“It happened again.” These three simple words jolted Eddy Piasentin’s attention away from feeding his four children their lunch and onto Chantelle, his wife. She’d just stepped into the dining room holding a drugstore pregnancy test. While the announcement of their fifth child was not unwelcome, it was certainly unexpected and the couple was a little apprehensive. Could the family continue to survive on one salary? Could the Piasentins save for their children’s education while paying down their mortgage and saving for their own retirement? And, God forbid, what if something tragic were to happen to Eddy or Chantelle?
The Piasentins aren’t alone in worrying about how to protect their family in the event of disability or death. Whether you’re a struggling young parent or a wealthy retiree, every life stage brings challenges when it comes to estate planning. Unfortunately, the subject can seem intimidating and confusing—and for some it’s simply too morbid to think about. It doesn’t have to be. “Consider estate planning an attempt to eliminate any uncertainties and tough decisions that your loved ones need to make after you die or become incapacitated,” explains Lawrence Pascoe, an Ottawa family and estate lawyer with more than three decades of experience.
We’ve created a list of steps to help you establish a solid estate plan. By following our guide you’ll not only learn how and why to protect your family, but ensure that your legacy lives on with those you love.
Where there’s a will
Lawrence Pascoe recalls a relatively wealthy client who married and fathered kids in his early 40s. “His intention was to make a will and leave everything to his wife, but he was tragically killed in a car crash before he could.” When the dust finally settled, the Ontario courts ruled that his wife would only inherit $250,000 from her late husband’s estate. “The rest was divided equally among his children,” says Pascoe. Since his three children were under the age of six, their portion of the inheritance was placed into a trust that was administered by the court until they turned 18. Every year, the widow would have to apply for access to that money to pay the bills and care for her growing kids. And every year the courts charged their administration fees. “Most people don’t realize that your spouse doesn’t automatically inherit your estate,” explains Pascoe.
The lesson here is that the first and most important step in protecting those you love is to make a will. “It’s the cornerstone of your estate plan,” says Julie Barsel, family and estate lawyer with English Bay Law Corporation in Vancouver. Die without a will—known as “dying intestate”—and the government gets to decide who your beneficiaries are and how your assets will be divvied up. This is especially important if you and your partner are not formally married: common-law spouses do not necessarily have the same property rights as legally married spouses.
For a will to be effective, it needs to clearly indicate your wishes, be readily found, and be easily verified by the courts (known as probate, but more on that later). You must clearly state who will be your executor (the person responsible for carrying out your last wishes and for filing paperwork, including your last tax return), decide who gets your assets, and at what age the beneficiaries will receive their inheritance. It should also include instructions for your burial and funeral. Finally, if you have dependent children, you should name a guardian.
While it may be hard for busy families, making time to create a will is essential. Thankfully, a basic will prepared by a lawyer can cost as little as $500 and take just half a day to complete.
One of the most important decisions is choosing your executor. Most people will select their spouse, but you should also choose an alternate, and that can be hard: just ask Adam and Sheila Chang. “Suddenly we were faced with trying to find a person who was both financially responsible and had our daughters’ best interests at heart—that’s not easy to find, even in a large family,” confesses Adam (we’ve changed their names to protect their privacy). If it is too hard to find a single friend or family member, consider asking more than one person to step into the essential roles. They don’t have to be accountants or lawyers: they just need to be responsible enough to know when to hire professionals to make those bigger decisions.
When you’re finished, make sure you put your will in an easy-to-find, secure place—such as a fire safe or safety deposit box—and tell your executor where it can be found.
Super powers (of attorney)
What if you were to become incapacitated because of illness or injury and unable to make your own decisions? A power of attorney (POA) is the next document you’ll want to complete in your estate plan.
POAs vary from province to province, but in general they give a family member or trusted friend the authority to make important financial decisions should you become unable to do so. If you don’t have one, your family may have to go to court just to pay your bills. Again, your spouse is the most likely person to fill this role, though you should choose an alternate as well.
Every province also allows you to grant power of attorney for health care decisions. If you think this is only relevant when you’re old and frail, ask the Dhaliwal family of London, Ont. In late 2007, 19-year-old Paramjit suffered life-threatening brain trauma in a car accident. When they arrived at the hospital, Paramjit’s parents, Jas and Bali, were told that medical staff wanted to induce hypothermia—a process of cooling the body to allow the brain to recover. The Dhaliwals had less than 60 minutes to decide, and they didn’t know what to do. Neither parent had ever talked to their son about these matters, and neither really knew what Paramjit would want. (They eventually approved the treatment, but the brain injury resulted in permanent cognitive impairment.)
That’s the role of a health directive, also known as a living will or a power of attorney for personal care. It gives you a say in how you should be treated if you’re unable to voice those decisions. Anyone over the age of 16 can have a health directive, and the document does not need to be drawn up by a legal professional to be valid (but it does have to be in writing, and it must be signed in front of two witnesses). You’ll need to appoint a person responsible for making medical decisions on your behalf and include any specific instructions regarding medical care, such as whether or not you want to go on life support and for how long.
Protect your income
While a will and POAs can dictate your wishes, they won’t actually take care of your family should you become incapacitated or die. For that you’ll need insurance.
Life insurance can play different roles depending on your life stage. “For a young family with a big mortgage, safety and security might be their prime objective,” says Lorne Marr, founder of LSM Insurance. “For someone later in life, however, life insurance may be used as an estate planning tool—an opportunity to leave a legacy or pay taxes so your heirs don’t have to.”
For young families, where money is tight, the most cost-effective option is term life insurance. This type of policy pays out a lump sum should you die during the term, usually 10 to 20 years. Usually much cheaper than other options, the one drawback is that term life must be renewed when the term ends, usually at much higher cost. It’s best to buy these policies as early as possible, say in your 20s, as health problems later in life might make you uninsurable.
You’ll need to buy enough coverage to pay off your current debts and replace your future earning potential, explains Glenn Cooke of LifeInsuranceCanada.com. The rule of thumb is to buy a policy that covers 80% of your annual income for the next 10 to 20 years. If you make $50,000 a year and have a $200,000 mortgage, the policy should pay out between $600,000 to $1,000,000.
The other option is permanent life insurance (including whole life and universal life), which has no expiry date. These policies may have an investment component, which isn’t subject to tax, as well as a “cash surrender value,” should you cancel them. The disadvantage is that they are significantly more expensive in the early years. For example, a 35-year-old male non-smoker who opts for $500,000 in coverage would pay about $35 a month for a term policy; the same universal life policy would cost about $190 a month, and a comparable whole life policy could easily top $250 per month.
Because of the higher cost in the early years, permanent insurance isn’t the best option for young parents on a budget. However, if you plan on using life insurance to pay estate taxes or leave a legacy, then permanent insurance may be appropriate.
Give it away now
“Quite often a parent will give a child some or all of their inheritance in advance of their death,” says Pascoe. “To keep the peace, though, you need to clearly stipulate whether the money was a gift or a loan. You also need to stipulate whether the gift was an advance on their inheritance, or in addition to the child’s portion of the estate.”
The benefit of giving cash gifts while you’re still alive is that it may reduce the overall tax burden on your estate when you die. When you give cash to adult children, there are no taxes payable, either by you or your child. “Gifting money is a good way to help out your kids while you’re still alive and can watch them enjoy it,” Pascoe says.
This is only true for cash, however. If you give your child an investment portfolio or real estate, the Canada Revenue Agency will deem this a sale at fair market value, and you will be responsible for any capital gains taxes. However, those assets will not have to pass through probate when you die.
Another factor to consider is whether you want your child’s spouse to benefit from your gift or inheritance. Under family law (which varies with your province), any money received from the family of one spouse is considered to belong to both spouses if it is commingled with the couple’s shared assets. For example, if Joe inherited $100,000 from his father and used it to pay down the mortgage or put it in his RRSP, then his wife Judy could claim half if the couple were to break up one day. But if Joe had deposited the inheritance in a separate account, he might not have to share this money after a divorce.
Pascoe recommends that parents specify in their will that a gift or inheritance is not for the mutual benefit of both spouses. “All wills should have such a clause,” explains Pascoe, who concedes that doing this type of estate planning “can be offensive to some.” But Pascoe defends his advice: “The reality is many marriages fail. By taking these precautions you may eventually help your child when he or she needs it most.”
Reduce probate and taxes
Probate is the process of legally validating a will, so all estates must go through a form of probate. Some provinces charge a modest fee for probate, while others base the fee on the size of your estate: Ontario has the highest fees at 1.5% (or $15 for every $1,000 of assets). “The trick is understanding how to structure the estate to minimize fees and taxes associated with this process,” says Barsel.
If you have a spouse, one of the easiest strategies is to hold property jointly. A house held in “joint tenancy” by two spouses will not go through probate: when one partner dies, their share of the asset passes automatically to the survivor. The same is true of a jointly held investment account.
If assets are not held jointly with your spouse, the general rule is that the Canada Revenue Agency will deem it to be sold at fair market value upon your death. Your estate will then be responsible for the capital gains taxes on any appreciation. For example, if you have a non-registered account with stocks and mutual funds that have grown in value from $200,000 to $400,000, your executor would be responsible for reporting $200,000 in capital gains on your final tax return.
It’s important to understand that the right of survivorship does not extend to an adult child whose name is added to a property deed. “This happens a lot after one spouse dies,” says Barsel. “The surviving spouse adds an adult child’s name to a bank account or house deed in an effort to avoid probate.” What these parents fail to grasp is that the adult child immediately becomes a full co-owner of the asset. “Even if you aren’t worried that your child will abuse their position, you could be putting your assets at risk should that adult child become involved in a lawsuit, bankruptcy or divorce proceeding.”
Taxes payable upon death are generally a much bigger concern than probate fees. The easiest way to reduce or defer taxes at death is to name your spouse as the beneficiary on your registered accounts, such as RRSPs, RRIFs and TFSAs. The full value of your RRSP or RRIF is taxable as income upon your death if left to anyone other than your spouse.
Another way to minimize taxes is to donate your stock portfolio, in-kind, to charitable organizations. When you donate publicly traded securities, you won’t have to claim any capital gains that may have accumulated over the years. Your estate will also get a charitable donation credit that can be used to further reduce the taxes owed.
As always, professional help is a must: meet with an estate lawyer and an accountant to develop an effective plan.
In trusts we trust
Last year, when Adam Chang was 52 years old, his father was diagnosed with Alzheimer’s disease. That prompted Adam and his wife, Sheila, to get serious about estate planning. The Changs had already written a will, bought life insurance and even maxed out their RRSPs and RESP, but they had not seriously discussed what would happen to their 13-year-old twin daughters if they were suddenly left without parents. The Changs wanted to leave their sizeable estate to their girls, of course, but they worried what might happen before they were “older and wiser and could make better decisions.”
Whether your heirs are minor children or spendthrift adults, you can prevent them from squandering your hard-earned savings by setting up a trust, says Barsel. A trust is a legal entity that holds assets on behalf of the beneficiary and appoints a trustee to distribute them according to your instructions. For instance, you could instruct the trustee to make regular monthly payments from the trust to the heir so the inheritance can’t be spent all at once. You can also set up a trust that pays out over time—say, when a child reaches age 25, 30 and 40. Or you can stipulate when and what the funds may be used for, such as educational expenses, a new home, or retirement savings.
Keep in mind, though, that setting up and administering a trust can get expensive, as Adam Chang found out. Initially, he wanted to protect his daughters’ inheritance with a testamentary trust—a trust written into the will that’s triggered upon death. But his lawyer dissuaded him. Unless a family has a very high net worth or unusual circumstances (such as a dependent who will require lifelong care), most don’t need to use trusts if they have a properly worded will, says Pascoe.
Review and update
Once your estate plan is in place, you’ll need to revisit it from time to time and keep everything up to date. This can actually be the hardest part, says Pascoe, as very often we get caught up in life and forget to update these important documents.
You should consider updating your will whenever you have a major life event such as the birth of a child or grandchild, when your children reach the age of majority, or if you or your named executor move to a different province. It’s also worth reviewing your estate plan if your net worth grows considerably. A larger investment portfolio, a bigger home, or a growing art collection should be addressed in your estate plan.
You’ll also need to re-examine your plan when someone dies. Usually this is an automatic response if your spouse dies, but it should also be done if, say, your executor dies before you, or your power of attorney is diagnosed with a debilitating disease.
Finally, make sure you update your will and account beneficiaries if you get divorced or remarry. In most provinces, a will is automatically revoked once you remarry (or get married for the first time, assuming you made your first will when you were single). However, your will isn’t automatically cancelled when you get divorced. A new marriage license doesn’t necessarily mean your new spouse is entitled to the entire estate, explains Barry Corbin, a Toronto lawyer who specializes in estate planning. In most provinces, if you die intestate, your new spouse will have to share your estate—including the home you lived in together—with your children from a previous marriage. Even if you remember to update your will, your ex-spouse could inherit a chunk of your estate if you don’t update the beneficiary of your life insurance policies.
If this all sounds complicated and difficult, just take things one step at a time. A proper estate plan will protect you, your family and your wealth, now and in the years to come. Just ask the Piasentins. With five kids under the age of 10 they aren’t getting much sleep these days. But they are gradually piecing together a plan that will allow them to rest easy, knowing their estate plan will minimize the impact a loss could have on their family.
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