Wills and Estate Planning For Canadians For Dummies

By Margaret Kerr and JoAnn Kurtz

Wills & Estate Planning For Canadians For Dummies walks you through the steps of planning your estate. This friendly guide will help you

• Reduce the tax you or your estate will pay
• Plan for your children's future
• Leave a charitable legacy
• Decipher the legal lingo in wills
• Prepare a living will to ensure you get the treatment you want
• Hire an estate planning team that will meet your needs

Through practical advice from expert authors, this book helps you ensure that your affairs are in order, and your loved ones will be looked after.

• Language: English
• Publisher: Wiley
• Release date: Feb 18, 2010
• ISBN: 9780470677544

Margaret Kerr

Born in Minneapolis, in 1951, Margaret’s drug addiction began at age 13. Since then, her father died when she was 17, her brother committed suicide at 18, and she lost another brother in Vietnam 9 months later. After surviving a car accident while 7 months pregnant and her own suicide attempt at 32, Margaret found peace and guidance through Christ.

Book preview

Part I

Estate Planning Basics

676578-pp0101.eps

In this part . . .

This part gently introduces you to estate planning. We hardly ask you to think about your approaching end at all! Instead we tell you exactly what estate planning is, help you figure out the present size of your estate, and explain how Canadian tax laws affect your estate plan.

Chapter 1

What Is Estate Planning, Anyway?

In This Chapter

Figuring out what it means to have an estate

Knowing what estate planning involves

Exploring why estate planning is essential

Looking at the tools of the estate planning trade

Understanding the right time to prepare an estate plan

Ensuring that you’ll be financially covered in your lifetime too

Taking care of your needs in case you become physically or mentally incapable

Going to the experts

Here’s the good news about estate planning: You have an estate! You don’t have to be a sports star or a computer maven, or to have inherited old family money to have an estate or to need to do estate planning.

Now for the bad news about estate planning: It forces you to think about death — and not just in an abstract philosophical kind of way. It forces you to think about your own death. You may not enjoy the estate planning process very much, but in this chapter we explain why you should do it even though it’s not a lot of fun. We’re going to ease you gently into estate planning. We’ll briefly discuss the main things you need to know, and then in the following chapters we go into more detail.

Understanding What Your Estate Is

We keep talking about this estate of yours, but before you start wondering why the butler and chauffeur didn’t show up for work this morning, we’d better give you a little more detail about what your estate is.

Your estate is made up of everything you own. But in legal terms, your debts — everything you owe — are also part of your estate, because what you own must be used to pay off your debts when you die. (We show you how to take stock of your estate in Chapter 2.)

technicalstuff.eps The things you own are referred to in law and accounting as your assets, and the debts you owe as your liabilities.

You need to take some other things into account when you’re estate planning, although they’re not technically part of your estate:

Life insurance: If you have a life insurance policy, when you die either your estate or an individual (or individuals) you name as beneficiary, whichever option you have chosen, will receive the insurance proceeds. (We tell you more about insurance in Chapter 4.)

Pension plans: If you’re a member of an employee pension plan, your spouse or a person you name as beneficiary may be entitled to receive a pension after your death or to receive a one-time payment.

Government benefits: Your spouse and/or children may be entitled to receive either a pension or a one-time payment from the Canada Pension Plan, Old Age Security, Veterans Affairs Canada, or Workers’ Compensation after your death.

Remember.eps Besides being what you own and owe, your estate is also a legal being that comes into existence on your death. It has some of the same legal rights that you had when you were alive, such as the right to enter into contracts and to sue and be sued. It also has some of the duties you had, the principal one being the duty to pay income tax.

Discovering What Estate Planning Is

Estate planning is essentially two things: planning to build up cash and other property in your estate, and planning what you want to happen to that property after you die.

Estate planning isn’t rocket science, but it isn’t a one-step process either. To start planning your estate you need to have a clear idea about the following matters:

What do you own and what do you owe?

What ways can you find of owning more and owing less so that you have more to leave behind?

Whom do you want to (or have to) provide for after you’re gone, and how much do they need?

What are the best ways of providing for them?

You’re going to have to take a hard, cold look at your financial situation and your family relationships and obligations.

Estate planning is not a one-time exercise, either, unless you kick the bucket immediately after making your plan and putting it into effect. Whenever an exciting incident — like love, marriage, babies, divorce — occurs in your life you need to review your estate plan and make any changes that seem necessary.

Figuring Out Why You Need to Do Estate Planning

Here are the main reasons why you need to plan your estate. You want to make sure that when you die,

You have done everything in your power to see that your family has enough money to manage without you — it takes planning to set aside and invest money for your family and to make sure that you have enough insurance (see Chapter 4).

Your property goes to the people you want to have it — if you die without a valid will, the provincial government decides who gets your property based on rules set by provincial law, and it may well not go to the people you have in mind (see Chapter 12).

A person you choose will look after your estate — without a valid will, there will be no executor named by you who will have the automatic right to look after your estate; instead, someone (usually a family member) will have to apply to the court to be appointed to look after it (see Chapter 12).

You have a say in who will look after your children — if both you and the children’s other parent die, a will is the best way to let your surviving family and the courts know whom you would like to care for the children (see Chapter 8).

Your debts can be paid with the least damage to your estate — if you make no plan for payment of your debts, there may not be enough cash available to pay them (see Chapter 13). If you leave no will, the person appointed to look after your estate will have to sell some of your property to get the necessary cash, without any guidance from you about what to sell and what to keep in order to give to a particular family member or friend.

The capital gains taxes your estate has to pay will be as low as possible — when you die your estate is taxed as if you had sold everything you owned just before you died, and without proper tax planning the bill can be high (see Chapter 3).

The probate fees your estate has to pay will be as low as possible — in almost all provinces probate fees are calculated according to how much your estate is worth; with advance planning you can reduce the value of your estate for probate purposes, and so reduce these fees (see Chapter 3).

The future of any business you own has been looked after — you need to plan ahead, whether you want your business to carry on (who should look after it?) or whether you want it to be sold (how to get the most money for it?). (See Chapter 9.)

Here’s a final, even more morbid, reason to plan your estate. As part of the process you can let your family know what you’d like done with your body. (Oddly enough, your body is not part of your estate, unlike the other things that belonged to you when you were alive, it belongs to your executor or, if you have no executor, your closest relative.) You can make your wishes known about organ donation (yes or no) and funeral arrangements (plain oak casket or the King Tut special, burial or cremation, flowers or donations to a favourite charity), so that your family members don’t have to go through the stress of making choices they think you’d approve of, or maybe even end up fighting about.

Getting a Handle on Estate Planning Tools

When you know what your estate consists of and what you want to give to whom, you can choose some estate planning tools to help you do what you want.

These are the most commonly used estate planning tools:

A will: A will is a written, signed, and witnessed document that states how you want your property to be given away after you die, and appoints an executor to look after your property and debts after your death. We strongly advise that you have a lawyer prepare your will. (We tell you more about wills in Chapters 12 and 13.)

Gifts given during your lifetime: A gift is a transfer of all of your rights over a piece of property. (After you make a gift, you no longer have the right to hold on to the thing given or to sell it or to take it back from the person you gave it to or to leave it to another person in your will.) Giving a valuable gift usually has tax consequences for the giver. Tax consequences is a fancy way of saying tax payments. We tell you more about gifts in Chapter 5.

technicalstuff_fmt.jpeg Trusts: A trust is another way to give property away during your lifetime. But instead of giving the property directly to the person you want to have the use of it (the beneficiary), you choose another person (a trustee) to hold and look after it for the use of the beneficiary. Why, you may be asking, would anyone want to do a weird thing like this? The main reason is to prevent the beneficiary from having total control of the property (for example, if the beneficiary is a child, or mentally disabled, or hopeless about business matters; or if you want one person to have use of the property in the short term but want a different person to become the owner of the property at a later date). Setting up a trust may have income tax benefits. If you decide to set a trust up, you’ll need a professional — an estates and trusts lawyer or a tax lawyer, to advise you and to do the paperwork. (For more on trusts, see Chapter 6).

Joint ownership of property during your lifetime: Joint ownership while you’re alive allows you to control who gets the jointly owned property when you die. You can own property jointly with another person (or with other people) in all provinces other than Quebec. All sorts of property (real estate, bank accounts, mutual funds, or other investments) can be owned in this way. When you die, your share in the property will automatically pass to the surviving owner without being mentioned in your will (although it doesn’t hurt to include a statement in your will that you want this to happen).

Life insurance: Life insurance is a kind of bet that you make with an insurance company. You’re betting that you’ll die and the life insurance company is betting that you won’t. If the life insurance company loses, it has to pay up on the bet — that’s the proceeds of the policy. A life insurance policy will help you ensure that your family has enough money after you die to replace the income you will no longer be around to earn, or to help them pay off taxes or other debts without using up your estate. However, many insurance policies end when the insured reaches retirement age — in other words, just when your chance of winning starts to improve.

Knowing When You Should Make an Estate Plan

Most people put off estate planning because they don’t want to face the certainty of dying. Some people are even afraid that doing some estate planning makes them more likely to die. We can assure you that there is no cause-and-effect relationship between estate planning and death. There is however a cause-and-effect relationship between a lack of estate planning and wasted time, trouble, and aggravation for the people you care about.

Tip.eps You should make an estate plan as soon as you have any significant property (and you care who’s going to get it) or as soon as anyone is financially dependent on you, whichever happens sooner. You are legally able to make a will when you’re quite young — as soon as you are 18 years old (even younger in some limited circumstances, as we explain in Chapter 13). Don’t assume that estate planning is something to do when you’re old, because you don’t have to be old to die.

Going through the estate planning process once is not the end of the matter. You will have to change your estate plan as changes occur

In your personal life. You should review your estate plan if you marry. Have a look again if you have children and as they grow up, leave home, and start to earn their own living. Think about changing your will if your spouse or partner dies or if you divorce or even if you separate and meet someone new.

In your business life. If you start a business either alone or with others, you should review your estate plan to make sure it deals with your business’s debts and with whether your business will fold or carry on under new management when you die.

In your executor’s life. You may need to change your will if the person you have named as your executor is no longer willing or able to take on those duties, or if you decide that you need someone with more sophisticated business or investment skills.

In the value of your property. If the value of the property you own goes way up or down in value, you may want to make changes to your estate plan to deal with the change in the taxes your estate will have to pay and with the debts your estate may have. You may also want to re-think how you’ve divided up your property in your will if you’re trying to treat everyone equally.

technicalstuff_fmt.jpeg In the law. Between the time you plan your estate and the date you die there will almost certainly be changes to tax law, family law, and estate law that may require changes to your estate plan.

Looking After Your Needs

You’re not dead yet. When you put together your estate plan don’t get so carried away with looking after everybody when you’re dead that you forget to look after yourself while you’re still alive.

What if you build up your investments but never have any money for new clothes, a night out, or a vacation? Suppose you were to give your cottage to your children on the understanding that you had the use of it for a few weeks every year? How happy would you be if they squabbled with you about when it was your turn and when it was theirs? What if you made your unmarried significant other a joint owner with you of the house you bought . . . only to find one day that significant other had run off with your best friend?

You must make sure that your plans leave you with enough money and property (and enough control over your money and property) to last you until you die.

Planning in Case You Become Physically or Mentally Incapable

Now isn’t becoming incapable a cheery thought. But while you’re confronting your own mortality, you have to also think about the possible decline before your ultimate fall.

A complete estate plan includes a plan for any time during your life that you can’t manage your own financial affairs — not only if you get Alzheimer’s disease but if a car accident leaves you in a coma, or if you have an operation that puts you out of commission for even just a short time, or, on a happier note, if you’re spending two or three months in Florida during the winter and you want someone to be able to look after things while you’re away.

technicalstuff.eps The tool used for managing financial matters is a power of attorney. A power of attorney is a written, signed, and witnessed document that gives the person of your choice (called an attorney in most provinces) authority to handle your legal and financial affairs.

You also have to think about what you want done if your health declines to the point that you are no longer able to make decisions about your own health care. When that happens, someone else has to make decisions on your behalf — but who do you want that someone to be? And what decisions do you want that person to make?

The tool used to deal with health matters is a living will, a written document that sets out your wishes about your health care, and that appoints a person (family member or friend or anyone you wish) to make health care decisions if you become unable to make those decisions for yourself. If you don’t have a living will, provincial law tells doctors and hospitals which of your nearest and dearest they should turn to for instructions. First on the list is a spouse, then adult children, and so on. If you run out of close relatives, the doctors and hospitals may have to ask a government official what to do with you. Now there’s a frightening thought!

Getting Professional Help

Should you get professional help? In a word, yes! We want to make this very clear. Estate planning and will preparation are dangerous territory for the do-it-yourselfer. The law in these areas is very complicated.

warning_bomb.eps If you make a mistake in preparing or signing your own will and power of attorney, they may not do what you want them to do, or, even worse, they may be totally invalid. And let’s not even think about what will happen if you make a mistake in planning to reduce the taxes on your estate.

But naturally you’re worried about the cost of professional help. Will you have anything left in your estate after you pay for it? Obviously cost will be related to the amount of work you want done. If you have a large estate and need to make complex arrangements to reduce taxes, sure it will be expensive, but generally a will is a real bargain as far as legal services go.

Lawyers aren’t the only professionals who can help you in planning your estate. Although a lawyer (or, in Quebec and British Columbia, a notary) with experience in will preparation should always be used to draft the actual legal documents and can usually give you much of the estate planning advice that you need, other professionals, such as accountants and financial planners, can also help in the financial, investment, and tax-saving part of the planning process. You may also be able to get advice from people or institutions you may deal with while building or planning your estate, such as

Insurance agents or brokers

Trust companies or banks

Stockbrokers and mutual fund agents or brokers

Tip.eps Even with professional help, the more you know the better. That’s where this book will come in handy. We’ll take you through the process of estate planning, financial planning, and preparing a will and other documents so that you can get the most out of your professional advisers.

Chapter 2

What Are You Worth? Preparing an Inventory of Your Estate

In This Chapter

Itemizing what you own

Taking a look at what you owe

Puzzling out your net worth

The first step in estate planning is to get a handle on what’s in your estate. That means looking at everything you own and everything you owe, as well as any life insurance, pension plans, or government benefits to which your estate may be entitled. After you’ve got those numbers, you can calculate your net worth.

Once you know where you stand, you can think about planning to increase the value of your estate. Doing that requires financial planning, which is not what this book is about. However, Personal Finance For Canadians For Dummies by Eric Tyson and Tony Martin (Wiley) is a good book on that subject.

Figuring Out What You Own

Make a list of everything you own and its value. You can be high-tech or low-tech — use your computer and a personal finance program or a plain piece of paper and a pencil. You may find Table 2-1 helpful.

Start the list with the things that are easiest to value:

Bank accounts: Check your bankbook, most recent bank statement, or your bank or trust company Web site to find out what your current balance is.

Guaranteed investment certificates: Look at the certificate to see how much you originally invested and call your bank or trust company or go its Web site to find out how much interest has accumulated since that time.

Government savings bonds: Look at the face amount and maturity date on the bond and call your bank or trust company to find out how much interest has accumulated since the bond was issued. (For Canada Savings Bonds you can check the CSB calculator on the Internet at www.csb.gc.ca.)

Stocks, corporate bonds, and mutual funds: If you have a broker, you get an account statement monthly or (if you don’t do a lot of buying and selling) at the end of any month in which there’s been activity in your account. Ask for a statement if you haven’t received one recently. If you don’t have a broker you can find out the value of publicly traded shares and bonds by checking the stock quotation pages in the business section of your newspaper or a stock quotation Web site on the Internet.

RRSPs: Call your bank, trust company, or other plan administrator, or check their Web site, for the current balance if you don’t get regular account statements.

Life insurance policies: Call your insurance company or agent to see if you have the right to cash in any of your policies before you die (and if so, for how much right now).

Employment pension plans: Ask your employer to give you a statement of the present value of your pension (it’s not necessarily the same as the total of your contributions and your employer’s contributions plus interest).

Money owed to you by others: If you are in business as a sole proprietor or as a partner in a firm, include the amounts of any bills you have sent to your clients or customers and that haven’t yet been paid (but you expect will be paid).

Then look at the things you own that you could sell if you needed to. Their value is the amount that a stranger who actually wants them would be willing to pay for them (this is called fair market value).

Your home, cottage, or other real estate: Look at ads in the newspapers to see the asking price of properties similar to yours (the sale price may be higher or lower than that); or for a fee you can have a real estate agent or appraiser value your property.

Cars, boats, or other vehicles: Check newspaper ads to see what a vehicle of your make, model, and year is selling for privately, or call a dealer. A dealer would likely offer you a lower price than a private buyer.

Artwork and antiques: Visit art galleries or antique shows to find out how much similar items are selling for. You can consult a dealer about the value of your property, but a dealer will probably charge to give you a careful valuation.

Jewellery: Browse around pawn shops or jewellery stores that sell estate jewellery to learn the resale value of your pieces, or ask a jeweller for an opinion (you might have to pay for anything more than a casual answer).

Furniture and household contents: Go to second-hand shops to find out what your sofa, dining room table, and bedroom suite are worth on the open market.

Your business, if you own one: Conservatively speaking, your business is worth at least as much as its parts (equipment, inventory, accounts payable, property owned or leased, etc.) could be sold for. Estimate the fair market value of those parts. Your business may be worth more than the value of what it owns, if it has a fabulous reputation or a great location or an incredible client base. You would need to pay a business valuator to put a price on your business if it could be sold as a whole rather than sold off piece by piece. If your business is essentially you personally providing a service (say dressmaking or accounting), it may not be worth much to anyone but you.

You’ll quickly discover that you paid a lot more for your belongings than you can hope to sell them for.

Figuring Out What You Owe

Your debts may be something you’d rather not think about. How much do you owe and to whom do you owe it? Table 2-2 will help make this job a bit easier.

Make a list of everyone you owe money to and the current balance that you owe in each case:

Mortgages: Call your mortgage lender to find out your outstanding principal balance.

Car loans: Call the lender (bank or financing company) to find out the outstanding balance.

Other personal loans: Again call the lender to find out your outstanding balance.

Student loan: You may receive regular statements; if not, call the bank.

Credit card balances: Check your most recent monthly statements.

Outstanding income tax installments or arrears: Check your reminders from Canada Revenue.

Real estate taxes: Look at your municipal tax bill for the total amount of your annual taxes (it will also show any outstanding unpaid amount) and deduct any payments you’ve made, or phone your municipal tax department to check.

Figuring Out Your Net Worth

Your net worth is what you would be worth financially after paying off all of your debts. To calculate your net worth, subtract the total of your debts from the total value of what you own. (You can use Table 2-3.)

Chapter 3

The Taxman Cometh: Taxes and Your Estate

In This Chapter

Looking at the ABCs of income tax

Finding out how your estate will be taxed

Developing your tax planning goals

Looking at possible tax planning strategies

Considering the tax planning that takes place after you die

Thinking about what happens when the tax bill comes due

Finding out about probate fees

Canada doesn’t have any death taxes or inheritance taxes (Yay!), but that doesn’t mean that Canadians don’t have to pay taxes following a death (Boo!). Taxes at death can be quite substantial, but with proper estate planning you can keep them to the minimum possible.

When you die, you may be gone . . . but you’re not forgotten by the tax authorities. Under income tax law, your estate is born as a brand-new taxpayer that comes into existence on the date of your death.

Your estate (via your executor) has to file estate tax returns annually, starting from the year in which death occurred until the year in which the last property of the estate is given out to the beneficiaries. Filing has two purposes: to report income of the estate (so it can be taxed in the estate), and to give Canada Revenue information about distributions of income from the estate to beneficiaries (so the income can be taxed in the hands of the beneficiaries).

Estates are taxed in much the same ways as individuals. So you have to know something about how individuals are taxed before we can tell you how estates are taxed.

Understanding Some Income Tax Basics

In this section we tell you briefly about

Income and capital gains

Calculation of taxable capital gains

Calculation of taxable income

Special rules for spouses

Income and capital gains

In Canada, individuals pay federal and provincial income tax on their income and on their capital gains. Examples of income are

Salary or wages

Commissions

Tips

Rental payments received

Interest payments received

Dividends on shares

Profits from an unincorporated business

Capital gains are profits from the disposition (such as a sale or a gift) of capital property, which is property with a long-term value, such as

Shares in a corporation

Real estate (but not your principal residence, which is what your home usually is — we talk more your principal residence later in this chapter)

Valuable art, jewellery, collectibles, or antiques

Income and capital gains are taxed differently. Income tax is calculated on the full amount of an individual’s income. Capital gains tax is calculated on one-half (changed in 2000 from two-thirds) of a capital gain.

Capital gains

We start with capital gains because tax on capital gains, rather than tax on income, is usually the big thing people have to worry about when they’re doing estate planning.

A taxpayer can make a capital gain by disposing of capital property for more than it cost, or have a capital loss by disposing of capital property for less than it cost. (We tell you later what you do with a capital loss.)

Calculation of taxable capital gains

It’s easiest to explain how to calculate a capital gain by starting with a sale of capital property. And in everyday life most capital gains arise from a sale. The amount of a capital gain on a sale is calculated by looking at two things:

The cost of the capital property, which is the purchase price plus other costs of acquiring the property (such as legal fees, commissions, licensing fees, the cost of borrowing money to buy the property, and the cost of improving the property). The cost of capital property, once all of these things are taken into account, is called the adjusted cost base.

The amount received on the sale of the capital property, which is the selling price minus the cost of selling the property. The cost of selling includes such things as repairs, advertising, legal fees, and commissions. This sale amount, once everything is taken into account, is called the adjusted sale price.

technicalstuff_fmt.jpeg A capital gain (or capital loss) is the difference between the adjusted sale price and the adjusted cost base. If the adjusted sale price is higher than the adjusted cost base, you have a capital gain. If it’s lower, you have a capital loss.

Only a portion of any capital gain is taxable. That portion is added to your income and is taxed as part of your income at standard income tax rates. The portion has changed from time to time. Before 1972, capital gains weren’t taxable at all. Then for many years, one-half of a capital gain was taxable. More recently, three-quarters of a capital gain was taxable. But in the year 2000, the portion fell twice — first to two-thirds and then again to one-half. For capital gains made on or after October 18, 2000, one-half of any capital gain is your taxable capital gain, and is added to your income. If you made a capital gain before October 18, 2000, you should check with Canada Revenue to see what portion of the gain is taxable.

Emma has a capital gain

Emma started hitting the garage sales after she heard that a man in Moncton had bought a grimy old painting for $5 that turned out to be a Rembrandt worth $2.5 million. At one sale she bought a box of costume jewellery for $50. Among the rings was a white stone in a really ugly setting. She took the ring to a jeweller, who told her that it was a one-carat diamond with a small chip in it. The jeweller thought the diamond would be worth about $2,000 without the chip. She paid the jeweller $250 to recut the stone to remove the chip. Three years later, Emma’s neighbour, John, got engaged to Emma’s sister, Isabella. (The match was set up by Emma.) John told Emma he was going to buy Isabella a nice ring. Emma mentioned that she had a good-sized diamond and asked John if he’d like to buy it. He agreed, on the condition that Emma have the stone properly appraised. So Emma went back to the jeweller and paid $75 to have the stone appraised. The appraisal certificate stated that the stone was worth $2,200. John paid the full $2,200.

Assuming that Emma reports a capital gain on her income tax form for the year, this is how she would figure it out:

1. Adjusted cost base calculation

Purchase price of the ring ($50) + Improvements to the ring ($250) = Adjusted cost base ($300)

2. Adjusted sale price calculation

Sale price ($2,200) – Cost of appraisal ($75) = Adjusted sale price ($2,125)

3. Capital gain calculation

Adjusted sale price ($2,125) – Adjusted cost base ($300) = Capital gain ($1,825)

4. Taxable capital gain calculation

Capital gain ($1,825) × 50% = Taxable capital gain ($912.50)

So Emma, as a law-abiding taxpayer, would put $912.50 on her income tax form as a taxable capital gain and would pay tax on that amount as part of her income.

(The calculation of the capital gain or loss is a bit more complicated if you used the property for business purposes and claimed capital cost allowance — that’s depreciation, or a gradual loss in value — against the property. In that case you’ll need to talk to Canada Revenue or get advice from an accountant.)

For an illustration of how a capital gain is calculated, have a look at the sidebar Emma has a capital gain.

If it walks like