Estate planning helps protect what matters most to you and efficiently transfers your assets to your loved ones to help ensure they are secure in their financial future after you're gone. Here are the 5 key components of an estate plan.
A comprehensive estate plan can provide reassurance and peace of mind that your loved ones will be provided for should you become incapacitated or pass away. It can also ensure a cost- and tax-efficient distribution of your assets while minimizing the potential for conflicts among your heirs.
Creating an estate plan begins with understanding the crucial elements to include. The following five components can help provide you a solid foundation.
1. Will
Your Will is the cornerstone of your estate plan. This legal document allows you to appoint an executor (also called an “estate trustee" in Ontario and a “liquidator" in Quebec) to administer your assets upon your passing. It also allows you to document your wishes and intentions for how property and possessions are to be distributed.
There's no legal obligation to create a Will but there's a very important reason for doing so. Without a Will in place, your assets would be distributed according to the provincial or territorial legislation based on where you live when you pass away. Taking time to create a Will, even if you're young and healthy, means you'll retain some control over what happens to your assets after you're gone.
Keep in mind that you may need to review and/or update your Will after certain life events or financial changes. For example, getting married or divorced, having a child or moving to a different province or country may necessitate a Will review. Updating your Will may also be necessary if you need to name a new executor or if you acquire new assets or liabilities. It's important to review your will with a qualified legal advisor to determine if changes are necessary.
2. Beneficiary designations
A beneficiary is someone who benefits financially from your estate. If you're developing a Will, for example, you can designate your spouse, children or someone else as beneficiaries and specify what assets you'd like them to receive.
There are also instances where you can name a beneficiary (not available in Quebec) in a registered plan to receive assets upon death. For example, you can designate beneficiaries for:
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
- Tax-Free Savings Accounts (TFSAs)
- Registered Education Savings Plans (RESPs)
- Locked in accounts - like Life Income Fund (LIF), Locked-in Retirement Account (LIRA), Prescribed Retirement Income Fund (PRIF) or Life income funds (LRIF)
With an RRSP you can name one or more beneficiaries. If you have an RRIF or TFSA, you can choose between naming a successor annuitant or holder or one or more beneficiaries. Individual RESPs allow one beneficiary designation while family RESPs allow for multiple beneficiaries.
Similar to reviewing your Will, it may be necessary to review and update beneficiaries for these types of accounts if you experience a life change. If you get divorced, for example, you may not want your former spouse to continue as the beneficiary of your RRSP. You'd need to change that designation; otherwise, they'd still be entitled to receive those assets.
3. Power of attorney (POA)
A Power of Attorney (or a Mandate in Quebec) is a legal document whereby one person, commonly referred to as a donor, gives another person(s), referred to as the attorney(s), the power and authority to act on the donor's behalf. In performing their duties under a POA, the attorney(s) must always act in the best interests of the donor.
There are two types of POA documentation you may need to include in your estate plan:
- Power of attorney for property and financial matters - Used to grant the attorney(s) authority to make decisions about financial and property matters on your behalf.
- Power of attorney for personal care - Authorizes someone else to make decisions regarding your personal care if you're unable to do so yourself.
You have the ability to determine how limited or broad your attorney's powers are when making financial or personal care decisions and when the POA will come into effect. Typically, POAs are drafted to allow the attorney(s) to act for the donor after their incapacity (referred to as an “enduring POA"*). Alternatively, POAs can be drafted to have a limited duration or scope, which will limit the authority of the attorney(s) to a specific task or transaction and for a limited time after which the POA would cease to be valid (commonly referred to as a “limited scope POA"). As with other estate planning documents, it's a good idea to review the scope of these powers regularly as well as the person you've selected to be your attorney to ensure that they're still a good fit.
4. Tax planning
There are tax contingencies you may need to anticipate in your estate plan, including income taxes due at death under deemed disposition rules, provincial or territorial probate taxes and any U.S. estate tax that you may owe.
Designating your spouse as the beneficiary of your RRSP or RRIF can allow them to transfer those assets into their own RRSP/RRIF without an immediate tax liability. Other estate planning tax management strategies you might consider include gifting assets to your heirs during your lifetime to cover taxes that might arise when you pass away.
Charitable giving may also yield valuable tax benefits. For example, making a large bequest in your Will to an eligible registered charity could yield a sizable tax credit. That may help to offset some tax liability owed on your final tax return.
5. Trusts
A trust is a legal arrangement in which you transfer an asset or assets to a trustee for the benefit of one or more of your beneficiaries. There are two main categories of trusts you might consider:
- Testamentary Trust - Established in your Will or by court order and takes effect once you pass away.
- Living Trust or Inter Vivos Trust - Any type of trust that is not a testamentary trust. These trusts are created and funded while you're still living.
A trust can be revocable (meaning its terms can be modified), or irrevocable (meaning its terms are permanent). Trusts can offer more flexibility and control for estate planning, as you can specify how you'd like your assets to be managed and when they should be distributed to your beneficiaries. A trust can also offer privacy as it does not go through probate or become part of the public record. Those are all features you might appreciate as you work toward growing wealth.
*Depending on the province/territory, the term used to describe a Power of Attorney document for property that can be used during the donor's incapacity may vary. Some provinces/territories may refer to it as a “continuing" or “enduring" Power of Attorney. In Quebec, it is referred to as a “Protection Mandate." Please consult with your qualified legal advisor.
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This article originally appeared on the RBC Healthcare - Advice & Learning