4 Tips For A Smooth Estate Transition

Every single year in Canada, billions of dollars in estate assets are transferred at death. In fact, we are approaching one of the largest transfers of wealth in history – approximately $1 trillion in personal wealth will be transferred from one generation to the next in Canada between 2016 and 2026, with roughly 70% of that in the form of financial assets.

Sometimes wealth transfers don't go as smoothly as expected. However, the good news is that there are quite a number of ways to minimize the risk of problems occurring during an estate transfer.

Where There's a Will There's a Way

One of the most common mistakes we see clients make is not preparing (or keeping up to date) their will. A will communicates your intentions and allows you, not the government, to determine how all of your assets get distributed when you pass. Some things to take into consideration:

• Having a will prepared by a lawyer is always preferable. A holograph (handwritten) will carries the risk that instructions may be misinterpreted or may not comply with provincial statutory requirements, which could invalidate the will or delay distributions.

• In most provinces, marriage revokes a will unless it specifically contemplates the marriage and identifies the future spouse. A marriage breakdown can also affect intended gifts or inheritances.

• Charitable giving can be affected if your will leaves too much discretion to the executors in choosing a charity or the amount of the gift.
  
  

Don't Forget Taxes!

Often times we hear stories about how people originally intended to split their assets equally between beneficiaries. However, if you fail to consider the tax consequences, the wealth transfer may not turn out equal at all.

Take the simple example where you have three assets, each worth $1 million:

• Child A will receive a Registered Retirement Savings Plan (RRSP) as the named beneficiary

• Child B will receive the family home

• Child C will receive a non-registered mutual fund portfolio

You think you're leaving $1 million to each child, but the reality is that Child A and C may receive significantly less after the taxes owed on the RRSP and mutual funds are paid. An RRSP is deemed to have been taken completely as income in the year of death and taxed as income. Child A will be paid the total value directly but the estate will have to cover the taxes. The house would go to the estate but be distributed in-kind to Child B with no tax liability (principal residence exemption). The non-registered mutual funds are the only liquid assets available to pay the taxes, so Child C's inheritance is used to pay the taxes and Child C gets a lower after-tax inheritance.

Beneficiaries

When a life event such as a birth, death, marriage, separation or divorce occurs, people often remember to review and update their will, but may forget to review their beneficiaries. This common oversight could greatly affect the realization of your final wishes.

When naming a beneficiary, it's also important to consider the age of the individual. Death benefits can't be paid directly to minors and will often have to be paid to a Public Trustee. If you want a death benefit to be paid to a minor, it's recommended that a trust be used to receive the funds on behalf of the minor.

With adult beneficiaries, an annuity settlement option or testamentary trust may be the right course of action if there are concerns that the beneficiary may not be financially responsible or is disabled and at risk of losing government disability benefits.

Segregated funds are one of the best ways to ensure a smooth transition of financial assets to listed beneficiaries in the quickest manner. If an insurance investment, such as a segregated fund contract, is in place, the death benefit bypasses your estate, avoids probate fees, and proceeds are paid directly to the beneficiary, usually within two weeks.

Joint Ownership vs. Power of Attorney

Sometimes an estate planning strategy involves questions of trust and ethics, especially in the case of joint ownership of non-registered assets. On the death of one joint owner, the asset transfers directly to the survivor, bypassing the deceased's estate.

Consider a single father with two adult children who adds one child as joint owner to his bank and investment accounts so she can pay his bills. At the time of death, the accounts automatically transfer to the daughter, and it's up to her to be honest and return the funds to the estate. An alternative is to have a properly executed power of attorney for property, which could allow the daughter to assist in administering her father's finances without adding her as a joint owner.

After a lifetime of carefully saving, investing and planning, you want the peace of mind of knowing your assets will be distributed as you intended. Feel free to book a free initial consultation with us to see if we can help alleviate some of the stress you may be feeling about transferring your assets to your beneficiaries.