Estate Planning: Building a Solid Foundation
Formally communicating your wishes through an estate plan ensures your financial affairs are handled the way you want and your loved ones receive maximum benefit from your estate.
Estate planning is often thought of as something to be done later in life. But it’s a smart move no matter what your age or income.
Having an estate plan is an important part of your overall financial strategy. At its most basic, it’s a properly prepared will. As you acquire more assets, it takes on added layers of complexity. Explicitly stating your wishes of how your wealth is to be distributed when you die will go a long way to avoiding family discord and ensuring those you love are financially protected.
Protect your family and your peace of mind
Whether you’re getting married, having your first child or retiring, having an effective estate plan helps ensure what’s most important to you is looked after. For now, that could mean making certain your spouse and children would have financial security if the unexpected happens. Later it might be about transferring the wealth you’ve worked hard to create to the next generation or your favourite charity as smoothly and tax-efficiently as possible.
Building an effective estate plan isn’t a one-time event. It’s a process that adapts to major events in your life and recognizes how your priorities shift over time.
If you don’t have an estate plan, or make the mistake of taking a “set-it-and-forget-it” approach, you raise the odds of falling short. Your loved ones could be saddled with money troubles while dealing with emotional loss. There can be strained family relations. Or, poor planning can result in your estate losing more than necessary to taxes and other expenses.
Not just for the rich
Estate planning isn’t only for the wealthy. It’s critical for anyone who has any amount of assets to leave behind and especially important for those with complicated family circumstances, diverse assets, and numerous beneficiaries. Many people also don't realize that their estate is as large as it really is, especially given the value of their home in BC’s hot real estate market.
Building a solid foundation
Whether your objectives lean to protecting income for your dependants, minimizing or deferring tax, or something else entirely, there are core elements your estate plan shouldn’t be without.
1. Will. Your will is the cornerstone and most important part of your estate plan. With it your assets can be distributed the way you want while minimizing delays and legal costs. Without it, government legislation will determine who handles your estate and how it’s divided, perhaps contrary to your wishes.
A will is the primary method for expressing your wishes and should include instruction on distribution of assets, identify beneficiaries and name the executor, the individual or organization chosen to administer the estate.
According to an Angus Reid Institute poll, surprisingly only 50% of Canadians have a will. The good news is that 85% of Boomers, pretty much anyone over 55, do. But half of them haven’t reviewed it in at least 10 years.
It’s a good idea to review it at least once every two years. Factors that can affect your beneficiaries include the birth of children or grandchildren, divorce and remarriage. Keep your will current and ensure your assets are passed on how you would want now. This may be much different from what you wanted earlier.
2. Power of attorney and related directives. A power of attorney lets another person legally act on your behalf. In estate planning an enduring power of attorney is a must. Should you become mentally incapable due to age, illness or accident, this document lets the representative you appoint make legal and financial decisions for you. Through a representation agreement you can go a step further and include the management of your health and personal needs.
3. Insurance. High health care costs, a permanent loss of income from your death or an onerous final tax bill on your estate, are just some of the threats to your family’s financial well-being and your legacy. IA variety of insurance strategies can be very effective. For example, benefits can be used to offset capital gains taxes and cover funeral expenses and other estate costs. Joint last-to-die insurance can defer taxes. Your financial advisor can help you determine what type of insurance would best suit your needs.
4. Taxation. At death, your assets are taxed as if you’d cashed them in and taken all the money as income (deemed disposition). This includes any increase in value (capital gains).
Capital gains tax applies to both your non-registered investments and registered savings such as RRSPs and RRIFs. Without a named beneficiary, such as a spouse or dependent child, the CRA could take as much as 48% of their value in tax. Capital gains doesn’t apply to your home (principal residence), which passes tax-free to your beneficiary.
One simple way to avoid taxes is to give some of your wealth away while you’re living, which decreases the size of your estate. Whether it's helping your children buy a home or finance a business or sending grandchildren to private school, you get to see the benefits while you're alive. Gifting assets can also have tax benefits if they are given to a registered charity.
On the other hand, gifting income-producing assets like stocks and bonds could trigger a capital gains tax hit, particularly if given to someone other than your spouse or an underage child. Talk to your financial advisor before making any decisions in this regard.
5. Communication. Money can be an off-limits topic in many families, but it’s wise to share your intentions and important information with your family, a trusted friend or advisor. Part of the estate planning process is recognizing the value of family consultation in reducing potential misunderstandings and conflict over estate settlement. Take the time to discuss and explain the rationale behind decisions you’ve made in your will and elsewhere.
Let someone know where key documents like your will, financial statements, birth certificate and insurance policies are kept, and who you’ve appointed as your executor. Don’t forget to discuss your choice of executor with the individual before you appoint them. Many people find out after someone has passed that they’ve been named the executor of the deceased’s estate but are not prepared. Being an executor is a significant responsibility; it shouldn’t come as a surprise!
6. Specialized strategies. If you have more complex estate needs or own a business, there are specific tools such as an estate freeze, trusts, and business succession strategies to consider.
Common mistakes when preparing your will
Leaving everything to your spouse
For many people, it makes sense to leave their entire estate to their spouse so he or she is provided for. The assumption is that the spouse will then pass on all of the assets to their children. However, it doesn’t always happen that way. A spouse could remarry and the assets might go to their new partner, for example.
You may want to set up a small trust for your grandchildren’s education, for example, or give cash gifts while you’re still alive in lieu of an inheritance.
Choosing the wrong executor
Many people choose someone who is close to them to handle the matter of settling their estate – spouse, children, friend — despite the fact that most people have no experience in this area. What should you look for in a good executor? Not only does this person need to outlive you, you should also look for someone with some expertise, good communications skills, and the time. It helps to appoint someone local as well.
If you’re naming more than one executor, make sure they can work well together. Parents may feel guilty choosing one child over another as executor, but need to lay that aside and pick the best person for the job. Co-executors among siblings can damage their relationship, potentially irreparably.
An option to appoint a friend or family member but you can pay a third party such as a lawyer or accountant to handle the task.
Not working with experts
A lawyer can explain your options, make sure you’ve covered every aspect of the planning and help get the paperwork in order. Your financial advisor also has a great deal of expertise in this area and help you with planning strategies to make the most of your assets as well as preserve them.
Not reviewing it periodically
Circumstances change, and so should our estate plans. Experts recommend revisiting your plan every three to five years — especially when there is a major life event such as marriage, divorce, the death of a spouse or family member, or a new child. Changes to legislation and tax laws should prompt a review as well.
Forgetting digital assets
More of our lives have moved online, which means a growing list of digital assets to keep track of. When we pass away, executors will need to access many of these, which includes everything from cryptocurrencies to accounts on eBay, PayPal, loyalty reward programs and social media websites.
To avoid slowing down the administration of the estate, make an inventory of online assets and passwords.
Is it time to create or review your estate plan?
Whether you’re creating a will for the first time or have a plan that’s in need of updating, your BlueShore Financial Advisor can assist. In collaboration with external partners and in-house specialists from the legal, tax, investment and insurance fields, we’ll work with you to help construct an estate plan that puts your goals front and centre. Contact us today to schedule a review.