Estate planning is the process by which an individual plans to pass on his or her accumulated wealth, including investments and life insurance, upon death to their beneficiaries, with the goal of:
- Preserving and/or enhancing the value of the estate, to the extent possible;
- Ensuring the intended amounts are delivered to the appropriate person(s) as quickly as possible; and
- Minimizing taxes, where possible
An estate plan needs to align with your whole financial picture so that your assets aren’t distributed in a manner you didn’t anticipate when you pass away.
Why is Estate Planning Important?
It is a common misconception that estate planning is only for the wealthy. However, every Canadian, irrespective of wealth accumulated, faces the same general considerations when addressing their estate planning needs. For example, where a person dies without a will (dying intestate), the province will take control of the estate and make decisions as to how the assets are to be distributed.
The potential costs and delays of probate, the process by which a will is settled, can also have devastating consequences. The goal then of estate planning is to arrange your financial affairs in a way so that your assets can be passed to your heirs as quickly and as completely as possible.
Estate planning is not just planning for death; it is also essential to ensure that your affairs are handled in accordance with your wishes while you are alive. Properly planned estate plans also contemplate instances where you may become mentally or physically incapacitated and unable to manage your own affairs. In such cases, tools such as a power of attorney become important life planning tools.
Although there are no ‘inheritance’ taxes to the recipient of willed property in Canada, there are often ‘deemed disposition taxes’ to the deceased’s estate, notwithstanding the tax-deferred roll-over provisions to spouses.
Properly planned estates have assets arranged and titled in such a way as to minimize any taxes payable. Estate planning tools such as trusts are often employed to reduce the exposure to taxes.
There are many strategies that can help you reduce or avoid the tax burden on your estate after you pass away, and a SPARK financial consultant can help you figure out which ones makes sense for your situation.
Inhibitions to Estate Planning
Many people avoid estate planning because they think it is complicated and expensive, which, for most estates, is not true. While it usually requires the guidance and assistance of an estate planning professional or attorney to execute the legal documents, a lot of time and expense can be saved by organizing your financial information and determining your goals and objectives prior to meeting with one.
What is needed to start the process for Estate Planning?
At the very least, everyone should have a simple will. The value of having a will cannot be overemphasized with respect to the amount of distress and costs it can prevent – and, most basic wills are relatively inexpensive. Larger estates may require additional layers of estate planning tools, such as trusts.
The more preparation done in advance, the easier and less expensive the process will be.
It is usually recommended that you start the process by taking an inventory of your assets so that you have a clear picture of what may be in your estate. You should also work with a financial advisor so that they can help you project what the after-tax value of your estate may be. Such an exercise will at least enlighten you as to the potential tax consequences to your estate and perhaps peak your interest in preserving or enhancing the value of your estate through the use of life insurance.
Other Considerations / Final Thoughts
Your estate plan will encompass more than just your will – it could include a review of your beneficiary designations, joint ownership arrangements and powers of attorney.
It will also consider the nomination of someone to act as guardian for your children by specifying your preference in your will (although your choice of guardian must also be approved by a court).
And finally, your estate plan should always be reviewed after any major life event – such as a birth, death, or divorce – to ensure it reflects your new reality, and then make adjustments to it as necessary.
Products and Services used in Estate Planning
- Power of Attorney – General and Enduring
- Letter of Direction
- Life Insurance – Permanent (and in some cases term)