By: Douglas Gray, LL.B.
Two out of three adult Canadians do not have a will. Over 50% of them have children. One out of four Canadians will die suddenly. You can’t take the risk that the CRA will end up with more money because of poor tax and estate planning and lack of a will. However, there are some classic pitfalls to avoid when preparing your will and doing your estate planning. Here are just 10 of the many pitfalls for the unwary and unprepared.
1 - Not Updating your Will. Many people do up a will and forget about updating it. So much can change in terms of your circumstances, assets, beneficiaries and wishes that you need to review your will on an annual basis at a set time, eg. your birthday, the first of the new year or some other memorable time. Also review your will when any major change occurs in your life, eg. divorce; death of a spouse, executor or beneficiaries, etc.
2 - Not Selecting the Right Executor, Trustee, or Guardian. Being an executor of a will can be very time consuming, stressful and complex. Many people are inappropriate choices for that responsibility. Some people don’t even ask the executor if they are prepared to assume that role, they just name them in the will, or the executor predeceases them or moves to another province or country. Consider the benefits of using a trust company as an executor or co-executor and having an alternate executor. You want to avoid hassles that will leave negative memories.
3 – Not Having Sufficient Financial Resources to Cover Taxes, Expenses and Debts. Poor estate planning could result in the estate being drained at death, leaving little, if any, assets left for distribution to beneficiaries. There are ways of minimizing this risk by advance planning. For example, holding assets in joint names, gifting before death, having designated beneficiaries of life insurance policies or RRSP/RRIF’s, and having sufficient life insurance. Premiums for insurance, to cover anticipated capital gains tax for example, could be paid for by yourself, or by those who will be the major beneficiaries of an asset triggering capital gains tax, eg. family cottage or shares in a business.
4 – Not Taking a Strategic Approach to Estate Planning if you Own a Small Business. If you are operating a small business and die, there are many negative implications that could result, unless proper planning is done. For example, if your business goes under, your estate could be depleted due to claims by business creditors, or because you signed personal guarantees to lenders, suppliers or a landlord. You should consider a buy/sell agreement secured by insurance, so that the company has sufficient resources to pay your estate out. There are many other strategic options to separate your personal assets from business exposure. In addition, you should consider estate freezes.
5 – Not Taking the Necessary Steps to Protect Your Estate from US Taxes. If you own any US real estate (eg you are a seasonal “Snowbird”, or have vacation or investment property), US publicly-traded stocks and bonds, or certain other kinds of US assets, you need special tax planning strategies. Properly done you can save most if not all, of any U.S. estate taxes otherwise applicable. Otherwise, your executors could end up paying US estate tax at the time of your death that could be as much as 50% of the market value of your US assets, with little or no tax relief against the Canadian capital gains taxes that become payable upon your death.
6 – Not Adopting an investment strategy for your RRSP’s and other investment portfolios that is consistent with your estate planning goals. Without proper investment planning and implementation, there might not be enough assets in your Estate to accomplish all of the bequests that are set out in our will.
7 – Not Understanding and Utilizing the Benefits of Trusts. There are many types of trusts that can go into effect during your life or on your death, that serve a variety of different purposes, all relating to saving on taxes or providing for others, eg. Trusts for minor children are set up to look after the needs of your children until they are adults.
8 – Not taking full advantage of second property tax strategies. If you own a vacation home, you want to set up tax planning strategies to minimize or eliminate the tax consequences of leaving the property to other family members.
9 – Not Preparing and Updating a Personal Inventory and Information List. This step is very important. Many executors do not have any information available, which results in frustration, delay, expense and potential legal problems. You need to prepare a current, complete and accurate outline with details, of your financial and personal information and update it as circumstances change. For example: assets, liabilities, income sources, personal and family information, names of key contact people and advisors, insurance policies, funeral wishes, business information and special instructions or guidelines for the executor. You don’t want to leave unanswered questions.
10 - Not Obtaining Professional Tax and Legal Advice. With customized strategic tax and estate planning techniques, you can definitely maximize the net assets available for those you want to remember, by eliminating, minimizing, or delaying tax. You can also avoid potential legal problems, e.g. someone challenging your estate to obtain a financial benefit or increased benefit. There are special situations where customized tax and legal strategies are required, eg common-law relationship, blended families, etc. Skilled advice is cheap money for peace of mind and prudent planning. Otherwise, the government coffers could be significant and happy financial beneficiaries.