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What is an estate?

Your estate at death is your net worth. 

Net worth = (Total value of all your assets) - (Total value of your debts)

A quick note about debts: Not all debts are passed on to your estate after you pass away. For example, government student loans are forgiven when the borrower dies. So if you pass away without repaying a federal student loan, your estate will not owe that amount.

If you have a mortgage, any balance on the mortgage loan must be paid from your estate. When calculating a person’s estate, only those debts that become the estate’s liabilities are taken into account. 

Your estate's assets include everything you own, such as: 

• Your house and other real estate properties
• Bank accounts
• Your car
• Stocks, bonds, mutual funds, etc. 
• Life insurance
• Personal belongings, like jewelry 

What is Estate Planning?

The best way to ensure that your loved ones are looked after when you’re gone is by having a plan set in motion.

Estate planning is the process of creating legally-binding instructions regarding how your estate is to be distributed among your heirs. That said, a comprehensive estate plan also includes: 

• Primary and secondary guardians for minor children
• The name of the person who will make financial decisions on your behalf if you are unable to do so because of aging or poor health
• The name of the person who will make personal care decisions on your behalf if you become incapacitated
• A plan for offering financial help to a disabled family members without affecting the latter’s ability to receive public benefits
• Protects your personal assets in the event of divorce or from creditors 
• A plan for minimizing tax at death
• A plan for avoiding or reducing probate fee

Who Needs Estate Plan?

Almost everyone should plan their estate. Unless your personal property is very small, you should have an estate plan in place to ensure that your assets are dispersed in the manner you choose.

If you die without an estate plan, the provincial court will develop one for you, which may or may not include what you had in mind.

Case Study: The Importance of Estate Planning

James and Linda Dawson were a middle-aged Canadian couple in their mid-50s. James was a small business owner who had built a successful construction company, while Linda worked as a high school teacher. Together, they owned a family home, investment properties, and a well-diversified investment portfolio.

Despite their accumulated wealth, neither James nor Linda had an estate plan. They assumed that their assets would automatically transfer to their children, Sarah (28) and Mark (25), without any legal complications.

The Unexpected Tragedy

In an unfortunate turn of events, James and Linda were involved in a car accident that took both of their lives. With no estate plan in place, their estate was left to be handled by the provincial court system.

What Happened Without an Estate Plan?

1. Probate Delays & Legal Costs
   
   • Since there was no will, their estate was tied up in probate for over a year.
   • The court appointed an executor, but legal fees and court costs ate up nearly 5% of the estate’s total value.
2. Business Uncertainty
   
   • James’ construction business was left in limbo.
   • Without a designated successor, employees were uncertain about their jobs, leading to a drop in business performance.
   • The court-appointed administrator eventually liquidated the company, rather than allowing their son Mark (who had experience in construction) to take over.
3. Disputes Among Family Members
   
   • Sarah and Mark disagreed on how assets should be distributed.
   • Mark wanted to keep the family home, while Sarah wanted to sell it and split the proceeds.
   • Legal battles between siblings strained their relationship.
4. Tax Inefficiencies
   
   • Without an estate plan, their investments and assets were subject to higher tax liabilities.
   • The family lost out on tax-saving opportunities that could have been planned through trusts and other structures.

How an Estate Plan Could Have Helped

If James and Linda had created an estate plan, they could have:

• Named a trusted executor to distribute their estate efficiently.
• Appointed Mark as the successor of James’ business.
• Set up a family trust to protect their assets and reduce taxes.
• Clearly outlined how they wanted assets to be divided, avoiding family disputes.

Key Takeaway

Estate planning isn’t just for the ultra-wealthy—it’s for anyone who wants to protect their family, business, and assets. Without it, your legacy is left in the hands of the courts, and the people you care about most could face unnecessary legal, financial, and emotional burdens.

Want to secure your family's future? Contact Dundas Life to start your estate plan today.

What is Estate Equalization?

Estate equalization is the process of dividing your wealth fairly among your heirs. When the estate is composed of easily divided assets, estate equalization is simple to ensure that each heir receives an equal share.

However, if you want to leave a specific asset to a specific individual but do not have enough assets to achieve an equitable distribution of the estate, things may become complicated. In this case, an estate planning tool, such as a life insurance policy, will be required to ensure that all heirs are properly cared for.

You can leave a specific asset, such as a family business, to one person while distributing the remainder of your estate, which normally includes life insurance proceeds, to other heirs. This method assures that the correct person leads your firm when you are gone, while also ensuring that no family members feel unfairly treated.

How Does Estate Equalization with Life Insurance Work?

Life insurance provides the liquidity required to ensure each heir receives an equal inheritance. Family members who want to inherit the family business get it, while the remaining heirs receive the life insurance payout and other non-business assets. 

For example, Miles is a family business owner whose business is valued at $5 million, while the total value of his entire estate is $10 million. He has three children: Rob, Sara, and Tina; and:

• Only Tina is actively involved in the company
• Sara and Rob do not want to run the family business 
• Miles wants Tina to inherit the company after his death, but he also wants to split an equal inheritance to the three heirs

Clearly, Miles has a problem. If he leaves the company to Tina, the other two children receive a smaller share (Tina gets 50%, while Sara and Rob each receive 25%). And if he doesn’t create an estate plan, each child will get equal company ownership. But splitting the company ownership is something that neither Mile nor his heirs want. 

In this scenario, taking out a life insurance policy can help. Miles can buy a $5 million policy and names Sara and Rob as the beneficiaries. This way, each of his three children will receive an equal inheritance after you are gone.   

Life insurance can also be used with other assets, such as family property. Say you have a cottage on Vancouver Island, which accounts for the lion’s share of your estate. You want to pass the family property on to the youngest child, as your other two children are settled abroad. By purchasing a policy, you can balance your estate among the heirs so that each receives the same proportion of the assets after your death. 

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Types of Life Insurance in Estate Planning

There’s no denying that life insurance is an important estate planning tool. But the question is: Which type should you use?

Life insurance policies come in two flavors: term and permanent. For estate planning, permanent life policies are a better option. 

A permanent life insurance policy stays in force as long as you live, provided the premiums are paid. Because of its permanence, you can rest assured that your policy will eventually pay out the cash benefit to your beneficiaries. Term life insurance, while less expensive, does not provide such a guarantee. It is only valid for a limited time, which means that the insurer will only pay while the policy is active. If you outlive your term life policy, your payout is forfeited.

How to use Insurance in Estate Planning?

You can use life insurance in estate planning for multiple purposes. Apart from ensuring your beneficiaries inherit the same amount of money, life insurance can help you with: 

• Estate preservation: Tax liabilities, probate fees, executor fees, legal expenses, and funeral costs can diminish the intended inheritance. Life insurance proceeds can offset these expenses, ensuring your heirs receive the desired amount of money.
• Estate creation: The life insurance payout is passed directly to your beneficiaries upon your death. In doing so, it creates an immediate estate for your loved ones.

Estate planning goes beyond providing for dependents after your passing. It should also address potential incapacitation or disability.

Ask yourself: If you were to fall critically ill or become disabled, would your family members be able to still live comfortably? If not, you may need critical illness and disability insurance protection as well. 

Critical illness insurance provides a one-time payment if you develop a serious illness. Most insurance companies cover heart attacks, strokes, cancer, and multiple sclerosis, but the list varies from company to company.

Like critical illness insurance, disability insurance provides benefits for the living. It pays a specific amount of money on a regular basis for a fixed period if you are unable to work due to illness or injury. 

Estate liabilities after death

Your estate has certain liabilities when you pass away. Knowing them and planning for them in advance can help preserve your assets for your beneficiaries. 

Taxes

• The executor files the final tax return and pays taxes before distributing the estate.
• All assets are deemed sold at fair market value upon death, with varying tax treatments – this includes businesses, investments, and RRSPs.
• Spouses/common-law partners inherit assets tax-free, but taxes apply when they pass.
• Life insurance efficiently covers taxes after death.
• A joint last-to-die policy defers taxes until both spouses pass, making it ideal for couples.

Probate fee

• Probate authenticates a will; the estate executor can settle assets only after receiving a grant of probate.
• Probate fees are paid by the estate and vary by province (e.g., 1.5% for estates over $50K).
• Ways to reduce or avoid probate:
  
  • Name a beneficiary (not the estate) for life insurance and RRSPs to bypass probate.
  • Use an irrevocable trust to transfer assets and minimize probate fees.

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Executor fee

• An estate executor administers the deceased’s estate per the will.
• Executors are often family or friends but may expect compensation.
• Large, complex estates may require a professional executor (e.g., an estate lawyer).
• Executor fees typically range from 4% to 5% of the estate’s value.
• Naming beneficiaries for life insurance and RRSPs reduces estate value and executor fees.

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Accounting and legal costs

• The executor must file the final tax return and may need to hire an accountant.
• An estate lawyer may be required for probate.  
• All related costs are covered by the estate and can be substantial.

Funeral costs

• The executor arranges and pays for the funeral from the estate.  
• Costs vary based on service type but typically range from $5,000 to $10,000 in Canada.

Is Estate Equalization Right For Me?

Estate equalization aims to distribute assets fairly among heirs. This can be challenging for large or complex estates without life insurance. Besides achieving equitable distribution, life insurance payouts can help preserve estate value by covering costs after death.

Permanent life insurance is a better fit for estate planning than term life insurance. Dundas Life works with some of Canada's top life insurers and can help you find the right policy at an affordable price. Schedule a free consultation on estate planning today!

Frequently Asked Questions

Why use life insurance for estate planning?

Life insurance is vital for estate planning. It helps balance the estate among heirs, preserves its value, and creates an immediate estate for beneficiaries.

Could you use term life insurance as an estate planning tool? 

Term life insurance is affordable compared to permanent life insurance, but it has a fixed end date. It lacks the guarantee of providing a death benefit to your beneficiary, making it unsuitable for estate planning. Instead, consider a whole-life insurance policy as an alternative.

Is estate planning and the last will and testament the same thing? 

No, they are not.

The last will guides asset distribution after death and names child guardians. Estate planning extends further, including tax reduction strategies and tools like life insurance, trusts, and powers of attorney.