Estate Planning

What is estate planning and why you should do it?

Estate planning is in many respects, preparation for convergence of two of life’s inevitabilities Death and Taxes.  It focuses on minimizing the work and difficulties faced by executors while maximizing wealth passed to heirs.

Without planning, you could have a significant tax liability on death.  Because death and taxes occur at the same time you can easily find yourself being taxed in the top tax bracket with a significant portion of your estate going to Revenue Canada.

Wealth maximization/tax minimization

The first step of an estate plan requires you to decide on the estate’s purpose. Who are the beneficiaries–what family and non-family members, what charities? Should your estate be dispersed to beneficiaries on death or should it carry on? Are funds to be kept aside for a specific purpose, eg. a grandchild’s education? Are there assets you wish to be shared after death such as the family cottage?

Once the estate’s objectives are determined, a plan is designed and enacted to ensure the objectives are reached. Here, it is vital to assess the income tax consequences.  For tax purposes, you are deemed to have sold all your property at its fair market value on the day of your death. An exception is available when property is willed to a spouse. However, this is merely a delay, as the same issue will arise on the death of the second spouse.

The excess of proceeds over the adjusted cost base is a capital gain of which 50% is included when calculating the tax. If part of the property includes rental properties there may also be “recapture” of prior year depreciation claims.

As the “sale” is notional and really only calculated for tax purposes, you do not actually receive any cash and therefore the liability must be funded from other sources.  A worst-case scenario would cause a forced sale of a property or other asset to pay the tax bill. A forced sale is never a good idea and as well, this may be contrary to your wishes if you wanted to keep a particular asset intact.

The value of your RRSP or RRIF at the time of death is also subject to tax.  In this instance you can access cash by having the estate liquidate the holdings; however, the net estate value will be dramatically reduced because it will likely be taxed at the highest rates.

An effective estate plan will work to eliminate, defer and/or minimize taxes to the greatest extent possible. The plan will involve a lawyer (preferably one with experience in estate and taxes), a Chartered Accountant and a financial planner with experience in both the insurance and investment fields.

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Objectives
1

To plan for and accumulate capital required to provide you with enough financial resources and income to retire and live the life and lifestyle you desire for as long as you live.

2

To financially plan for health related contingencies such as disability, critical illness or long term care.

3

To minimize tax on your income, savings and investment returns during your life, and after your death.

4

To ensure that the immediate and long-term needs of your family are provided for in the event of your death or disability.

5

To preserve the value of your estate to the greatest extent possible.

6

To ensure your outstanding taxes, and final expenses payable upon your death are paid by your estate rather than being shouldered by your family.

Reasons to Review
1

Change in marital status (marriage, divorce or death) a family member or beneficiary.

2

Significant change in the income or the values of the estate’s assets.

3

Birth or death of family or near family members.

4

Change in health of yourself, your spouse or beneficiary.

5

Change in specific bequests.

6

Change in business conditions including execution of buy-sell agreements.

7

Changes in the form of ownership of a property.

8

Desire to change executor, trustee and/or guardian.

Organize Important Information

epd_thumbThis Estate Planning Directory is designed to help you organize important information about your personal and financial affairs. You’ll find it provides a convenient record and will be easy to update on an annual basis. As well, it will help your survivors wind up your personal affairs upon death in an orderly fashion.

Keep this record in a safe place along with your other important papers. Most importantly, please let your families know where it’s kept at all times. Please call me if you or your families have questions or concerns on any Insurance, Investment or Estate Planning matters.

Click here to download the full Estate Planning Directory.