The first consideration in planning your estate is to list the assets that you own. Most people are surprised when they list their property and try to put a value on what they have accumulated.
There are many types of property and in order to plan your estate the different nature of each asset and it’s associated taxes must be taken into consideration.
A list of your assets includes the following items:
REAL ESTATE – this includes your residential home, wood lots, cottages, farm land, apartment buildings, basically land and anything built on land.
INSURANCE – there can be many different types of life insurance, some for the protection of your family or business and other types for a person’s own use.
PENSIONS – many Canadians today have pensions from their employment. Most people will have Old Age Pension, Canada Pension and perhaps “the supplement”.
REGISTERED RETIREMENT SAVINGS PLANS – this is basically a deferred tax saving device legislated by the Federal Government.
PERSONAL POSSESSIONS – this includes all that you use and enjoy in everyday life from the car you drive to the appliances in the house. For some things like motor vehicles and guns, the government has special rules which must be followed to transfer them. Some of these items are subject to taxes if they have appreciated in value.
BANK ACCOUNTS – If an account bears interest, the interest is taxable. Of course, it is better to have income that is taxable, than no income at all. Bank accounts can be in two or more person’s names and this can be helpful in estate planning.
SECURITIES – I use the word securities to include bonds, which are debts owed and stocks which represent percentages of ownership of a company. This term includes mutual funds, Canadian Savings Bonds, G.I.C.’s etc. Stocks have dividends (income) and hopefully capital gains, both of which are taxable. Bonds have income – taxable as well. Shares in small private limited companies are also securities and subject to taxes.
Once the assets of a person are listed then estate planning can begin. Every person has different things they want to do and the idea of estate planning is to accomplish a person’s wishes in the best possible way with the least amount of tax payable. Of course, it should be kept in mind that one’s particular wishes may result in taxes that cannot be avoided, however, in many cases a person’s wishes can be carried out by methods that protect the family and also limit or avoid taxes.
Perhaps the best way to explain estate planning is to consider a number of personal situations:
CASE #1 – John and Jane Doe are happily married with two children under nineteen. They live in a home which is on a 200 acre wood lot that John got when his father died. John works for the Telephone Company and has a Pension Plan with workplace insurance. Jane is a homemaker. They have a small bank account, car, truck and furniture.
ESTATE PLAN – It might be a good idea to put the wood lot and house into the joint names of John and Jane. This would transfer the house and wood lot automatically on the death of either of them, although it may have some tax consequences. It is important that John’s insurance is payable to Jane because, if he should die first, this money will go directly to Jane. Having the insurance payable in other ways can cause problems, for instance, increasing the value of your estate as probated and thus causing an increase in probate fees. Sometimes upon checking insurance policies it is discovered that they are made payable to parents or even the old girl friends. The Bank account, if not joint – should be, as money can be readily accessed by the survivor especially in the event of death.
Perhaps of major concern for both John and Jane is who is going to bring up the children in the event they both die before the children become adults. Trusts can be set up to allow a responsible family member or friend to bring up the children in the way John and Jane would have wanted.
Keep in mind that times change – children grow up – people get fired or retire – the estate plan one makes today rarely fits five or ten years down the road. Always up date your estate plan as you and your ideas change.
CASE #2 – Harry married when he was 18 and never got around to getting a divorce. He and his wife were separated three years ago and she’s “out west somewhere”. Thank God, he often says, they never had any kids. He and his brother, Bob, inherited the family farm and 300 acres of woodland last year when their father died. It’s got a lot of timber on it and they have it in the Coop. Last night Harry, who is known to have a few, went off the road and killed himself. Guess who now owns half of the family farm and is his brother’s new partner?
ESTATE PLAN – Harry should have got a Divorce and settled his affairs with his wife before he died and hopefully before he inherited the wood lot from his father’s estate and then made a Will leaving his half of the farm to his brother. If he didn’t want to leave his half share to his brother he could have entered into an agreement with his brother to deal with his interest in the farm at his death.
CASE #3 – Ned is 83 but is as bright as a penny and as sharp as a tack. He has been on his own since his wife died six years ago. All he has is a bank account, a few sticks of furniture and a 100 acre wood lot that has been in the family for years (before 1970). He lives with his only daughter and son-in-law and wants to give the wood lot to his grandson.
ESTATE PLAN – Ned can have his bank account put in his name and his daughter’s and give a deed to the wood lot to his grandson. Giving away your property is never in your economic best interest and may seriously affect the pride one has of looking after your own affairs. That is, Ned’s independence may suffer from a pre-death transfer of his assets. Further, transfer of the wood lot to the grandson may have serious tax and benefit consequences. A will is indicated in this situation.
CASE #4 – Mary is 79 and has lived in her own home all her life. She was, in fact, born in that house. Her sisters and her brother got married and moved away – her parents died- she was the one that stayed home. It was natural that she got the house when they died by their Wills. She has been failing these last six months and just broke her hip and is in the hospital. Soon she may have to go to a nursing home. She wants her niece to get someone to come to the hospital to write her Will or make a deed giving the house to her niece.
ESTATE PLAN – A Will would properly transfer the home to her niece at her death.
CASE #5 – John and Harry are brothers who bought a wood lot together in 1980. Although they both work in town and have steady jobs, John dies and Harry wants to buy John’s half from his widow. She won’t sell because she fears tax consequences. Is there any answer for this?
ESTATE PLAN – John and Harry can have an agreement whereby, upon the death of either of them, the other is obliged to buy the share of the deceased. Each can take insurance out on the other’s life and the proceeds of such insurance can then be used to buy the share of the deceased from the estate of the deceased.
CASE #6 – Charlie has worked with his dad on the family farm for years. It is a dairy farm but has 200 acres of timber land that they usually cut something off each year. Charlie has been after his father for years to get his affairs in order, but “the old man” doesn’t like to be pushed. Charlie’s dad died last week. Charlie has worked on the farm since he was a kid. His three sisters came home from Ontario for the funeral and one of them is married to a lawyer. He’s a nice enough guy, but he is talking about dad not having a Will and what has to be done. Charlie doesn’t want to loose his business but he can’t afford to buy his sisters out.
ESTATE PLAN – Charlie and his father should have had a contract to deal with their business on the death of either of them. The father’s Will could have given his share of the business to his son, Charlie and given other assets to the daughters. There are many ways of dealing with these problems, each with their own tax advantages or disadvantages.
CASE #7 – Bill is 25 and is single. He has been going steady with Mary for three years and they plan to get married next year. Bill has a good job with an insurance plan and has just purchased a wood lot. He and Mary plan to build their home there and, in fact, he put the foundation in already. Bill dies and it is discovered that the insurance plan at work is in his mother’s name and the wood lot goes to his father and mother.
ESTATE PLAN – Bill should have a Will leaving everything to Mary. If a single person dies without children and without a Will, everything goes to the parents equally.
CASE #8 – Harry is 69, retired and remarried. His first wife died three years ago. He has four children from his previous marriage. He met his new wife at the hospital when he was getting his hip replacement. They fell in love, they married the next year and Harry died the year following. Harry never got around to making a Will. It turns out there was a $200,000.00 home owned jointly with his wife and $ 100,000.00 in cash, GIC’s and a wood lot. Under these circumstances, the four children from the previous marriage would get nothing.
ESTATE PLAN – A Marriage Contract between Harry and his new wife is the only way to assure the four children of his previous marriage will get anything from his estate. Such a Contract could be drafted to provide for both the new wife and his children. Harry and his new wife should both have new Wills. In these circumstances, it is likely that Harry’s new wife also has children she would want to benefit from her estate, should she die first.