Estate planning is an essential part of wealth management, particularly if your estate involves significant assets or complex issues. When properly structured, an estate plan can reduce the taxes and expenses of your estate, simplify and speed the transition of assets to the next generation and ensure that your beneficiaries are protected. We've provided the following information to help guide you through the estate planning process and to introduce you to some of the most important options available to you:


CREATING YOUR ESTATE PLAN

Creating an estate plan does not necessarily require a substantial commitment of time or money. Most often, an estate plan can be constructed by following these six simple steps:
Step 1: Prepare an inventory of assets and liabilities.
Step 2: Define your estate planning objectives.
Step 3: Evaluate your objectives.
Step 4: Determine how to achieve your objectives.
Step 5: Use the right advisors to implement your plan.
Step 6: Periodically review your plan.



MORTGAGE TERM

The mortgage term is the length of time you commit to the mortgage rate, lender, and associated mortgage terms and conditions. The term you choose will have a direct effect on your mortgage rate, with short terms historically proven to be lower than long-term mortgage rates. The term acts like a 'reset' button on a mortgage. When the term is up, you must renew your mortgage on the remaining principle, at a new rate available at the end of the term.


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STEP 1: PREPARE AN INVENTORY OF ASSETS AND LIABILTIIES

An inventory of your assets and liabilities is necessary for various elements of your estate plan, including tax minimization and Will planning. Assets that you should list in your inventory include:

  • Your home and vacation property
  • Registered and non-registered investments
  • Bank accounts
  • The face value of annuities and insurance policies
  • Personal property such as cars, jewelry, art, etc.
  • Pension assets (i.e. membership in a company pension plan)
  • The current value of any businesses you own
  • Liabilities that you should list in your inventory include:
  • Mortgage on your home and vacation property
  • Investment-related debt
  • Credit cards
  • Personal obligations such as family support
  • In your inventory you should also document where the following items are located:
  • Original Will(s) and power of attorney/mandate
  • Birth and marriage certificates
  • Marriage contracts
  • Insurance policies
  • Real estate deeds
  • Location of safety deposit boxes
  • Details of pre-planned funeral arrangements
  • Location of trust documents
  • List of your professional advisors
  • Names and addresses of executor(s)/trustee(s) and beneficiaries of your Will
  • Names and addresses of guardians/tutors for children (if not set out in your Will)

  • STEP 2: DEFINE YOUR ESTATE PLANNING OBJECTIVES

    When developing your estate plan, you should consider both personal and financial objectives that you wish to achieve with your plan. While objectives vary between individuals, below are some of the core questions you should answer:

  • Who are your estate beneficiaries?
  • What impact will the estate plan have on your family?
  • How long do you intend to provide support for your immediate family?
  • Are there significant family assets that will need to be addressed?
  • Is minimizing income tax and probate taxes important to you?
  • Do you want your beneficiaries to receive their inheritance immediately or at some future date?
  • Do you wish to leave any portion of your estate to charities?

  • EVALUATE YOUR OBJECTIVES

    Once you have clearly defined your estate objectives, the next step is to determine how your objectives can be achieved based on your current financial position. In conjunction with your objectives, you will need to consider other factors such as inflation, tax liabilities and U.S. Estate Tax.
    See Taxes at Death for information on potential tax liabilities.


    STEP 4: DETERMINE HOW TO ACHIEVE YOUR OBJECTIVES

    Your action plan will result from the issues identified in your estate evaluation conducted in Step 3. The fundamental component of your action plan will likely be creating a Will or, if you currently have a Will, at least a review of the document. A significant number of potential issues can be easily resolved through a well-constructed Will. For example, tax planning opportunities such as the use of testamentary trusts and special provisions for beneficiaries can be addressed.
    Other potential elements of your action plan may include changes in the legal ownership of assets (i.e. the use of Joint Tenancy agreements), the purchase of additional insurance to address estate preservation objectives and possibly the gifting of assets prior to death. (It should be noted that Joint Tenancy agreements With Right Of Survivorship (JTWROS) do not apply for residents of Quebec.)
    See Methods of Transferring Your Estate for additional information on Wills.


    STEP 5: USE THE RIGHT ADVISORS TO IMPLEMENT YOUR PLAN

    This step is crucial to ensuring that your estate plan is properly implemented. You may require the assistance of several professionals, including an estates lawyer (or notary in the province of Quebec), an accountant, a financial planner, a trust officer and your investment advisor. As you seek out these advisors, make sure you select individuals with an expertise in estate planning.

    Questions you should ask potential estate advisors include:

  • What degrees or relevant designations do you hold?
  • How long have you practiced in the estate planning area?
  • Have you implemented estate plans of similar complexity to my own?
  • What information can I provide to facilitate your implementation of the estate plan and reduce your work time?
  • Is there a charge for an initial consultation? Do I have the option of an hourly fee or a flat rate for your services?

  • STEP 6: PERIODICALLY REVIEW YOUR PLAN

    As a final step, you should always remain vigilant and cognizant that changes in your personal situation and in legislation may require changes to your overall estate plan. Periodic revisions are a must to ensure that your estate plan is still attaining your objectives.

     


    ESSENTIAL METHODS OF PLANNING


    METHOD 1: WILLS (PROBATABLE ASSETS)

    Your Will represents the most fundamental element in your estate plan. It is also essential to ensuring your wishes are carried out with minimum expense and delay.
    A Will is a legal document signed by you and normally witnessed by two individuals whom are present at the signing. The Will can be revised at any time in the future to reflect changes in your financial or personal situation. The instructions outlined in your Will only take effect upon your death and are in no way binding upon you during your lifetime.
    While the other methods of estate transfer should be considered, the Will is a necessary document in all circumstances as it serves two basic purposes:

  • To ensure that your property will be distributed to your beneficiaries according to your wishes
  • To appoint an executor (called a liquidator in Quebec), who is the individual or corporation who will act on your behalf and carry out your wishes

  • In addition to the above two items, a Will typically includes the following:
  • An outline of the administrative powers of the executor, liquidator(s) and trustee
  • An indication of how you want your estate to be managed and distributed Naming of a guardian for your minor children (referred to as a tutor in Quebec)
  • Instructions to minimize income taxes, if possible
  • Specific instructions for the distribution of your personal effects as well as your wishes regarding burial
  • Your beneficiaries can be any person or entity (i.e. a charity) that you wish to name. In many provinces, however, there are restrictions provided under provincial family law preventing you from excluding from the estate persons such as your spouse, children or anyone to whom you may be providing ongoing support.

    TYPES OF WILLS


    There are two types of Wills that can be created, with a third option in the province of Quebec. Formal Will ?A formal Will is usually a typed document signed by you in the presence of at least two witnesses. These witnesses cannot be your beneficiaries or their spouses. Formal Wills are normally created by a lawyer or notary and written in "legalese" to ensure that your Will achieves your stated objectives.

    Holograph Will
    A holograph Will is written entirely in your own handwriting and is signed by you. It is not necessary to have a witness to your signature. Most provinces recognize this type of Will as being valid, but use of a holograph Will is not recommended due to potential pitfalls such as ambiguous language or illegible writing.

    Notarial Will
    This is only an option for residents of Quebec. A notarial Will is created by a notary and normally signed in the presence of only a single witness. The original copy of the Will is kept by the notary.

    How Often Should Your Will Be Reviewed?
    In some situations, an out-of-date Will can be worse than no Will at all. You should review your Will at least every two to three years to ensure that it continues to accurately reflect your wishes. More frequent review may be necessary as significant changes in your financial or personal situation occur (i.e. birth of a child).
    Also, your Will should be revised if you move to another province, if there are changes in legislation, you marry or divorce, or if an executor/trustee or significant beneficiary dies.

    Testamentary Trusts
    In addition to a direct or outright distribution of estate assets to beneficiaries, assets can be left to a testamentary trust for the benefit of your beneficiaries. A testamentary trust only takes effect at death. The creation of the trust is documented within the text of the Will.
    A testamentary trust allows you to pass specific assets to beneficiaries without allowing them to gain control of the assets. The assets held in the trust are invested and managed by the trustee of the trust with income and capital distributed to the beneficiaries in accordance with your wishes as stated in the Will.
    Often, the trustee is also the executor/liquidator of the estate although you may wish to consider a separate person to act in this capacity.


    METHOD 2: NON-PROBATABLE ASSETS (JOINT OWNERSHIP)

    One of the simplest forms of transferring assets from your estate is through the registration of assets in joint ownership. There are two ways of owning property with one or more persons. One is Joint Tenancy With Right Of Survivorship (JTWROS) and the other is Tenancy-In-Common.

    Joint Tenancy with Right of Survivorship (Joint Tenancy)
    Note: Quebec residents cannot use a Joint Tenancy with Right Of Survivorship (JTWROS) agreement since an automatic right of survivorship does not exist under Quebec law.
    This form of ownership allows two or more people to own an asset together. All persons listed as joint tenants share ownership and control of the asset, and upon the death of one of the persons (i.e. a tenant), the ownership automatically passes to the surviving tenant(s). By passing directly to the surviving tenant(s), the asset does not form part of the estate and thus is not subject to provincial probate taxes.
    While this method of ownership can be effective in avoiding probate administration costs, there are a number of complications that may result from its use. The following list outlines some of the potential problems of using Joint Tenancy:

  • Each joint tenant has an equal, undivided interest in the whole property Property that is held in Joint Tenancy by a bankrupt tenant is severed on bankruptcy. The severing of the tenancy makes the arrangement a Tenancy-In-Common arrangement with the other tenants. (For more information, please see Tenancy-in-Common below)
  • Changing ownership of an asset may have tax implications Changing ownership to joint tenancy may expose the jointly held asset to family law or creditor claims

  • The use of Joint Tenancy ownership may ultimately cause property to end up in the ownership of persons other than those who the deceased would like to see receive the property.
    Joint tenancy may, in some instances, be severed by legislation (i.e. joint ownership of matrimonial home with a person other than your spouse in Ontario) The deceased cannot control the disposition of the jointly-held property once they are gone. The property passes to the surviving joint tenant(s) regardless of the provisions in the deceased tenant's Will. Hence, it is important that the other joint tenant(s) added in Joint Tenancy are also the intended beneficiaries. Otherwise the asset will pass to an unintended heir upon death.

    Tenancy-In-Common
    A Tenancy-In-Common is another form of co-ownership. It is the ownership of an asset by two or more individuals together, but without the right of survivorship that is found in a Joint Tenancy. Unlike a Joint Tenancy agreement, co-owners in a Tenancy-In-Common arrangement can own equal or unequal interests in an asset. Thus, on the death of one of the co-owners, his or her interest will not pass to the surviving owner, but will pass according to the Will of the deceased. If the deceased did not have a Will then the provincial intestacy laws would dictate the distribution regime. Unlike Joint Tenancy, the assets held under a Tenancy-In-Common agreement will be subject to probate taxes because the assets would have passed through the estate of the deceased tenant.



    METHOD 3: GIFTING ASSETS BEFORE DEATH

    Without question the easiest method of transferring assets is to gift them to your heirs prior to death. Gifting is frequently used without the motivation of its estate planning merits, but simply to assist children and family members with activities such as a home purchase or business financing.

    Gifting of assets can have potential tax benefits if the asset is given to a registered charity or if the asset was income-producing, resulting in less taxable income. Be careful when gifting income-producing assets such as stocks or bonds. Your altruistic act may trigger an unexpected tax liability for you. Generally, gifting an asset to an individual (other than a spouse) is treated as a sale (at fair market value) thus triggering any unrecognized capital gain on the asset. Also, the income attribution rules will be applied if the gift is to your spouse or a minor child. Under this rule, the income earned on gifts to either of these persons will still be taxable in your hands (except for capital gains received by a minor child).

    Another drawback to gifting is that you relinquish all control over the asset, which may not be an acceptable outcome. Finally, while gifting assets represents a simple method of transferring the estate as well as reducing probate taxes, like most things, it should be done in moderation. Before a gift is made you should ensure that by making the gift you do not jeopardize your own lifestyle. This is best evaluated within a comprehensive financial plan.

    It is also possible to gift assets on your deathbed by using an enduring power of attorney or mandate.



    METHOD 4: LIVING / FAMILY TRUSTS

    The use of a trust in estate planning represents a slightly more complex method of estate transfer. The essence of a trust is that it is a relationship rather than a separate legal entity. This confusion arises from the fact that the Income Tax Act treats a trust as a taxpayer, requiring it to file a separate tax return annually.
    However, this relationship is between the trustee, who holds legal ownership of the trust asset for the benefit of the beneficiaries, and the beneficiaries who are entitled to the use and enjoyment of the asset.
    In Quebec, the concept of the trust is slightly different. A trust is created when a "settlor" transfers legal title to a " patrimony" and then names a "trustee," who manages the property for the benefit of a "beneficiary." Unlike the common law jurisdictions that permit ownership to be split between the trustee and the beneficiary, under civil law in Quebec the ownership resides in only one person. Nevertheless, the operation of this trust in Quebec is very similar to trusts in the rest of Canada.
    In simple terms, a trust provides an intermediary between yourself and your intended heirs. By using a trust you can transfer ownership of an asset out of your hands, allowing your heirs to benefit from the asset and at the same time allowing you to retain control.

    There are two types of trusts:

  • An inter vivos trust (living trust) is a relationship that is created during an individual's lifetime
  • A testamentary trust is created on and as a consequence of the death of an individual. Testamentary trusts are discussed in more detail above, under Method 1: Wills (Probatable Assets)
  • A living trust can be structured to provide the person gifting the assets (i.e. the settlor) with significant control and flexibility over the timing and amount of assets distributed to the trust's beneficiaries (your heirs). Control of the trust assets by the settlor is derived from the trust indenture (document), not from controlling the assets directly. Note that all income retained in a living trust is taxed at the top marginal tax rate.

    Taxes at death
    While there are no true "estate taxes" in Canada there are three potential taxes or pseudo-taxes that may be incurred at death:
  • Income Tax Due to Deemed Disposition
  • Provincial Probate Taxes
  • U.S. Estate Tax (on your U.S. assets)


  • Income Tax Due to Deemed Disposition
    In the year of death, a final (terminal) tax return must be filed by the estate's executor/liquidator that includes all income earned by the deceased up to the date of death. Also included in income at death is the net capital gain recognized under the deemed disposition rules.
    The deemed disposition rules of the Income Tax Act treat all capital property owned by the deceased as if it was sold immediately prior to death. Thus, all unrecognized capital gains and losses are triggered at that point with the net capital gain (gains less losses) included in income.
    The Income Tax Act does contain provisions to defer the tax owing under the deemed disposition rules if the asset is left to a surviving spouse or to a special trust for a spouse (spousal trust) created by the deceased's Will. This provision allows the spouse or the spousal trust to take ownership of the asset at the deceased's original cost. Hence, no tax is payable until either the spouse or the spousal trust sells the asset or until the surviving spouse dies. The tax is then payable based on the asset's increase in value at that point in time.
    A Special Note about RRSPs and RRIFs In addition to the potentially significant tax liability from recognized capital gains, it is also necessary to deregister (i.e. collapse) any registered assets such as Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) at the point of death. The full value of the RRSP or RRIF must be included on the deceased's final (terminal) tax return. There are exceptions to this deregistration requirement if the RRSP or RRIF is left to the surviving spouse, a common law spouse and in some cases to a surviving child or grandchild.
    An RRSP or RRIF can be transferred tax-free to a surviving spouse's own plan. Also, the RRSP or RRIF can be transferred tax-free to a financially-dependent child or grandchild who is under age 18, or who is mentally or physically infirm, even if there is a surviving spouse. The registered funds must be used to purchase a term-certain annuity with a term not exceeding the child's 18th year.

    Provincial Probate Taxes Upon death, the executor of your estate will typically be required to file for probate with the provincial court. The estate's executor must submit to the court the original Will and an inventory of the deceased's assets. Upon acceptance of these documents by the court, letters probate (called "Certificate of appointment of estate trustee with a Will" in Ontario) are issued. This document serves to verify that the submitted Will is a valid document and confirms the appointment of your executor.
    With the executor's submission to the court, he/she must also pay a probate tax. This tax is based on the total value of the assets that flow through the Will. The rate charged varies between provinces with some provinces having a maximum fee. All provinces except for Alberta and Quebec levy potentially significant probate taxes.
    Probate is not required for a notarial Will in the province of Quebec and for those that have other types of Wills drafted in Quebec the probate tax is very nominal. In situations where the estate is extremely simple and does not require any involvement with a third party such as a financial institution, the Will may not need to be probated. As well, probate taxes can be reduced by using strategies such as the naming of beneficiaries, Joint Tenancy With Right Of Survivorship agreements and the use of living trusts.
    See Methods of Transferring Your Estate for more information.

    U.S. Estate Tax
    In addition to the taxes payable in Canada, you may also be subject to a tax bill from the U.S. Government. Canadians that own U.S.-sourced assets such as real estate, corporate stocks and certain bonds and government debt are required to pay U.S. Estate Tax based on the market value of their U.S. assets at death. Any assets that are considered "U.S. situs" property (i.e. deemed to be located within the United States) will be subject to this tax. Most people do not realize that investing in the securities issued by a U.S. corporation such as IBM or Microsoft in their Canadian brokerage account may result in a U.S. Estate Tax liability for their estate.
    While changes to the Canada-U.S. Tax Treaty have reduced the number of Canadians that may be subject to this Estate Tax, for many individuals with significant net worth, U.S. Estate Tax will still represent a significant tax burden to their estate. Potential methods of reducing the total cost of U.S. Estate Tax include the following:

  • Use life insurance to cover the U.S. Estate Tax bill, allowing your total estate value to be maintained Sell your U.S. assets prior to death. This is the simplest method of avoiding the tax, but timing is everything with this strategy as the sale could result in an immediate Canadian tax liability
  • Individuals with substantial U.S. holdings may wish to consider using a Canadian holding corporation since the assets would be owned by the Canadian corporation and not by the individual
  • Reduce the value of your estate below the current threshold Hold Canadian mutual funds that invest in the U.S. market. While the fund may hold U.S. assets, it is considered a Canadian asset, and is not subject to U.S. Estate Tax
  • Hold the asset in joint ownership. This may serve to defer the tax until the other tenant dies, assuming the surviving tenant can prove that he/she acquired their interest in the asset using their own capital


  • Planning for incapacity
    The final component of your estate plan should address potential situations where you may become physically or mentally incapacitated. This is achieved by creating an enduring power of attorney. Without an enduring power of attorney, your attorney (not necessarily your lawyer or notary) cannot act on your behalf during a period of incapacity until they receive court approval.
    For Quebec residents, the enduring power of attorney document is referred to as a mandate (in anticipation of incapacity). In Quebec, a notary or lawyer can draft mandates. It is important to note that all mandates terminate if a court-ordered curator or tutor is appointed or the persons you appoint die before your death. You can revoke a mandate at any time, so long as you are mentally competent.
    Please choose from the following links for more information on planning for incapacity:

  • Power of Attorney
  • Enduring Power of Attorney
  • Living Wills
  • Pre-Planned Funeral Arrangements


  • Power of Attorney The most common form of this document, a financial power of attorney, is also referred to as a power of attorney for personal property or financial decisions. The authority that you give the individual acting as your "attorney" (for Quebec residents, a "mandatory") can be either limited to specific activities or assets, called a " limited power of attorney," or can provide the attorney with wide-ranging control of your financial affairs called a "general power of attorney."
    A power of attorney may be temporary or of indefinite duration, but in all cases the authority provided by this document ends upon your death or incapacity. The appointment of a committee or guardian by a court order will also terminate a power of attorney.

    Enduring Power of Attorney
    It is important to note that the power of attorney document (general, limited or financial) will not be valid if you become mentally incapacitated unless it specifically states that the attorney's authority is to be maintained under this circumstance. Additional wording is necessary to ensure the document is considered enduring in subsequent mental incapacity. This is commonly referred to as an "enduring power of attorney."
    Your power of attorney/mandate should be created with the assistance of a lawyer or notary to ensure it accurately reflects your wishes.
    For British Columbia residents, there is now a representation agreement that will allow adults to appoint representatives. If the adult should lose mental capacity, these representatives can have authority to make decisions about the person's legal affairs, financial affairs, personal care and health care needs if necessary.
    The representation agreement is an additional document that can be utilized alone or in conjunction with an enduring power of attorney.

    Living Wills
    The provinces of Manitoba, Ontario, Quebec and Nova Scotia all have legislation allowing for the creation of what is commonly referred to as a living Will. Depending on the province, a living Will may also be referred to as a power of attorney for personal care, a mandate, a health care directive or proxy, an advance directive or a representation agreement.
    The purpose of a living Will is to provide instructions regarding your medical care if you were to become incapacitated and unable to state your wishes. This document may indicate the type of treatment you may or may not wish to receive. A living Will should be created with the assistance of a lawyer or notary and discussed with your family physician and family members.

    METHOD 5: PRE-PLANNED FUNERAL ARRANGEMENTS

    When funeral arrangements are pre-planned there is considerably less potential for stress, confusion and mistakes. Making arrangements for a loved one in a rush can cause additional pain and costs at a difficult time. For this reason, more and more Canadians are considering pre-planned funeral arrangements as part of their estate plan. This allows for family input, minimizes the chances of additional costs and ensures your wishes are followed without burdening family members.

    Life insurance
    Life insurance can play a significant role in your estate plan as it provides a solution to a wide range of potential objectives. In general, life insurance serves one of two purposes: either to create an estate for your heirs or to preserve your existing estate. Generally, life insurance premiums are not tax deductible but the benefit paid to the estate (probate may apply) or a beneficiary (probate would not apply) is also not subject to income tax. (For explanations of the insurance solutions discussed on this page, please see our section on Understanding Insurance.)

    METHOD 6: USING LIFE INSURANCE

    Some common reasons you may wish to use life insurance include: To provide liquidity in an estate to pay off liabilities such as taxes or mortgages. This will ensure that non-liquid assets, such as a cottage or business, do not have to be sold, but can be left to your beneficiaries. To establish a fund to provide income for an individual you wish to support. To make a donation to charity.
    While term life insurance can be used to fund a short-term estate need such as paying off an outstanding mortgage or protecting the estate against an immediate shortfall, universal or whole life insurance is the preferred option when the insurance is for estate purposes.
    Examples include having a life insurance policy that would cover estate taxes on death (capital gains generated due to the deemed disposition rules) or the ability to leave bequests without the advent of taxes payable.
    As with all insurance products that are used for estate planning purposes, a thorough cost-benefit analysis should be performed in order to assess the appropriateness of the strategy.

    How much life insurance is enough?
    The amount of coverage you require will depend on your estate objectives and current financial status. As you age, you may find that the level of coverage you require declines or perhaps changes from short-term to permanent coverage. Determining exactly how much and what type of insurance is most suitable for your situation can be best assessed through the preparation of a financial plan and the aid of a life-licensed advisor.