Reference Articles > Estate Planning: What Is It, Why Do It, and Some Helpful Hints
     

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This article reviews some highlights of the estate planning process. It is not a review of the law and is meant for information purposes.

WHY AND WHAT IS AN ESTATE PLAN?

As difficult as the subject can be, it is better to plan for death then not. It is also better to plan your estate then leave it to chance. You can also do some inter vivos estate planning or planning that is done to defer or reduce taxes during your lifetime as opposed to after your death and to protect assets from events such as marriage breakdown or insolvency. It can involve such things as setting up a family trust in favour of your children, entering into a marriage contract or re-organizing the shareholdings of a family corporation.

The most important feature of any estate plan is the Will. There are two main kinds of Wills. A Will written entirely in your own handwriting and signed by you at the end is called a holograph Will. This kind of Will does not need to be witnessed. Or you can have a Will prepared by an estate planning solicitor. As drawing a will is such an important act it is not recommended that you try to do this yourself or with the “help” of printed forms purchased from a stationer.

The legal fees will vary according to the complexity of the estate planning and of the resulting Will. These fees include:

• reviewing your completed questionnaire;

• meeting with you to discuss your estate plan and taking your instructions with respect to your Will and Power(s) of Attorney;

• drafting the Will and Power(s) of Attorney and forwarding a draft for your review;

• meeting with you to sign your Will and Power(s) of Attorney;

• preparing the witness’ Affidavit of Execution of a Will to be kept with each original Will;

• giving a true copy of the Will or the original Will to you, together with two original copies of each Power of Attorney.

The cost of retaining a solicitor to ensure you receive appropriate advice so that your Will properly reflects your wishes is modest relative to the importance of leaving your affairs in order. The costs are less than the fee paid to a real estate agent on the sale of your home on both an absolute and percentage basis. Generally, the legal account is rendered when the documents are signed. If, for some reason, you decide not to proceed to sign the documents after a draft has been prepared, you will usually still be billed for the initial meeting and preparation time. Once the documents are signed a copy is usually kept electronically by the lawyer. This makes them easy to change or update.

Many people postpone the preparation of a Will until faced with an overseas trip or an unexpected illness. The uncertainties of life and the welfare of your family are good reasons to make a Will earlier and to revise it regularly as part of your personal financial planning. But there are also other good reasons why you should have a Will.

Did you know that if you die without a Will in Ontario …:

• and are married, have children and your assets are worth more than $200,000.00 your surviving spouse will not be entitled to your whole estate;

• it is up to the Court to appoint someone, usually your next-of-kin, to administer your estate;

• if your minor children are entitled to funds from your estate, it is the Children's Lawyer of Ontario (formerly the Official Guardian¬) and the Accountant of the Superior Court who will decide how those funds should be invested and what amounts should be paid for your children's maintenance, until they are 18, at which time, unless they are legally disabled, your children will receive the balance of these funds;

• the distribution of your assets will not necessarily be made as you would have wished;

• a Court appointed Estate Trustee may have to post a bond, an additional cost for your estate;

• and if you have a common-law or same-sex relationship, although your partner can pursue your estate for support, he or she has no automatic right to share in the assets of your estate.

Executor/Estate Trustee

Your choice of estate trustee, whether one or more, is one of the most important elements of your estate plan. Your estate trustee administers your estate in accordance with your Will and wishes. The authority of the estate trustee is effective the moment of death. The authority is not dependent upon receipt of the Certificate of Appointment from the Court.

The estate trustee should be someone who can exercise sound judgment, has good business sense and can act impartially when there may be conflicting interests between beneficiaries. Ideally this person should also be familiar with your family. More than one estate trustee may be named allowing you to choose family members and/or professionals and provide for alternate estate trustees, if those appointed cannot act.

Where there are different classes of beneficiaries such as a spouse with a life interest and ultimate beneficiaries, unless you specifically state that you want one class of beneficiaries favoured over another, the estate trustee must act even-handedly between classes of beneficiaries.

If an estate trustee is not appointed by Will, the Court will appoint someone to administer your estate (usually your spouse or closest next-of-kin). The selected person may not be the optimal candidate due to a lack of familiarity with your assets or a lack of financial expertise. The Court usually appoints only one person as administrator of the estate.

Personal Effects

Bitter feuds can result over the division of personal effects. A Will can incorporate specific gifts, or it can refer to a memorandum kept with the Will which sets out your wishes on the distribution of personal effects, or the task of distributing personal effects can be left to the discretion of the estate trustee, divided up or sold and the proceeds divided equally.

What about Particular Assets of Unique Value or Special Significance?

If you have assets which special significance to you and your family, such as a family cottage where the family has gathered and enjoyed good times, a Will can direct creative solutions to deal with such assets. By preparing a Will you can provide for the best approach for you and your family of unique and special assets.

Residue

The "residue" is whatever is left in your estate after your estate trustee has dealt with personal effects, specific gifts and has paid debts. What you can do with your residue is endless. Should you leave the entire residue outright to your spouse? Should you instead provide for a spousal trust leaving your spouse with a life interest in the residue? Should you leave some or all to charity? Do you leave some to family now and the rest later? The variation is endless – but only if you have a Will.

Different planning considerations apply to each alternative. Ultimately the choice is yours – keeping in mind statutory limitations and court decisions. For example, the Family Law Act provides that, subject to certain exceptions, if you do not provide a married spouse with a sufficient gift on your death so that that spouse will then hold at least one-half of the difference between your respective "net family property" values, then that spouse is entitled to make a claim under the Act and to take that specific amount from your estate as a first charge prior to any other gifts under the Will. This statutory right of the surviving spouse could put your estate plan in jeopardy. This can be avoided by further planning, such as a marriage contract in which you and your spouse agree not to be bound by the Act and to uphold each other's Wills.

What about Children?

Children's inheritances must be deferred until they are the age of majority or at least eighteen years old. You could hold the share for a longer period? Perhaps, since the possibility of dissipating an inheritance is greater at age 18 than at a more mature age. You could defer payment to a later age or defer payment into two or three capital sum to be distributed over time as the child becomes older. This allows the child to have direct experience in handling and investing the first portion, but if for some reason he or she should dissipate the funds, there is still a portion in reserve.

Guardians

Most people with young children are naturally concerned about who will look after their minor children. The appointment of guardians for children under 18 contained in a Will is only binding for 90 days from the death of the parent. After that period, it is up to a court to make a decision as to who the appropriate guardians would be. However, in doing so, the court will read the Will and take into account the parent's wishes. Typically, the parent's wishes are very persuasive.

Taxes

Ontario has abolished succession duties some time ago. Similarly, the federal government has eliminated estate taxes. The only taxes currently eligible on death are income taxes, capital gain taxes on the property of the deceased and Court fees.

When you die, Canada Revenue Agency treats it as if you had disposed of all your assets at their fair market value. This is called the deemed disposition of your assets and may trigger a capital gain. Your principal residence is usually free of any capital gains tax. A second family home, the cottage, ski cabin or the condominium in Florida, though, may trigger capital gains, if the property has appreciated in value (again, unless left outright or in trust for your spouse).

Further, if your assets are left outright to your spouse or exclusively in trust for your spouse, the "rollover" concept applies. This results in a deferral of the recognition of capital gains until your spouse either disposes of the assets or dies, at which time the capital gains, if any, will be triggered.

Although people with substantial estates often enter into sophisticated estate plans it is important to remember that you should not let the "tax tail to wag the dog". The plan should always suit the family's needs first and have enough flexibility to change direction in the event there is a substantial change in your personal or financial circumstances.

Court Fees

In Ontario, court fees (a tax) are payable upon the application for a Certificate of Appointment of Estate Trustees (formerly Letters Probate) based upon the value of your estate. Court fees are now $5.00 per $1,000.00 for the first $50,000.00 in value of your estate and $15.00 per $1,000.00 thereafter.

As a result, planning which of your assets will actually be part of your estate upon your death can be important. Creative estate planning, utilizing vehicles such as trusts, gifts during your lifetime, joint ownership of assets, corporate reorganizations, a second will or the use of alter ego or joint partner trusts in appropriate circumstances, may significantly reduce court fees payable by your estate. However, just as the “tax tail should not to wag the dog” planning just to avoid court fees should be avoided without careful consideration.
Conclusion

Estate planning allows you to consider your life's acquisitions and arrange their disposition either currently or upon your death to those persons or organizations you want to benefit in an organized and reasonable way.

Your estate plan should be reviewed on a regular basis to ensure that it is still appropriate. It should also be reviewed after significant events happen, such as marriage, separation, divorce or death of a family member. Estate trustees may have moved away. Amounts of legacies may be inappropriate in light of your increasing or decreasing assets or inflation. Beneficiaries may have died, fallen out of favour, or become incapacitated. Laws may have changed. Children might have grown up to be responsible adults.

If you do not plan and your estate is distributed by default, or your estate plan is not updated to keep pace with your personal and financial circumstances, your family may feel that you didn't care enough to take those extra steps. Attending to your estate plan will afford you and them significant peace of mind.