Posted on August 13th, 2021 by Don Knechtel in Domestic Tax

Estate Planning Tips – Don’t Leave Your Loved Ones Confused

last will and testament

Estate planning is a topic that we all need to consider.  Even if you think that your situation is straightforward and simple, you should still have an estate plan.  No matter the size of your estate, you want to make sure that as much as possible is given to the people you intend to benefit.

For many, the subject of estate planning can seem intimidating.  They do not want to think about it, hoping that everything will take care of itself.   Most often, this does not happen without some pre-planning.

Think of estate planning as taking care of those uncertainties and tough decisions that your loved ones would need to make after you die or become incapacitated.  In this article, I will touch on a few issues that you may consider in your planning.

The Importance of a Will

While the majority of individuals understand the need for a will, a large percentage never bother to make one or even consult a lawyer to draft one for them. A will allows you to decide upon death “who” gets “what assets”, “when”, and “who” looks after the estate and any trusts. A will may also allow you to state your preference as to who should have custody of children, though it is not binding in Court. You may also express your wish on how to be buried, but this is not binding upon the executor.  Without a will, Ontario’s Succession Law Reform Act governs all of those decisions. Therefore, the main reason for having a will is to allow you to make these decisions, rather than letting the government’s statute dictate them.

Getting Started on Your Will

The first thing that you need to do is determine what you have. So prepare an inventory of your assets at their current value.  The list should include your home, cottage, and other real estate, plus investments such as RRSPs or RRIFs or shares of businesses owned. It should also include bank accounts, pensions, and personal property like cars, boats, or jewelry.  Don’t forget to include the value of any insurance policies or debts such as loans or mortgages.

The next step is to determine the taxes that will be owed to the government on your death.  In most cases, if you are married, you are looking at the taxes that will arise when the second spouse dies.  The Canada Revenue Agency allows a tax-free rollover of assets from the deceased spouse to the surviving spouse.  In Canada, taxes are determined at death based on the assets held at that time.  You are deemed to dispose of all of your assets (with a couple of exceptions) at their fair market value.  As a result, your final tax return will include unrealized capital gains on your real estate and non-registered investment portfolio and possibly personal use property.  You will also be taxed on the value of your RRSP’s and RRIF’s.  This is a necessary exercise.  For example, what if your heirs discover that there is not enough liquid assets to pay the tax bill – that family cottage that you wanted to pass down to your children now needs to be sold or mortgaged to pay the taxman?

Once you have determined what will be left after taxes, you can determine how your estate will be distributed.

Important Questions to Ask Yourself When Preparing Your Will

  1. Will all beneficiaries share equally?
  2. Is one beneficiary to receive certain real estate, business assets and another cash or investments of equal value? If so, provisions in your will need to be put in place to determine value and insure fairness.
  3. Do you want to benefit a favourite charity? To reduce taxes, consider gifting to the charity a portion of a stock portfolio with an accrued gain rather than cash.  The estate will be allowed a tax credit based on the value of the gifted stock and no tax is payable on the accrued gain.  Your will needs to address what you intend to gift.
  4. Are there young children you wish to benefit or need to provide for but they are too young to know what to do if they were to receive a large sum of money? Consider putting provisions in your will that establishes a trust to benefit the children on your death.  A trust is a legal entity that holds assets on behalf of the beneficiary and appoints a trustee to distribute the assets according to your instructions.

If you have a good financial plan and know that you have sufficient assets to meet your needs, you may consider giving away a portion of your estate now.  This could reduce your estate’s tax burden and you get the benefit of seeing your beneficiaries enjoy the money now.  Caution should be taken with respect to what is gifted.  If cash is given, there are no tax consequences.  However, if you give away that cottage, capital gains tax will be due now rather than on your death.  Many people also like to add their children to the property deed or the ownership of their investment portfolio, in order to avoid the probate tax on death.  Among the possible problems that could result is that those assets are now open to your children’s creditors, should they have financial difficulties.

No matter what your estate plan is, you should discuss it with your family.  You should let your beneficiaries know what your plans are and the reasons behind your wishes.  This will reduce disputes and heartache after you are gone.  Finally, life changes and situations change, so it is good to review your plan from time to time and make changes where they are warranted.

Planning for your estate now will eliminate any unnecessary surprises.  Perhaps the tax liability could be even be solved by an insurance policy.  Talk to one of our DJB professionals, they can review your situation and recommend a course of action that is right for you.

About the Author

Don KnechtelPartner | CPA, CA

Don has over 25 years practicing in the area of taxation for both individual and corporate clients, including estate tax, corporate reorganizations, estate planning, and succession planning.
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