What is Estate Planning?
Estate Planning is an integral part of financial planning, which facilitates transferring your family property, tax-efficiently and smoothly to others (your beneficiaries) in accordance of your wishes at your death or later in your life (when you wish to transfer your property).
An Estate plan if properly executed will:
-Conserve the value of the estate (minimize income tax)
-Minimize estate taxes; however minimizing estate taxes should not ‘drive’ the estate plan;
-Enable a deceased’s assets to be distributed in accordance with their wishes;
-Preserve the standard of living of the survivors/ dependents
What is the role of will in estate planning?
The will is the key element of estate planning. It allows you to achieve above listed goals of estate planning.
Why do you need a will?
1. SELF DETERMINATION
The most obvious reason you should make a will is in order to ensure that, insofar as possible, after death, your property is distributed in accordance with your wishes.
In the event you do not leave after your death, your property is divided in a statutorily mandated manner, without regard to what your stated wishes might have been during your lifetime.
2. INCOME TAX BENEFITS
There are income tax advantages of having a will, especially in the event where you name your spouse as beneficiary. On death, under the Income Tax legislation, there is an immediate deemed disposition of all capital property (i.e. it is as if all capital property were sold and any capital gains realized and taxed on death). However, if you have a will, and your will meets certain criteria, there will be a rollover in favor of your spouse, which means that Capital
Gains Tax won’t be paid until your spouse’s death. You may also be able to create testamentary trusts for your beneficiary which may provide tax benefits into the future.
3. MINOR CHILDREN
In your will, you can name a guardian for your infant children. In the event both parents die, by naming a guardian, a guardian then has the legal capacity to apply for confirmation of this appointment and take over care of the children. In the absence of such a designation, there could be serious confusion around who was to care for minor children, such that the children could either be the subject of a custody battle or, alternatively, could come under the protection of the state. Typically, parents have a very good idea of who they would trust to be the guardian of the children.
4. TRUST PROVISION FOR CHILDREN
In a will, one can provide trust provisions for children in the event children are beneficiaries under a Will. For an example, provisions could be made for advances from an estate to cover costs of education and the like. There could also be provisions that children do not inherit until they have attained a certain age, for example 21 or 25.
5. PROTECTION UNDER EXISTIONG FAMILY LAW LEGISLATION
You can insert provisions in a Will that would protect your beneficiaries in the event those beneficiaries were involved in marriages that have turned sour. In a Will, you can provide that a beneficiary spouse in the event of a marriage breakdown will not share income earned on an inheritance.
WHAT CAN HAPPEN IF YOU DIE WITHOUT A WILL
6. STATUTORY DISTRIBUTION
In Ontario (as in other Provinces), there is a statutory scheme for distribution of YOUR estate if YOU die without a Will. The rule is that the first $200,000.00 of your estate goes to your husband or wife. Your spouse will receive one-half of the remainder if there is one child and one-third of the reminder if there is more than one child. While on the face of it, this may seem to be appropriate, in many situations, on closer examination, there are some serious drawbacks. If there is, for example, a situation where the home of the parties are living in is in the husband’s name an it is worth $300,000and assuming for the moment it is the only asset of the husband and there is more than one child without a Will the wife would be entitled to $233,333 and
children entitled for balance. In order to realize this amount, the house would probably have to be sold and the children’s portion, or $66,667, paid to the public trustee and Guardian until the children reach the age of majority. It would no doubt be the intention of the parties, on the husband’s death, that the wife and children would be made homeless. In a Will, this situation could have been provided for.
7. MINOR’S INTERESTS
In an estate where you have died without a Will, the public Trustee and Guardian to be kept must manage any interest of a child under the age of 18
For them until they reach 18 years of age. There is much less scope for contribution towards the children’s expenses during their minority than there typically would be if trust provisions were spelt out in a Will. Obviously, there are the drawbacks of having to deal with the bureaucracy.
8. THE APPLICATION
If you die without a Will, since there is no one automatically named as the Executor (the person entitled to take charge of the Estate), chaos can sometimes reign until Letters of Administration are taken out. Before Letters of Administration can be taken out, typically, there is there has to be a search made for any Wills and it is necessary for the Administrator, in most instances, to post a bond which can be substantial expense to the estate. There can also be competing interests as to who is going to be appointed the Administrator. This can make for a far more expensive, by way of legal fees, to die without a will than to die with a Will.
Chandresh Brahmbhatt MBA
Financial Planning Consultant
Investors Group Financial Services Inc