Estate-planning checklist

A pre-retirement review presents the ideal opportunity to revisit your client’s estate plan to ensure it is both up to date with any changes in your client’s life and reflects his or her priorities and long-term goals.

“An estate plan is about continuity, first through your various life stages and then through to the next generation,” says Gord Graves, vice president and national director of trust and wealth services at BMO Harris Private Banking in Toronto. “Clients should ask themselves: ‘What are the things in my life that I’ve accomplished that I want to see continue after me, whether that be a legacy left for children or perhaps to charitable causes’.”

Here are some key considerations to keep in mind when a client asks you about an estate-planning review:

– The will

The foundation of a good estate plan is the will. If your client already has a will, now is a good time to review it. If not, your client should take steps to get one as soon as possible. A will is the only way to ensure that your client’s assets are transferred to the next generation in an orderly fashion.

“Not having an estate plan and, in particular, not having a will, is the worst thing that a person can do,” Van Cauwenberghe says. Without a will, she adds, the courts will appoint someone – a family member or, possibly, the public trustee – to administer the estate and distribute the assets according to provincial intestacy rules.

And that process probably will not be in a manner consistent with what your client would have wished. There also may be higher costs associated with having an estate administered by a public trustee.

A key part of preparing a will is selecting the executor – often, a family member; sometimes, a trusted friend – who will administer the will and settle the estate.

It’s usually best for your client to select his or her spouse as executor, then name an alternate, says Matthew Ardrey, a Toronto-based consultant and manager of financial planning with T.E. Wealth, a subsidiary of Industrial Alliance Insurance and Financial Services Inc.

If there is no obvious candidate who is capable or willing to act as executor, then your client probably will have to arrange for a corporate trustee to serve in that capacity.

Another key part of the estate-planning process is nominating an individual to hold power of attorney (POA) for personal care and for property. The lawyer who prepares the will also would prepare the POA documents.

The will also could include indications of preferred individuals to be guardians of any dependents. Make sure these choices reflect your client’s current wishes.

In addition, the will may contain instructions regarding funeral arrangements.

“It helps relieve stress for the kids, and reduces disputes,” Van Cauwenberghe says, “because the client has made it clear what he or she wants.”

Most estate-planning advisors recommend that clients consult a lawyer who specializes in estate planning when devising the will, particularly in cases of complex estates. Says Van Cauwenberghe: “You need to work with someone who deals with estate-planning issues every day.”

Is your client, his or her spouse or one of their children a U.S. citizen or a U.S. tax resident? Does your client own property in the U.S.? Any of these scenarios is likely to mean that there are U.S. tax or estate implications for your client. A cross-border tax and estate-planning expert should be consulted in such cases.

The will should be reviewed regularly – some suggest every three to five years – or whenever there’s a major change in the person’s life, such as a marriage, divorce or the birth of a child.

– Probate

It’s important to take a holistic view of estate planning. Take stock of all of your client’s assets – including how they’re held, which affects their treatment at time of death.

Most estates pass through probate, a process by which the courts validate the will and confirm the authority of the executor to settle the estate. There are fees involved with probating a will, which, depending on the province and the size of the estate, may range from a nominal sum to around 1.5% of the value of the estate.

Your client’s registered plans, including RRSPs, tax-free savings accounts (TFSAs)and registered retirement income funds that have named beneficiaries, as well as life insurance policies, will bypass the estate and thus are not subject to probate. These investment vehicles also offer creditor protection (although not from the Canada Revenue Agency) and privacy because they are not part of the will, which becomes a public document after probate.

“A spouse should usually be named as the beneficiary of an RRSP or TFSA, because there’s a tax-free rollover at time of death to the surviving spouse,” says Warren Baldwin, financial planner and regional vice president with T.E. Wealth in Toronto.

When the surviving spouse dies, any money left in the registered plan will avoid probate but be regarded as income, and the estate will be taxed accordingly.

Some clients, such as business owners, could be well served by having more than one will, according to Tim Cestnick, president and CEO of Toronto-based WaterStreet Group Inc.: a general will to deal with most assets; and a corporate property will, through which certain assets that aren’t typically subject to probate, such as shares in the private corporation, could pass through.

“It can make sense to include certain types of assets in a separate will,” Cestnick says. “If you add those assets to your general will, they will be included in probate.”

But don’t place too great a focus on avoiding probate costs. Assets that pass outside the will avoid probate but may be subject to income taxes.

– Tax planning

Good estate plans are designed to mitigate the impact of taxes upon death and preserve as much of the estate as possible for the heirs. There are only a limited number of ways of doing so.

A tax return will be filed for the deceased for the year of death. That includes income earned that year up until death, plus the gain on the deemed disposition of the deceased’s assets. If there is a surviving spouse or a spousal trust in the will, the estate can be rolled over to the spouse or trust and the taxes on the deemed disposition deferred.

One way to deal with the anticipated tax liability is to include a gift to charity in the will. The estate will receive a tax receipt for the donation, which can be claimed as a credit against the taxes payable on the deceased’s final tax return.

Another way to mitigate the tax hit is to make sure that all capital losses are utilized. At death, capital losses can be claimed against all types of income – not just capital gains – and can be carried back to previous tax years (with some limitations).

It’s also a good idea to maximize the value of any principal residence exemption in cases in which there is more than one property that qualifies as the principal residence.

“It’s generally a good idea,” Cestnick says, “to designate as the principal residence the property that has the biggest capital gain per year of ownership.”

– Insurance

Your clients probably already have insurance as part of their overall financial plans. Insurance is an ideal estate-planning tool because assets in the policy grow tax-free, and proceeds paid to beneficiaries upon the policyholder’s death also are tax-free.

“It’s a tax-effective way to transfer your estate to heirs,” says Sam Sivarajan, head of investments at Manulife Private Wealth, a unit of Manulife Financial Corp., in Toronto.

Insurance policies often are included in an estate plan to provide proceeds to the estate to address the anticipated tax liability upon death. (See “Real estate,” below.)

“It’s a popular [strategy] for business owners,” Sivarajan says, “or anyone who is transferring specific assets that will have tax consequences on transfer.”

And, of course, life insurance as part of an estate plan can be used to, in effect, create an estate if the policyholder dies suddenly.

“One might still have a spouse and children to look after,” Sivarajan says. “You want to make sure they’re looked after until they’re able to look after themselves.”

– Trusts

Does your client’s estate plan include trusts? Trusts are commonly used as a way to maintain control over which beneficiary will receive certain assets, as well as when and how they do so. Trusts also may offer protection against creditors and against marriage breakdown should the beneficiary – typically, an adult child – go through a divorce.

Inter vivos trusts (a.k.a. “living” trusts) are created during your client’s lifetime. Testamentary trusts are created upon death according to the terms of the will. Both types can be used in estate plans, depending on the personal circumstances of your client and his or her goals.

Trusts are a great way to manage the transfer of assets to children or to other vulnerable beneficiaries. A trust may be set up to leave a child beneficiary certain amounts when they reach certain ages – say, when he or she reaches age 21, then again at 25, then at 30.

Until recently, testamentary trusts had the advantage of being taxed at graduated rates – the same rates that apply to individuals – rather than at the top tax rate on the first dollar of investment income earned, which is the manner in which inter vivos trusts are taxed. In this year’s federal budget, the government indicated that testamentary trusts will be taxed at the top tax rates beginning in 2016. Estates will continue to benefit from a 36-month period of access to graduated rates while the estate is being administered.

Estate-planning advisors say the various non-tax benefits of testamentary trusts remain significant despite the changes to their tax treatment. In fact, the decision whether to use a testamentary trust in an estate plan is now likely to revolve around estate-planning considerations alone.

“The tax [implications] aren’t driving the conversation anymore,” Graves says. “It’s what are you trying to accomplish, what are you trying to protect, and how do we get the right peace of mind for you.” (For more on trusts, see story on page B8.)

– Real estate

Dealing with property can give rise to complex estate-planning issues – and create friction within families. This is particularly true in the case of a vacation property.

If the principal residence exemption doesn’t apply, the deemed disposition of a property can lead to a tax liability, which may be substantial enough to force the executor to sell the property to cover the taxes. Often, this can be addressed ahead of time through the purchase of an insurance policy, the proceeds of which can be used to offset the taxes.

Your client may be considering leaving a vacation property to two or more children. But serious issues can arise if one child can’t afford his or her share of the costs of upkeep, if a child prefers to sell his or her share or if the siblings don’t get along.

It may be preferable to require the sale of the property, with one particular child having the right of first refusal to buy the property with his or her share of the inheritance. If more than one child wants the property, they can agree to buy it together or it can be sold to the highest bidder.

© 2014 Investment Executive. All rights reserved.