We all know death is inevitable. This bit of grim wisdom is front and center in the well-worn phrase, "the only two certainties in life are death and taxes." And yet, even though we are aware of the inevitability of death, I still find it surprising how few of us plan for it.
Estate planning is basically accounting for all of one’s assets and making sure that they will transfer as smoothly as possible to the people or entities to whom you wish to bequeath them upon your death. This is a very meaty subject and so I want to share some of my Coles notes on how you can best prepare for your exit.
- Have a financial plan and update it each year. I will discuss financial planning in the next blog in greater detail. For now, though, I want to say that a financial plan is a great starting point because it gives you a reasonable idea of what your estate will be worth each year.
- Make sure that all of your registered accounts (RRSPs, RIFs, LIRAs, LIFs, TFSAs) that can have a beneficiary have the correct beneficiary. Not only the right person, but the right spelling and legal names. All these little details can cause delays in distributing assets. Registered accounts can have multiple beneficiaries and registered charities can be listed as a beneficiary. If a beneficiary is properly listed on the account, the money can be distributed immediately and directly to your beneficiary when you die. There is no waiting for the will to be probated (probate is the process by which a judge verifies the validity of the client’s final will). The costs of the probate process are charged to your estate to the tune of 1.4%. This is why distributing your assets to the beneficiaries outside of the probate process can be so appealing. If there is no beneficiary listed on the registered account, then the account defaults to the estate, which means that the assets will be probated and the probate fee will apply.
- Make sure you have the three most important legal documents that are up to date and reflect your wishes: a will, a power of attorney, and representation agreement. Research has shown that more than half of Canadian adults do not have a signed will! Dying without a will, called dying intestate, means that your survivor will be required by law to go to court to have someone appointed who will manage and distribute your estate. This will cause delays, be more costly, and likely lead to a court deciding who gets what. Yikes! If you don’t have a will please make it a priority to get one! The Power of Attorney document is also critical as you are appointing an individual to make financial decisions on your behalf should you become incapacitated while living. That’s a lot of responsibility. Clearly, your Attorney has to be someone you completely trust to act in your best interests! Hopefully, they will also outlive you to carry out your wishes. Finally, the Representation Agreement outlines your wishes with respect to your health such as incapacity, end of life and other support decisions.
- Understand what taxes will be triggered and owing upon your death and consider ways to minimize them. Registered accounts (with the exception of the TFSA) are deemed as sold on the date of death and the market value is treated as additional income in the year of death. For example, if there is $100,000 in a RIF, then $100,000 would be added to the deceased’s annual income (from all sources such as CPP, OAS, investments, etc) and the total amount would be taxable. The exception to this treatment is if there is a spouse. In that case, the RIF would rollover tax free to the surviving spouse. One way to minimize this tax is to take out more than the minimum required from a RIF in lower income years and to consider drawing the maximum from a LIF if you have a large one. A financial plan will show you whether there is a good opportunity for either strategy. A TFSA is truly tax free so there is no tax to be paid upon death. Make sure you always keep it maxed as it is a very valuable and one of the last tax shelters available. A non-registered account does not have a beneficiary so it will be probated and subject to probate tax. All capital gains are also deemed as taken on the date of death and will have to be reported on the deceased’s final tax return. RBC now has a special non-registered account that is called a Joint Gift of Beneficial Right of Survivorship (JGBRS) that allows a sole owner non-registered account to name successor account holders. It is ideal in certain circumstances as it allows the account to not be included with the assets to be probated. Finally, as I discussed in my last blog, one common use of permanent life insurance is to pay final taxes. I find clients quite divided on this application though. Some hate the idea of taxes eroding their estate and, as a result, buy permanent insurance. Others think that their heirs should be happy to get anything once they are gone!
Remember, if you don't already have your estate plan in place, it is not too late to start!