10 Things to Consider When Planning Your Estate
The term “estate planning” could be defined as accumulating and managing assets while you are living, and providing for the transfer of those assets to other persons or entities, both during your lifetime and afterwards. Thus, it concerns the remainder of your life as well as beyond your life.
Here are ten things, in varying detail, that constitute an estate plan. Appropriately, the first pertains to your personal security.
Assure that you have enough money to be able to live as you would like, now and in the future.
Providing sufficient income for retirement is a particular challenge in these times. Although the stock market has performed better recently, many people have seen slow growth in account balances, particularly on fixed-income investments with interest rates near an all-time low.
Appropriate investments depend of your circumstances and stage of life, but here are some general principles, understanding that the specifics should be determined in consultation with your financial advisor.
- If you are still working, invest as much as possible in an RRSP
- or other plan available through your employer.
- In addition to what you invest in a retirement plan, try to build other investments such as securities and real estate. Of course, if you are already retired, additions to you investments may be difficult and unnecessary.
- Once you reach retirement, spend each year only a sustainable percentage of your total assets. This percentage will depend on your age when you start drawing from those investments.
- For your portfolio of securities, choose an asset allocation appropriate for your age. For most people, as they grow older, this will mean increasing the percentage of fixed-income investments and cash equivalents, and focusing on dividends rather than growth potential when choosing stocks.
- Diversify your investments so that you are not so vulnerable if certain stocks and bonds do not perform well.
Have a will (and possibly also a trust) to make sure your estate passes according to your intentions.
An up-to-date will is the highest priority of an estate plan. It enables you to arrange for the distribution of your estate according to your wishes and to choose the person(s) or institution to administer your estate.
If you do not have a will, your assets will be distributed according to the intestacy laws of the province where you reside, and these may or may not coincide with your wishes. In the Province of Manitoba, your estate would be divided as follows:
- If you have a spouse and no issue, your spouse would receive everything.
- If you have issue but no spouse, your issue would receive everything.
- If you have a spouse and issue, and all of the issue are also issue of your spouse, your spouse would receive everything.
- If you have a spouse and one or more issue, and one or more of the issue are not issue of your spouse, your spouse would receive $50,000 or one-half of your estate, whichever is greater, plus one-half of any remaining estate, and your issue would receive the balance.
- If you have no surviving spouse or issue, your father and mother, or the survivor of them, would receive everything.
- If you have no surviving spouse, issue, father or mother, your siblings or their issue would receive everything in equal shares. If none of them survive, your estate would go to your grandparents, and if they are not living, then to their issue.
The term “issue” refers to children, grandchildren, etc. Any amount going to children would be equally divided among them, and a deceased child’s share would go in equal portions to his or her children.
It should be noted that if you are not legally married but have a common-law partner, that partner will be treated like a spouse in the distribution of property. Also legally adopted children are treated the same as biological children.
The laws if intestacy vary by province, but with some variation would generally be similar to Manitoba’s.
You will expedite the process of drafting a will, if, prior to meeting with a lawyer to discuss your will, you think about your objectives, prepare an inventory of your estate, list preliminarily the beneficiaries of your estate, and consider whom you would like to be your personal administrator and who would be guardian of your minor children (if applicable.)
Remember that a will is much more than a legal document. It is a testimony to you inner will – the central values and commitments that have emerged from a lifetime of learning, growing, and working.
If you have a will which has been in existence for a number of years, review it with your lawyer to make sure it still expresses your wishes. Circumstances change. The value of your estate may have changed significantly; children may have been born into the family; named beneficiaries may have died; you may no longer own property mentioned in the will; a person named as your administrator may have become incapacitated; you want to provide for additional persons or for charities.
Be aware of the process of administering an estate and carefully choose the person(s) and/or institution responsible for administration.
The process by which a court validates a will (if one exists), confirms what the estate assets are, what debts and expenses are to be paid, and how the remaining assets are to be distributed is called “probate.” This process goes much more smoothly if you have executed a will and named your personal administrator. Otherwise, the court will appoint the administrator. Note that a personal administrator who is named in a will is also called an “executor” or sometimes “executrix” in the case of a female.
Many people name a relative or close friend (i.e. someone who knows them well and who is likely one of their heirs). Others designate a professional administrator, such as a trust company, because it has expertise in the administration of estates, and because a neutral administrator may avoid family strife when there are a number of children. It is possible to name co-administrators – two family members or a family member and a trust institution. The latter option has the advantage of combining expertise with intimate knowledge of family dynamics.
Keep in mind that your probate estate (what your will governs) is only part of your total estate. Your probate estate includes property owned in your name alone, property owned by you and others as tenants in common, payments owed to your estate because of your death, and proceeds payable to your estate from life insurance policies and retirement plans.
There are many other assets which are part of your total estate because you had an interest in them, but which are not governed by your will. Your interest in those assets passes to others by law or beneficiary designation. These assets include:
- Real estate and bank accounts held in joint tenancy.
- Bank or brokerage firm accounts payable or transferable at death.
- Life insurance proceeds payable to named beneficiaries.
- Retirement benefits paid to a spouse, children, or other beneficiaries.
- Property held in trust.
- Property given to a charity in exchange for a life income arrangement.
- Bank and brokerage accounts payable on death to named beneficiaries.
In planning for the disposition of your estate, you must integrate your probate and non-probate assets. Otherwise, there may be some unintended consequences.
Consider a trust.
A trust is established when a person (the “settlor,” also called the “trustor”) either while alive or by will, transfers assets to a person or institution (the trustee) that manages the assets and distributes income and principal to one or more beneficiaries pursuant to a written trust instrument.
A trust can be established either for a term of years or for the lifetime of one or more beneficiaries, and it can be established during your lifetime or at the end of your life by direction of your will.
A trust can offer the following benefits:
- Expert management of assets.
- Privacy because the contents of the trust are not available for public inspection as a will is.
- Avoidance of probate fees since the trust is not subject to probate.
- Convenient way to provide for a family member or friend to whom you would prefer to give a stream of income instead of a lump sum.
- In the case of a charitable remainder trust, provision for both individuals and a charity and tax savings.
Often, married individuals create spousal trusts. A spousal trust is normally created at the death of one spouse to benefit the surviving spouse. The deceased spouse would have made a provision in the will that some or all of his or her property would be placed in trust. The surviving spouse would be entitled to all of the net income. None of the capital can be distributed to anyone other than the spouse during the spouse’s lifetime. At the death of the surviving spouse, the remaining principal might go to the children, charity, or both.
A spousal trust has these advantages:
- Expert management of assets is provided for a spouse who may not have experience in financial matters.
- The deceased spouse controls the ultimate disposition of assets.
- Taxation of capital gain in property transferred to the trust can be deferred until the death of the second spouse or earlier sale by the trustee.
Provide for the possibility that an accident, serious health condition, or declining mental capacity will render you incapable of managing your affairs.
With a power of attorney you can delegate responsibility. The power can be limited and specific. For example, you might give someone the power to sign for you at a real estate closing when you cannot be present. It could also be general, covering a wide variety of potential transactions and responsibilities.
An “enduring” power of attorney authorizes a person or an entity (such as a trust company) to make the necessary financial and legal decisions for you in case you become mentally incapable. For the power to be enduring, the document must say that it will continue in effect when you are no longer able to make decisions for yourself.
You could also give a person a power of attorney solely for health care decisions. You still make those decisions so long as you are able, and the power only becomes operative when you are unable to act for yourself. Some people like the idea of having one person in charge of financial affairs and having someone else, who is less likely to be preoccupied with saving costs, make decisions about long-term care, etc.
With an Advance Health Care Directive (also known as a “living will”), you can make known in advance your choices regarding the medical treatment you do and do not want in the event you become unable to express your choices. The living will is different from a power of attorney for health care decisions. The former pertains to your wishes regarding life-sustaining procedures, while the latter covers, more generally, decisions about your care.
Make a list of tangible and digital property and indicate who is to receive each item.
Tangible property refers to jewelry, dishes, albums, and items other than real estate and investments. If these were designated in your will, the will would have to be revised every time you purchased or sold an object or changed your mind about its disposition. To prevent this and preserve flexibility, you may prepare and sign a list of tangible property, indicating who is to receive each item at your death. You may alter the list from time to time, making sure that each alteration is properly signed and dated. The list should be referenced in your will. If you want to leave all items of tangible personal property to your spouse, you could state this in your will and provide that tangible property is to be distributed according to the referenced list in the event you are not survived by your spouse.
Digital property refers to assets and valuable information accessed online through passwords. Increasingly, people bank and pay bills online, and have online contracts. It is important to leave in a secure location, such as a safe deposit box, the list of pertinent websites and passwords to access them. Otherwise, your executor may overlook valuable assets.
Review the beneficiary designations of your life insurance policies and retirement plans and make changes if necessary.
Sometimes a person updates a will but neglects to update beneficiary designations of life insurance policies and retirement accounts. Those designations may be the same as when the life insurance policy was purchased or the retirement fund was established, but they are no longer appropriate. It might also be time to reassess your life insurance needs. When your family was young and you had not yet accumulated much of an estate, you probably purchased term insurance to provide maximum family protection at minimum cost. Later, you might have purchased life insurance to secure a business loan or to provide estate liquidity. Some of these policies may have been whole life or universal life, and they now have considerable cash value. Review them with your financial advisor or insurance agent to see what changes should be made at this stage of life, taking into consideration your other assets.
Leave a letter or other record to the person who will administer your estate listing all of your investments and indicating the location of all documents.
This will make it easier for your administrator and will ensure that all of your property is accounted for and that your wishes are followed. The letter may also contain instructions about funeral arrangements following your death. The latter should, of course, also be conveyed to family members. Such instructions are sometimes stated in the will, but the letter provides an opportunity to amplify them and note wishes regarding a memorial service.
There are unclaimed death benefits from policies which survivors did not know existed, and there are also bank accounts and safe deposit boxes which the decedent had not revealed and an executor may not discover. A letter stating the location of all investments and documents will assure that everything you own is found and distributed as you intended.
Anticipate and prepare for payment of taxes that will be payable at the end of your life.
Unlike the United States, Canada does not have transfer taxes on gifts and bequests. However, in Canada a person is deemed to have disposed of all property the moment before death. This means that the includible portion of capital gain (currently 50 percent of it), with certain exceptions, is taxed on your terminal income tax return.
The exceptions are capital gain in your principal residence and in property that goes directly to your spouse of to a trust for your spouse. In the latter instance, the gain will not be taxed until the property is sold by the spouse or trustee or, if not sold during the lifetime of the spouse, at his or her death.
Suppose, for example, that a single person dies on August 31, and her income for the year up to that point from investments and pensions was $50,000. She owned stock and real estate, other than her principal residence, worth $500,000 with a cost basis of only $200,000, and she had an RRIF with a balance of $275,000, which went to children by beneficiary designation. The taxable portion of capital gain would be $150,000 (50 percent of $300,000), and total income reported on the terminal income tax return would be $50,000 + $150,000 + $275,000 = $475,000. The tax payable would have to come from estate assets, which would, of course, reduce the amount available for estate beneficiaries.
In this instance, the estate had sufficient liquid assets to cover the income tax. Liquidity can be a problem if you own a lot of real estate or other illiquid assets. Sometimes people purchase life insurance to provide the liquidity for taxes that may be due, particularly if they would like to pass the illiquid assets intact to heirs. The death proceeds from a life insurance policy are tax-free.
You should be aware of the fact that while your estate is in probate, an income tax return must be filed each year for the estate, reporting income earned on estate assets.
Think of charitable organizations that have been important in your life and embody your values to which you may want to make legacy gifts.
As you engage in estate planning, you will want to consider what portion of your estate you want to give to charity. Your decision will, of course, depend on the size of your estate and the needs of your family. Some individuals discover that they can provide adequately for loved ones and still have something left for institutions they admire.
Sometimes, through wise planning, it is possible to design a gift so that you not only help others in your community and beyond but also save significant taxes and provide for your family security. Below are brief descriptions of some ways of making legacy gifts. If any seem appropriate for you, discuss them with your legal and tax advisors in light of your estate plan. A representative of the Winnipeg Symphony Orchestra can answer your questions about any gift plan and provide a financial illustration tailored to your situation, which you may then discuss with your advisors.
If you have no family members for whom you need to provide, or if your estate is more than adequate to provide for surviving family members, then consider a provision for charity in your will. If you already have an up-to-date will, you may simply add a codicil (amendment) to that will without going to the expense of having a new will drafted. The bequest could be a specific amount, a particular piece of property, or a portion of whatever remains after all taxes, expenses, and other bequests have been paid, and it will result in a tax credit on your terminal income tax return. To maximize the tax benefits, empower your executor to select the estate assets to satisfy the bequest. The executor can then select the most highly appreciated listed securities for the gift, and none of the gain in those securities will be taxed. You may designate the purpose of the gift, and if it is a certain size you may create a named, permanent endowed fund that will memorialize your connection with the Winnipeg Symphony Orchestra.
If you want to leave bequests to both family members and the Winnipeg Symphony Orchestra, and you have an RRSP or RRIF, consider naming the Winnipeg Symphony Orchestra as a beneficiary of all or a portion of whatever assets remain. Your tax credit will offset the tax on the retirement funds paid to the Winnipeg Symphony Orchestra, and you will have made the gift tax-free. However, in some instances, as noted above, it could be more advantageous to empower your executor to make the gift with appreciated securities.
If you have a life insurance policy which is no longer needed for family protection or estate liquidity, consider naming the Winnipeg Symphony Orchestra as owner and beneficiary or as beneficiary only. If the Winnipeg Symphony Orchestra is made owner, you will be entitled to a donation receipt for the value of the policy and any premiums you subsequently pay. If you merely make The Winnipeg Symphony Orchestra the beneficiary, retaining the right to change the beneficiary or access the cash value, you would receive no donation receipt now. However, if the death proceeds are paid to the Winnipeg Symphony Orchestra, a tax credit would be allowed on your terminal income tax return.
If you are at or nearing retirement age, and you would like to make a significant gift, but you can’t afford to give up income from any of your investments, consider a life income plan. One such plan is called a gift annuity. It pays a fixed amount to one of two persons for life. Another is the charitable remainder trust, which would pay the net income earned on trust assets to you and/or another beneficiary. With either plan you receive a donation receipt resulting in a tax credit. You may also create either of these plans under your will to provide for survivors.
If you have an adult child, who is not prudent with money, or a special needs child, who will always need support, and you would like to make a charitable gift, create a charitable remainder trust, either during your lifetime, or under your will, to provide for that child. The improvident child would receive a legacy in the form of life payments without the temptation of a large lump sum. In the case of the special needs child, payments from the charitable remainder trust could supplement support from other sources.
There are other charitable estate planning arrangements not discussed here, but this list at least demonstrates that a legacy gift can be designed so that it not only advances the mission of the Winnipeg Symphony Orchestra but generates substantial financial benefits for you.