consider charitable donations to lessen taxes in the estate.

Reduce probate fees. Probate fees will be based on the value of assets administered through your will. Here are some ways to reduce probate fees:

Establish a spousal trust during your lifetime to hold assets or property for the sole use of your spouse.
Own assets jointly with your spouse.
Distribute assets or cash while alive.
Name a beneficiary (not the estate) on life insurance policies.
Include an alternate beneficiary on your life insurance policies in case your initial beneficiary predeceases you, or dies simultaneously (that way, probate fees will be avoided on the proceeds).