How not to die

.

  By Guest Blogger Sinan Terzioglu

.

Estate planning is an essential aspect of a financial plan, but we know 70% of Canadians have not yet completed the most important elements, like drafting a will and designating a power of attorney (POA) for property as well as for personal care. In Canada, if you die without a will, the distribution of your assets will be determined by the laws of the province or territory in which you resided, so having a will and developing an estate plan are crucial to ensure your wishes are met.

Trusts

Trusts are legal structures used to hold and manage assets for the benefit of beneficiaries. In the realm of estate planning, trusts are used to protect assets, provide for dependents and reduce tax burdens. Those with blended families often have unique estate planning problems, especially if children and stepchildren are involved. Trusts can be viable solution to ensure that assets are distributed according to one’s intentions.

Example: Brenda and her husband Tom have been married for a decade. Each of them has adult children from previous marriages. Following Brenda’s divorce from her first husband, she purchased a home solely for herself, which Tom later moved into after they got married. Tom does not have an ownership interest in the house.

Brenda is 10 years older than Tom. She has designated her children in her will to be the beneficiaries of her financial assets and she would like them to also inherit her house but for this to occur after Tom passes away. Brenda is concerned about the potential risks associated with leaving the house to Tom first and would like to ensure that her children ultimately inherit the property.

Brenda has valid concerns. Entrusting Tom to pass the house to her children in his will entails risks, as various unforeseen circumstances could arise. For instance, if Tom remarries after Brenda passes and then gets divorced, the property could become part of the dispute. To mitigate the risk of her children potentially never inheriting the house, Brenda should consider establishing a testamentary trust which would hold the house after Brenda passes away. This legal arrangement would enable Brenda to retain a degree of control over the property after she’s gone and would ensure that her children inherit the house as she wished.

Family Cottage

Cottage owners typically wish to keep the property in the family after they die. Without a carefully thought out plan, leaving the cottage in your will or transferring/gifting it to your children or relatives could lead to unanticipated income tax obligations. However, this is just one aspect of succession planning for the family cottage and often not the most challenging.

Example: Dave and Cindy purchased their cottage in Ontario in the 1970’s for $100,000. The market value today is $1,000,000. Over the years they put in $100,000 of capital expenses so if they die today and the property is passed to their three children, their estate would face a $200,000+ tax bill. They are not concerned about their estate covering the tax bill and are aware of tax-efficient options for succession planning such as the use of various trusts.

Dave and Cindy’s son lives in BC and their two daughters live in Ontario and often spend time with them at the cottage. Because of their growing families, their daughter’s have not been able to use the cottage on the same weekends which has created some tensions.

Family dynamics can be complex. Passing a cottage down to family is usually much more challenging than most realize. For example, their son living in BC may one day question why he’s paying equal amounts as his sisters for maintenance costs, property taxes and utilities when he only uses the cottage for a couple of weeks a year. The other two families could increasingly find it difficult to figure out and accept a schedule that is equal and fair. Also, one child may become resentful because he/she feels that they are always the only one dealing with arranging upkeep and maintenance of the property.

Chances are this cottage would not remain in the family for very long and could even destroy the family. It’s important to be realistic when thinking about whether to pass the cottage down to your children or not. In situations like this, it would best to sell the cottage and split the proceeds equally. At that point, one or more of your children can decide to buy a cottage for themselves.

Choosing an Executor

Most people decide to designate trusted family members, such as children, spouses or siblings, as their executor. Many view the appointment as an honour but serving as an executor is much more demanding than most realize. Executors are required to gather and complete a wide variety of documents all within specified timeframes. The role is often stressful, complicated and exposes one to personal liability risks. Also, being an executor is very time consuming as the process of settling an estate takes an average of about 1.5-2 years and approximately 150-200 hours.

Given these factors, most should seriously consider appointing an institution such as a law firm, trust company or the trust division of a bank as executor. Professional executors have the expertise to handle complex scenarios involving privately-held businesses, out-province assets, dual citizenship filings and blended families.

Hiring a professional executor would alleviate the burden on your family and/or close friends, allowing them to focus on the grieving process. The total fee is usually around 4% on the first $1 million of estate assets, gradually decreasing to approximately 1% for amounts exceeding $5 million. There is no upfront cost to appoint an institution as executor and usually there’s an initial estate fee (likely around $20,000) at the outset of the work after you pass.

If you still prefer to assign a person such as a family member as executor but would like to relieve them of full administrative responsibilities, you can appoint an institution to provide executor support services. This would ensure everything is processed correctly and not overwhelm your executor. Appointing an institution to be executor or provide executor support services may be viewed as a very valuable gift for your loved ones, making the cost well worthwhile.

Takeaway

Estate planning is much more than simply drafting a will as it goes beyond distributing assets. A well thought out estate plan alleviates the responsibilities on your family and ensures a smooth transfer of assets while minimizing tax implications.

Once you have created an estate plan, it’s important to revisit it regularly especially after major life events such as a divorce and the loss of a loved one. Some have learned the hard way that beneficiary designations of investments accounts at financial institution override a will so it’s important to review and ensure your beneficiary designations are up to date. Don’t die without one.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

.

About the picture: “Here’s another dog pic,” writes Robin, in Ontari. “Briggs, who was a wonderful companion, full of Westie hi-jinx. I’m a long time follower of your blog and have turned both my daughters on to the benefits of your advice.”

To be in touch of send a picture of your beast, email to ‘[email protected]’.