Bill’s Blog |November 1, 2024
I recently attended an advanced Estate Planning conference in Vancouver, and it triggered the importance of discussing and developing a solid estate plan for clients. So, what is your estate? Here is the definition from Investopedia: An estate is everything comprising an individual’s net worth, including all land, real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.
There are two times when an estate value is of particular relevance: personal bankruptcy and when an individual dies. For this blog, we will focus on when a person passes away. What happens to the estate when a person dies? A lot unfolds once a person deceases, and depending on whether a person did estate planning, the consequences can vary greatly.
For starters, do you have a proper will that states what your last wishes are for all of your assets? Second, if you lose your mental capacities, who will act as your power of attorney to ensure your financial needs and obligations are fulfilled? Other important factors in a will are your wishes to either be buried or cremated. There are significant economic costs between burial and cremation, so how will these be funded? Have you considered a pre-paid funeral solution? Pre-paid ensures your wishes are fulfilled, and fully paid for and it removes a huge burden off the family or executor. A will can also clearly state what your desire is if you were to become fully unfunctional, and this removes the stress for the family in a crisis. Choosing the right executor is also critical. Being an executor has significant responsibilities, and be sure the person has the proper skillset to fulfill this vital role.
If you pass away without a will and die intestate, this will leave a huge mess for the family to clean up. Often, there are significant tax issues, burial costs, trustee fees, and legal and accounting costs. Who will cover all of these expenses? All estate planning requires time, finances and careful planning with optimal solutions. Sadly, only about 48% of Canadians have a will and even fewer do estate planning.
Many people falsely believe, “Well I have a will and all my estate planning is complete”. Having a proper will is simply one step in the process and there is still much work to be done. Depending upon your asset mix, not all assets or financial products are created equal when a person passes away. Without understanding how each asset is treated upon death, it will have colossal tax consequences. You must seek wise financial counsel from those who know the rules and can help you properly structure your estate. Depending on the size and complexity of your estate, having an estate accountant and lawyer with a financial advisor in estate planning is vital. Without planning over 50% of your estate can go to the tax man, a trustee and other professionals! If you are a business owner or professional there are many advanced strategies to mitigate taxes, but this requires planning. Know your options and understand the costs of deploying these strategies.
There are many things one can do if you are a Canadian to ensure your wishes for your estate are fulfilled. For example, if you leave all of your assets in the bank, they are 100% taxable upon death and will go into probate. Probate costs vary in each province, but there are also long delays (6 months to over 2 years) in settling the estate that can also be a big burden to your loved ones. Let’s say you have $100,000 left in a bank account upon death, well that asset is a deemed disposition and will be taxed at your margin tax rate. The government requires all taxes to be paid within 6 months. If you had just put the $100,000 (cash) in a life insurance contract, it would stay outside of the estate (Private) and be paid in full in most cases in about 30 days and without tax. The difference is huge to your possible wishes, as one is delayed and taxed, and the other is tax-free and paid out quickly to your beneficiaries. What would you prefer?
What happens to investment real estate or family vacation properties when the owner dies? I strongly suggest you understand the rules around real estate investments or they can be lost from the family forever. What happens to your pensions, RRSP and TFSA’s? What happens to business assets? There are many questions, and equally lots of potential solutions if you seek out the right professionals before you die. Do you want to leave a legacy to a cherished charity or grandchildren? Again to do this efficiently and mitigate tax this requires careful planning. So, if you don’t like the idea of leaving half your wealth to the government and other people, then please consider starting your estate plan today.
All the best,
Bill Westmacott: Owner, Life Insurance Broker in BC, financial educator and solution provider.