Aja McClanahan is a personal finance writer who has a story of getting out of over $120,000 in debt. She's been featured in Yahoo! Finance, MarketWatch, U.S. News and World Report, Kiplinger and has written for publications like Business Insider, Credit Karma, Inc., and many others. Aja writes about investing and personal finance for Wealthsimple. In her spare time, she manages her own investment portfolios for herself, husband, and two kids. Aja double majored in Spanish and Economics and holds a Bachelor of Arts degree from University of Illinois at Urbana-Champaign.
Estate planning in Canada follows many of the same rules and conventions as estate planning in other countries. As with estate planning anywhere else, the goal is to accomplish at least two goals: distribute your assets according to your desires and minimize tax liabilities. You’ve worked hard for your money and your financial goals, so you definitely don’t want your wealth ravished by the government or used in a way that goes against your wishes and principles. Having an estate plan and designating powers of attorney can ensure that your property remains in the hands of the people and causes you care about the most. And a will can save your loved ones time and money with managing your estate and dividing your assets.
What is estate planning?
Estate planning involves creating a set of instructions that detail how your assets are used and distributed in the event of your death or incapacitation. Your estate plan will be composed of several types of legal documents and financial tools so your loved ones won’t have to guess about your final wishes.
When you’re creating an estate plan, you’re forced to think about the future when it comes to your assets and your money. Thinking about this future could also have an additional, beneficial effect. “Estate planning can also be helpful to manage and structure your financial affairs while you are alive and still able to make good decisions about your financial affairs,” says pension consultant and founder of Retire Happy, Jim Yih.
How to develop an estate plan in Canada
There are different ways to develop an estate plan in Canada. You can attempt to do this on your own or engage the help of an expert. There are also kits, apps, and websites that can provide a template for you to complete according to your preferences. You could also do a combination method by using an estate planning tool, app, or template, and then having a lawyer revise it so that it meets your needs and is considered legally binding. An estate plan includes several different elements like a will and certain power of attorney documents. You should be prepared to engage several experts. Nick Shinder, investment advisor at Echelon Wealth Partners, points out that you’ll work with many professionals in the estate planning process that could include:
Financial security advisors
Start the planning process
Once you have your estate-planning team in place, it’s time to put your imagination to work. You’ll need to determine, in the best case scenario, what should happen to your wealth when you die. Canadian financial analyst Tom Drake says to start by “looking at what assets you have and how you want to distribute them. You’ll need to think about how you’d like to transfer the wealth of your estate, considering special factors such as minor children and charities.” This kind of financial planning upfront will save your family members a lot of stress and pain in the future. Lastly, you’ll want to think about the personal representatives that will handle the affairs of your estate when you’re not able to. These representatives could include appointing an executor, trustee, and/or guardian.When it comes to retirement planning, the sooner you start, the more time your money has to grow. Get started now and in just five minutes we’ll build a personalized investment portfolio to help meet your goals.
Some questions that you may want to ask yourself include:
Are there specific assets you want to give to specific family members?
At what point would you want your family members and loved ones to receive specific assets? After your death, during your lifetime, or at a specific time?
Do you want to leave parts of your estate to charity? If so, which one(s)?
How important is it for you to minimize income tax and probate fees?
Do you have a life insurance policy to cover anticipated capital gains taxes that will arise after your death and protect your business against loss, if you own one?
Who do you want to transfer registered assets like RRIFs and RRSPs to? These accounts, depending on your beneficiary designations, can be transferred to a surviving spouse or common-law partner, a dependent, or a designated beneficiary. Just keep in mind that if these accounts are transferred to someone other than a spouse or a dependent, then the value of the account will be included as income on your final tax return.
Gathering and documentation
Now that you know what you have and how you’d like to distribute it, it’s time to gather personal documentation to make accessing and organizing your assets easier. You’ll want to gather information on things like:
Insurance policies, including both business and personal insurances like life insurance
Titles; deeds; proof of ownership for property, vehicles, and other belongings; proof of joint ownership of assets
Estate inventory (heirloom items, keepsakes, etc.)
Now it’s time to create the documentation that will make up a complete estate plan. At a minimum, this is what should be included in your estate plan:
Without an estate plan that includes a will, your family will have to go to court to appoint an administrator of your estate. The administrator manages the estate and makes important decisions about what happens to the assets. If the court appoints an administrator, it could be someone who has no regard for your desires or keepsake items. They could sell precious family heirlooms, fail to minimize fees and taxes or just neglect to transfer assets to your loved ones the way you would have wanted. Additionally, the courts could take a long time to make decisions for your estate. When you have a will in your estate plan, there is an element of efficiency and speed when it comes to handling the financial matters of your estate and transferring your property to your heirs.
In your will, you can appoint who takes ownership of your assets and belongings, who’d be responsible for your minor children along with who’d become the executor of your estate. You should also be mindful of how different provinces handles decedents’ estates. Erin Bury of Willful notes, “Each province has a different approach to how assets are distributed in the event that someone dies intestate (without a will), and there are variances in terminology and approach between each province when it comes to drafting wills.”
Trusts are another useful estate planning tool to have in your arsenal. They allow for the legal transfer of assets to a trustee who will then hold the asset on behalf of your designated beneficiary until they’re ready to receive it, for example, by the time they turn of age. There are usually two kinds of trusts: Living trusts take effect during your lifetime, while testamentary trusts are created in your will and take effect at your death.
Power of attorney and living will
This is important in the case of incapacitation or injury. Though you are not legally deceased there could be a situation where you cannot make certain decisions on your own behalf. When you give someone the power of attorney over your affairs, they can make these decisions when you can’t. Most often, you’ll want to draw up a financial power of attorney document and healthcare directive (sometimes called a living will and combined with a healthcare proxy in order to carry out instructions for personal care.)
Though not totally necessary, it can still be helpful to add information about your final arrangements. This can include details about your funeral and even final resting place. This can give great comfort to your loved ones knowing that you were buried according to your stated desires and preferences.
Legalizing and storing your estate plan
Once all of the pertinent documentation has been drafted, you’ll want to make sure that it’s legally binding and in the right hands.According to Erin Bury of Willful, a will is considered legally if it is:
Written by you in sound mind
Signed with a wet (i.e. nondigital) signature
Signed by two witnesses who do not benefit from your estate.
Your will is “official” as long as it meets the criteria above—there’s no need to even engage a lawyer (although it’s almost always a good idea.) In Quebec, however, the requirements can be somewhat different. Be sure to consult with a professional familiar with estate laws in Quebec (or any other province where you’ll be drafting and using your will.)A will could be kept in a safety deposit box at a bank or right in your home. A copy (or original) could be kept by the lawyer or notary who drafted the document.In either case, inform your loved ones where they can find this information in the case of your death or incapacitation. It will make it that much easier to start settling your affairs in the smoothest way possible.
Your estate plan is not a “one and done” deal. There are a few things that could cause you to revisit and revise your estate plan. For example, you may experience major life events such as marriage, divorce or the birth of a child. Also, there may be factors outside of your control like changes in certain laws that could affect how your estate is handled in your country or province. In all of these cases, you will need to revisit and update your estate plan.
Estate planning checklist:
Here’s a handy list as you begin planning your estate:
Legally binding will
Power of attorney
Final arrangement details
Taxes and fees
Though there isn’t an official “estate tax” in Canada like there is the United States, there are taxes on certain types of accounts and assets typically transferred in an estate. For example, some retirement savings accounts are taxed through estate sale proceeds as well as certain kinds of real estate. You also need to be aware of cases in which you’d be considered a U.S. resident for tax purposes, including if you own shares of a U.S. corporation or own real estate. However, if you own shares in U.S. mutual funds but aren’t a U.S. citizen, you won’t be liable for U.S. estate tax on that asset.
There are some exemptions and exceptions to these rules, but having a property estate plan in place is key to minimize the estate’s tax liabilities. Without an estate plan to properly transfer these assets, you could end up paying more taxes than you are legally obligated to. Then, there are fees related to settling an estate—probate fees, attorney fees, provincial fees, accounting fees, etc. With an estate plan, you’ll be able to appoint an executor who will work to minimize these fees and maximize what is left to your heirs.
If you’ve still got minor children, part of the estate planning process should include creating a will. If your children are minors then you want to give explicit instructions to the courts as to what should happen with your children should you expire before they reach the legal age of responsibility. Should you fail to do this, the courts would have to determine what would happen to your children. Furthermore, if you’ve left them any money, the courts would determine how that money is handled as well. Having a will can ensure your children are taken care of even when you are not around.
Estate planning for business owners
It’s also important to keep in mind that estate planning gets a little bit more complicated if you are a business owner. In that case, your estate planning will also have to address issues relating to business succession, as well as dealing with more complicated tax issues. In these sorts of situations it’s advisable to seek the assistance of experts who specialize in estate planning for business owners and are familiar with that sort of tax planning.
Creating an estate plan with a valid will will make your transition from this world to the next easier for both yourself and your loved ones. You’ll have the peace of mind knowing that you put a plan in place and your loved ones will appreciate your willingness to think ahead on their behalf.