Estate Planning: Traditionally refers to the planning of your affairs with regard to your property.
Property Includes: Real Estate (real property) and moveable or personal property (chattels-which includes clothing to investments).
Two Main Categories of Planning
NOTE: Both Testamentary and Inter vivos planning involve legal formalities and legal and tax consequences. It is recommended that in carrying out this form of planning you obtain legal, accounting and investment advice.
- FOR DEATH (TESTAMENTARY) - Typically involves the use of:
Jointly held property (Joint Tenancy)
- WHILE ALIVE (INTER VIVOS) - Typically involves the use of:
Powers of Attorney
Inter Vivos Trusts
Two Things to Consider When Estate Planning:
- A WILL
- POWER OF ATTORNEY
What's the Difference?
A practical explanation is that a Power of Attorney allows you to appoint someone to manage your property up until your death. While a Will allows you to appoint someone to manage your property after your death.
Why See a Lawyer?
Seeing a lawyer about doing a Power of Attorney and/or Will is normally a good investment, under the old saying "an ounce of prevention is worth a pound of cure." Most lawyers will prepare a simple set of Wills and Powers of Attorney for a couple for between $400.00 - $600.00. Typically the person who finds themselves with defective Wills or Power of Attorney, or is required to manage someone's money without either of the two find themselves required to obtain a Court Order in order to correct the problem. In terms of money the cost of straightening out such errors in straightforward cases often run in the $2,500.00 to $5,000.00 range.
The problems that are often found with Wills or Power of Attorney done with the do it yourself kits are as follows:
- Failure to meet the strict formality requirement, particularly execution (signing); and
- Failing to understand the significance or risks associated with signing the documents and being advised of possible measures to minimize the risks.
Unfortunately, most of these problems are identified after it is too late to do anything about them, i.e. the person is either incapable or dead.
Common Mistakes in Wills
- Improper execution (signing) of the will, particularly witnessing and usually result in the will being invalid.
- The failure to properly appoint executors (persons appointed to look after your property).
- The will does not dispose of all the property (usually caused by the will failing to contemplate certain events leading to the failure of bequests [gifts], a typical example is the death of a beneficiary).
Common Mistakes in Attorneys:
- Improper execution.
- Failure to understand the power being given to the Attorneys.
Why Your Should Have a Will
In the absence of a Will, the Succession Law Reform Act, R.S.O. 1990, c. S. 26 ("SLRA") governs who gets your property on death by imposing what is best described as a "STATUTORY WILL" (referred to as "intestate succession"). The SLRA distributes your property on a formula based on who your nearest living relatives are. The most notable aspects of the act are as follows:
- The following examples illustrate some of the distribution provisions of the act:
- Where you die leaving a spouse and no issue (issue means descendants, namely, children, grandchildren etc...), your spouse is entitled to all of your estate;
- Where you die leaving a spouse and children your spouse would be entitled to the first $200,000.00 of your estate (this amount is updated by regulations every few years). This amount is called the "spousal preferential share". The amount in excess of the spousal preferential share is split between the spouse and issue, on the following basis:
- Where there is one child or deceased child with issue, the estate is split in two equal halves between the spouse and issue; or
- Where there is more than one child and/or deceased children with issue then 1/3 of the excess is given to the spouse and the remainder split between the issue based on a formula which divides the estate into the number of children.
- If a person dies without a surviving spouse or issue then their estate is given in equal shares to their parents, or parent if only one is surviving;
- If a person dies without a surviving spouse, issue or parents then their estate is distributed among their siblings (brothers and sisters) and if any of their siblings die leaving children their share is divided among their surviving issue according to a certain formula in their place; and
- In the absence of any of the above provision applying the statute goes on to search for next of kin in a certain priority and if none exist then the property escheats (goes to) the Crown (Government).
- The scheme of distribution under the act fails entirely to recognize certain family relationships when determining who is entitled to a share of the estate of an intestate person. These categories of people are legally strangers to the deceased for the purposes of the act and include the following people:
- Common Law Spouses (unmarried spouses);
- Step Children; and
NOTE: The obvious warning here is that where you have either no will or an ineffective will and you have engaged in retirement planning with your spouse, your entire efforts or intent for the survivor to be supported by the estate that you both of built up could be frustrated if, you have children or the person is a common law spouse.
Marriage and Divorce
If you marry, any previous will becomes invalid unless it contains special provision dealing with the actual marriage. If you Divorce, gifts to your former spouse become are treated as if spouse predeceased you. If your are simply separated than the law continues to treat you as married until Divorced. All of these provisions can be overridden if there is a will drafted to the contrary.
Special care should always be taken with children under the age of 18. There are two aspect to this issue. Firstly, providing a guardian for a child and secondly, providing for the financial support of a child. The law does require and hold estates responsible for any dependants especially children.
Children are normally under the care of their parents. The parents should make plans for the care of the children in the event that both parents, or in the case of a parent having custody of a child were the other parent is incapable of looking after the children for someone to care for the children in the event that the parents die. While the Court always has the final say in matters concerning children, the most common practice is for the parents to provide for a Guardian in the Will along with some form of memorandum incorporated into the will giving the reasons why the parents have chosen a particular person. The courts generally respect the wishes of the parents expressed in the Will assuming that the parents have carefully considered the matter.
With regard to the obligation of the parent to support children, after the death of a parent, the estate assumes the parents support obligations. If a persons Will has not made adequate provision for the children than the courts often effectively Order that monies be taken out of the estate to provide for the children. Consideration therefore should be given to how children are going to be provided for, both in terms of out of the current estate as well as perhaps life insurance. In order to avoid any problems with the Office of the Children's Lawyer taking over the money, provision should be made in the will or other documents for setting up either a payment plan (i.e. who the money is to be held by), or a more sophisticated trust depending on the circumstances.
If a person has been supporting any other family members, including persons who are not minor children, like in the case of children their estate may be obliged to continue to provide support. Examples often include spouses, adult children still in school, or incompetent adult children. The Dependants relief provisions are more broadly defined with regard to the persons entitled to apply and as such common law spouses and step children can be included in this category. Like minor children the persons estate assumes this liability for the support of these persons. Like minor children this should be both considered and planned for and is treated the same way by the courts.
Family law Act Claims
While not frequently a problem with married couples who are leaving the majority of their property to one another this is a factor which must be considered. Basically, the Family Law Act, R.S.O. 1990 c. F.3, provides that spouses are to share equally any increase in net worth during the course of their marriage, except inheritance and gifts. Upon death or separation a spouse in entitled to apply for what is called an "equalization". In an equalization the value of all the property acquired by the spouses since the marriage is totalled and the spouse having the smaller share of the total increase is entitled to payment from the other spouse of an amount which makes their share of this increase equal (½ the difference). A problem could arise for example if a husband owning more property decided to leave it all to the couples children, in which case the wife could apply for an equalization and perhaps also claim dependants relief. If this is done and the Will did not contemplate an application, the wi fe could get both the entitlement under the Will and under the Family Law Act.
Basic Consideration before Doing a Will
- Find executors willing to act and provide for at least one alternative set of executors (note that you should discuss with them any preferences regarding funeral arrangements);
- Ascertain any dependants you have and consider how you are going to meet your obligations to them;
- Determine any specific bequests (specific gifts of property or money) you wish to give and provide at least one set of alternatives; and
- Determine the general scheme of distribution of your estate and provide for at least one alternative.
Why One Should Have a Power of Attorney
The main purpose for having a Continuing Power of Attorney for Property is to permit you to select a person to look after your financial affairs if you are either unable to do so physically or are incompetent. If you became incompetent without a Power of Attorney your family would not have the right to look after your finances for you. In their place the Government and more specifically the Public Trustees Office would have that right. The Substitute Decision Act, allows people to apply to replace the Public Trustees Office in a certain order of priority. Usually based on closeness of relationship and competence.
The disadvantage of relying on an Application under the Substitute Decisions Act to look after your affairs are as follows:
- The person whom is appointed may not be the person you wished to look after your affairs;
- The process is expensive and time consuming;
- The process is potentially embarrassing and even harmful for person that are close to the line in terms of competence as it tends to bring things out in the open as far as their mental ability goes; and
- It imposes ongoing financial burdens on the "Guardians" and "Estate" in the form of Bonds and passing of accounts which must be prepared.
NOTE: An Attorney under a Power of Attorney typically has the power to do anything you can do with your property except making a Will. In most Attorneys this is the case once the document is signed. The practical risk is that they could sell all your property against your wishes and the only recourse you would have is to sue them to recover the property, whereas you normally could take action also against the recipient as well. Putting in place safeguards often ends up triggering the involvement of the Public Trustees Office, so some thought should go into the risks and how what countermeasures can be taken.
How to Select an Executor or Attorney:
The keyword here is TRUST. You should ask a person you wish to appoint as an Attorney or Executor if they are prepared to act for you, and you should also trust them. There are two aspect of this trust you should consider:
- You should trust them as a person in regards to their honesty; and
- You should trust their judgment.
The reality of the situation is that you also have to consider the age of the people your are appointing. In all cases they must be the age of majority. However, another important consideration is the fact particularly as Attorney that they may have to carry out their duties for some time and as a result you may wish to consider their longevity and health. As a practical example, as a 50 year old with children in your early 20s you may trust your children's honesty but you may wish friends of your own age to be your Attorney's owing to greater financial management experience for example. However when your children reach 30 it may be reasonable to then make a new Attorney appointing your children. In the case of a Will with no trust, this may not be a concern as there is no real financial management requirement. Also these problems can sometimes be solved by multiple and alternative appointments.
TRUST: Means a right of property held by one person ("Trustee") for the benefit of another ("Beneficiary").
Three Basic Types of Trust:
- EXPRESSED - Usually a written trust, specifically created.
- CONSTRUCTIVE - Created by law, usually imposed by Court in situations where one part is vulnerable to the conduct of another (not unusual between family members)
- RESULTING - Implied by law from the fact (usually arises when property is given by one person to another for no consideration)
The only type you can use to plan with is an expressed trust as the others arise from circumstances.
Trusts originated with "USES" which was similar in concept and was used primarily to avoid succession taxes in England.
Principle Uses of a Trust:
- To pass wealth on in a family to multiple generations
- Minors or incapable persons
- Creditor/Asset protection
Basic Rules Imposed on the Trustee:
- The Trustee and Beneficiary cannot be the same person
- The Trustee does not have the benefit of the ownership of the trust property (some exceptions) NOT OWNERS OF THE PROPERTY
- The Trustee must act with an even hand between beneficiaries
- Must act reasonably and prudently with trust property and in some cases the types of investments allowed are restricted
Two Types of Trust for Tax Purposes:
- TESTAMENTARY (Created as a result of the donor's [person giving property] death) the advantage of the testamentary trust is that it is taxed as if it is a person at marginal rates (the percentage of tax paid fluctuates with income like your personal income tax).
- INTER VIVOS (Created by a living donor during his/her lifetime) the disadvantage is that any income in the trust is taxed at the highest tax bracket regardless of the trusts income.
It is more difficult to create a tax advantage from an inter vivos trust and therefore it is appropriate if doing so consult an accountant, particularly with a large trust.
- When you die you are deemed to have disposed of all your property giving rise to capital gains on death, therefore the following should be considered:
- Taking advantage of spousal rollovers; and
- Is there enough money in the estate to pay tax.
- There are probate fees incurred in obtaining administration of an estate that goes up on a sliding scale. A word of caution however, income tax consequences of dispositions may be much greater than probate fee consequences and some people trigger much higher taxes in order to avoid probate fees. A good example is the elderly parents or parents who put their house in the name of children in order to avoid probate fee, thereby losing a principle residence exemption. Also the tax liability on a property may be significantly less when disposed of by the original owner than it will be if donated to someone else.
- Trusts are only allowed to continue 21 years beyond a person alive when the trust is set up and therefore the property must be disposed of within that time period.
- There are new deemed realization rules for Income Tax triggering a deemed realization of Capital Gains every 21 years.
- Long term trust often have problems in that they fail to anticipate changes which often occur in the families circumstances, with careful drafting this risk can be greatly reduced.
- In normal circumstances, for example a spendthrift trust you cannot hold property in trust solely for one competent adult as the only beneficiary, therefore in order to keep a trust alive you must have other beneficiaries.
- Problems with simple trusts:
- Investments are restricted to authorized trustee investments;
- You cannot encroach on the Capital; and
- Cannot substitute beneficiaries or trustees.
- Problems frequently arise in trust that are long term, with good advise and drafting they can be designed to meet most of the contingencies. Further, if testamentary trusts in particular a good set up from the beginning is important, for example splitting trusts up if possible to take advantage of the marginal tax rate.