7 Reasons you should make an estate plan
An estate planning is not only for the rich and not only about dying and what you are leaving behind – it’s about living the life that lies ahead knowing you took care of your family, friends and finances. A well-executed estate plan creates the peace of mind and financial security to fully enjoy life. A well-executed estate plan will enable you to choose who controls your finances and assets if you become mentally incapacitated or after you die, and it will go a long way towards quelling any family strife and ensuring that your assets are handled in the way that you intend them to be.
If you want your assets and your loved ones protected when you no longer can do it, you will need an estate plan. Without one, your heirs could face huge tax burdens and the courts could designate how your assets are divided, or even who gets your children.
An estate plan can be done through the use of a will, beneficiary designations or insurance declarations for insurance policies, beneficiary designations in RRSPs or TFSAs, or through trusts. An estate plan ensures that:
- your assets will not go to the Crown;
- your assets are distributed pursuant to your wishes;
- distribution is tax effective; and
- your beneficiaries are protected (appointment of guardians and establishing trusts for minors).
You should consider having at least a will for distribution of your assets whatever they are, small or large; a Power of Attorney to enable someone you trust to deal with your finances when you cannot; a Representation Agreement to enable someone you trust to make health and living arrangement decisions for you when you cannot. And perhaps a Living Will, if you cannot stand the thought of being alive because machines do the work instead of your body.
- you will die
Naturally, being dead, you will no longer be concerned with your assets, but your loved ones will need those assets to maintain their lives. Losing you will be hard enough, losing your support, financial, personal, physical, will add to that loss. Having a plan will lessen their burden and knowing that you will be taking care of them even after you die will bring you some peace of mind.
- minimize Taxes and fees
Estate planning will entail an inventory of your assets and decisions on how you wish for these assets to be held and distributed. There are usually a few options that can achieve your goals. There are always pros and cons, benefits and costs to these few options. And it will require analysis to come to the option that suits you best. Minimization of taxes and other fees that may be payable upon your death is one of many factors that should be considered.
Probate fees in British Columbia are calculated, generally, at 1,4% of the value of the estate. There is no cap, so this can be a significant amount and planning to limit probate fees is important.
If planned properly, certain assets can pass outside your estate and avoid probate fees, such as assets held in an RRSP or a life insurance policy with named beneficiaries. You should always name beneficiaries to avoid such assets as RRSP and life insurance to be probated and subjected to probate fees, thus, depleting your estate.
Another way for your assets to pass outside your estate is to hold them in joint tenancy or in trusts. Real estate, for example can be transferred prior to your death to reduce or eliminate probate tax. However, while making a decision on property transfers the property transfer tax (“PTT”) that applies at the time the legal ownership is transferred shall be considered. The PTT is paid at a rate of 1% on the first $200,000 of the fair market value, 2% on the value from $200,000 to $2,000,000 and 3% thereafter. Depending on the value of the property and other circumstances it may not be feasible to pay the PTT to avoid the probate tax at 1.4%. Also, transfer of title can result in income taxes.
The income tax can be deferred by creating an alter ego or joint partner trust once you are 65 years old. Then you can roll your assets income tax free into such a trust. However, if your asset is real estate, PTT will remain. Also, if that real estate you transfer into a trust is your principal residence, rolling it into an inter vivos trust will cause a loss of principal residence exemption from that time forward. However, if your roll your principal residence into a joint partner or alter ego trust, the exemption is still available.
In addition to having assets pass outside your will and not be subject to probate fees, another way to minimize probate fees is through the use of multiple wills. Each will will create a trust, but only one trust can be taxed at marginal rates with the rest being taxed at the highest marginal rate for individual. Still, multiple wills are a good tool when some of the assets require a will to be passed but do not require for that will to be probated.
Estate planning is an intricate puzzle, pros and cons, a spider web – if pulled at one corner, will change the entire design. A puzzle that, if properly solved, can provide great benefits.
- Decide who gets your children
If you have children who are minors, then in your will you can name who you would like to look after them if you die. Of course no one is better then you, not even close. But some people are better than the others or Public Guardian and Trustee. Even if you have the best of friends, it is not an easy decision, but at least it will be your choice and someone you know and hopefully trust.
While the guardianship appointment you make in your will is not binding on the courts (as courts in British Columbia will always consider the best interests of the child as well the wishes of children who are over 12 years old), it is usually given significant weight.
- decide who gets what – MAKE SURE IT IS YOUR FAMILY, NOT CROWN
If you don’t make an estate plan, all your possessions will be distributed in accordance with the law, and this may not be the same as your wishes. For instance, in British Columbia, if you do not have an estate plan in place then your estate will be distributed as follows when you die:
- If you have a spouse and no children, your estate will pass to your spouse;
- If you have no spouse, then your estate is divided equally among your children;
- If you have a spouse and children:
- First the spouse will receive a preferential share of either $300,000 or $150,000 of your estate, depending on whether you have common children with your spouse or not;
- Any residue of the estate left after that will be divided in half with one half to go to your spouse and the other half to be shared by your children;
- Your spouse is also entitled to all household furnishings. Under the former rules, the home would have reverted back to your children upon your spouse’s death. Under the new rules your spouse has the right to acquire the family home from your estate;
- If you have no spouse and no children, then your estate is divided equally among your parents;
- If your parents aren’t alive, then it is divided equally among your brothers and sisters.
There are further rules setting out how your estate would be distributed if you have no spouse or children, and your parents and siblings aren’t alive. The rules for distribution on intestacy go so far as children of your aunts and uncles (4th degree kin) and stop there since 5th degree kin are deemed to predecease you under the legislation. Thus, in the event all your living descendants are 5th degree kin (children of your cousins), they will not inherit and your estate will go to the Crown.
- decide how and whem beneficiaries get their share
If you don’t have a will, then your beneficiaries will be entitled to their full share of your estate once the estate has been properly administered. This may not be ideal if a beneficiary is a minor.
In a will you can provide for a minor beneficiary’s share to be held in trust for them until they reach a certain age or for staggered distributions to them at different ages or upon achieving certain milestones in their lives: completing bachelor’s degree, buying a first house and so on. Or you can have both – ages and achievements – and if achievements are attained early distribution may be accelerated; that can be an additional incentive for the beneficiaries to excel in life. A trustee of the minor’s trust shall be provided with the discretion to make earlier distributions to the beneficiary for things such as the beneficiary’s education, wellbeing, health and other needs.
If any of the beneficiaries of your estate who reside in British Columbia are under the age of 19, and you either don’t have a will or your will is silent on when that beneficiary is to receive their share of your estate, then their share of your estate may have to be paid to the British Columbia Public Guardian and Trustee, who would hold the minor’s share in trust for them until they reach the age of 19. The guardian or parent of the minor would then have to apply to the Public Guardian and Trustee whenever they need money for the minor from their inheritance for things like their education or living expenses. When the minor turns 19, they can demand all their money from the Public Guardian and Trustee.
If you have a will, however, you can name the trustee to hold the minor’s share in trust, and that the trustee can use the minor’s share of your estate for the minor’s benefit, without having to get approval of the Public Guardian and Trustee.
- Decide who MAY deal with your finances, personal & health care
By executing a Power of Attorney, you can appoint someone to make financial and legal decisions on your behalf when you are not available for any reason. By making this power of attorney an enduring one you extend your attorney’s power to making financial decisions in the event you become incapable, without the need for an expensive court order. Your attorney should be someone who you trust to make decisions in your best interests.
Attorney under the power of attorney may only deal with finances. If there is a potential that you may need someone to make personal care and health care decisions on your behalf, in British Columbia you can appoint such a person or persons under a representation agreement, you can also set limits to their discretion. The personal care and health care decisions include:
- personal care decisions on matters ranging from where you live, what you eat, participation in social activities, and contact or association with other people; and
- decisions to consent or refuse to consent to health care matters ranging from routine tests and dental treatment to major surgery, and diagnostic and investigative procedures.
In British Columbia, if a health care decision needs to be made for you and you are incapable and do not have a representative, a temporary substitute decision maker will be chosen to decide on your behalf as follows:
- A health care provider must choose the first available person starting with your spouse, and continuing in the following order: your child, your parent, your sibling, your more distant relatives, your close friend, a person immediately related to you by marriage.
- The first person contacted who agrees to make decisions on your behalf and who is at least 19 years of age, has no dispute with you, and has been in touch with you within the last 12 months, becomes your temporary substitute decision maker.
- If, in the opinion of the health care provider, there is not an available and qualified person to be your temporary substitute decision maker, or there is a dispute about who is chosen, then the health care provider must choose a person authorized by the Public Guardian and Trustee, including a person employed by the Public Guardian and Trustee, to be your temporary substitute decision maker.
Thus, the temporary substitute decision maker may not be the person you would choose to make your health care decisions.
- MINIMIZE COSTS
For example, if you do not have an estate plan, you did not appoint an executor. If your estate cannot be distributed without probate, someone will have to be appointed as administrator. That means asking court to make an appointment. That means time and money. Delays may cause depletion of the estate.
If use of joint tenancy is the best option for you and you did not do it, the asset will have to go through probate, which will translate in delays and probate fees, which could have been avoided with your spouse or child simply becoming a sole owner automatically.
The examples are plenty. While creating an estate plan will entail legal fees now, a well implemented one can save your beneficiaries time, money and heartbreak in the future in various court proceedings, probate fees and income taxes, and eliminate any need and costs of involving the Public Guardian and Trustee.