Estate Planning

We hear the term ‘estate planning’ but often do not recognize how it pertains to us. It can be a difficult subject to approach as it forces us to face our own mortality but estate planning is not about death. Rather, it’s about embracing the present and guaranteeing a bright future for your family through the orderly transfer of your wealth by ensuring that your assets will be distributed to your heirs as you wish. This includes the avoidance of unnecessary taxes and administrative expenses (probate, etc.).

The foundation of any estate plan is a properly drafted will. This is the document that you utilize as your voice to convey your wishes to your heirs. The will is only the start of the planning process. Creating an effective estate plan starts with the following steps:

  • Consulting the appropriate professionals: a lawyer, an accountant, and an advisor to help put the estate plan together.
  • Prepare an inventory that represents a detailed list of your assets and liabilities.
  • Assess your life and disability insurance needs to determine that you have adequate coverage.
  • Establish an Enduring Power of Attorney to deal with financial and legal matters and a Personal Directive to deal with health care issues in case you are incapacitated and unable to make decisions for yourself. Otherwise the province will step in and make those decisions on your behalf.

Estate planning is something that benefits everyone, whatever their circumstances (marital status, age, wealth, etc.). The problem is, too few of us heed this advice and the consequences of a ‘do nothing’ option can be extremely detrimental to your heirs and loved ones. Estate planning is also an ongoing process regardless of age because of different life stages, different priorities and issues require different strategies to meet your needs.


Young Family

At this stage, you’re just starting to accumulate assets and raise a family. Preliminary planning is important. It includes the preparation of a will and should include appointing a guardian for your young children. Another important consideration is assessing your life and disability insurance needs to ensure you have adequate protection for your loved ones in the event that something happens to you.


Mature Family

During this stage, children are young adults and have either left home or are pursuing secondary education. You have accumulated considerable assets and are entering your peak earning years. Review your will periodically to ensure it represents your current or changing circumstances (eg. marital status, children from another relationship, etc.).


Pre-Retirement

You are now getting older, retirement is approaching and health concerns become more of an issue. You will need to assess your life needs and priorities, such as becoming a ‘snowbird’ or moving to a more retirement-oriented community. You need to review your will and ensure that your current wishes for asset transfer meet what is stated.

Taxes and probate costs are often the greatest liability to your estate and the key to minimize them is to reduce the value of the estate.

One of the simplest ways is to ensure you have designated beneficiaries on all your Registered Retirement Savings Accounts (RRSPs), Registered Retirement Income Funds (RRIFs) and Tax Free Savings Accounts (TFSAs). These assets then, do not form part of the estate but pass directly to the beneficiaries.

Gifting assets to your intended beneficiaries while you are living will allow you to pass on certain assets prior to death; therefore they do not form part of the estate and you benefit from seeing what the gift has done.

In the case of property, jointly-owned property with the right of survivorship will pass to the remaining owner(s) without going through probate.

Life insurance can be used as a tool to cover administrative costs (lawyers, etc.) and provide sufficient liquidity to cover probate taxes, income tax liabilities and other debts payable at death. Life insurance is generally paid tax free to the estate or the beneficiaries.

Strategies to minimize taxes at death are quite accessible and fall into the framework the Canada Revenue Agency (CRA) allows. Prior to taking any of these actions, you will want to talk with a professional (lawyer, accountant, financial planner) and determine how any of these actions may assist in lowering the probate fees and taxes.

Your estate plan will provide you with the peace of mind that comes with knowing you have left your personal and financial affairs in order, and will not burden your loved ones with the task of resolving them. There are a few considerations that can be made in settling your affairs that would relieve the stress of those grieving for you.

Reconsider your executor periodically – discuss with the individual that you are considering them to take the executor role and ensure they are up for the task upon your passing. Some individuals may be honoured by the request but may not be able to do the work that is involved with being an executor.

Arranging a funeral can be very stressful, emotional time and can result in added costs resulting from last-minute arrangement. A preplanned funeral can reduce costs, allow for family input into the arrangements, and ensures that your wishes are known.

After you have prepared your will and decided how you wish your assets to be distributed, the next step is communication. It’s really important to communicate your wishes to your family and loved ones so there is no misunderstanding. One of your main goals in preparing an estate plan is to try to avoid conflict and though it’s hard to be fair in everyone’s perception, the chances are far better if your heirs know where they stand prior to your death.


Example: Bequeathing the Family Cottage

You have prepared your will and specified that the family cottage will be inherited by the children. But keeping the cottage in the family may not be that straightforward. When property is transferred to succeeding generations, there is one issue that people tend to forget about – the capital gains tax that is associated with the deemed disposition.

So, what is ‘deemed disposition’? Under certain circumstances, taxation rules assume that a transfer of property has occurred, even though there has not been an actual purchase or sale. This could happen upon death or transfer or ownership.

When property changes hands other than to the spouse, it’s considered a deemed disposition. If a capital gain results, a tax liability is triggered. The capital gain is based on the current fair market value (FMV) of the property less the adjusted cost base (ACB). The difference is the capital gain of which 50% is taxable. The FMV is usually determined by getting an appraisal by a qualified real estate expert. The ACB is simply the original price paid for the property plus the costs of any capital improvements.

A family cottage has emotional ties by many of the family members that have used it throughout their lifetime. A deemed disposition resulting in a capital gain can further add to the uncertainty of what may happen to it. Questions may arise such as, “Who could afford to pay the tax associated with the deemed disposition?”

Be sure you understand the implications of transferring a cottage after death and prepare yourself for the tax bill associated with the deemed disposition of this property.


PlanWright Financial is a wholly-owned subsidiary of Encompass Credit Union.