So you finally got around to creating a will. That’s great! But before you give yourself a pat on the back, remember that there is more to estate planning than just the will itself.
A will is only one of many tools available for estate planning. Depending on the size and complexity of your estate, as well as your long-term financial goals, trust and other estate planning instruments may be beneficial.
Follow along as we explore all that makes up an estate and why estate planning does not end with writing a will.
What is an Estate?
Your estate consists of everything you own, including:
- Savings and checking accounts
- Your home
- Your car
- Your life possessions
- Life insurance policies
Certain debts may be collected from your estate after you pass away. If you leave behind debt, your estate consists of everything own you minus your debts.
Liabilities, as you might expect, can lower the value of your estate. If the overall amount of your debts surpasses the total value of your estate, your heirs will receive nothing upon your death. The good news is that if the estate does not have enough money to fully repay the creditors, they cannot come after your family. Unless they co-signed for the loan, your spouse or children do not inherit it when you die.
What is a Will?
A will, often known as the last will and testament, is a legal document that specifies how your inheritance should be divided among your heirs after your death. You can write your own will or engage an attorney to assist you. Remember that a will only becomes legally binding if you sign it in front of two valid witnesses, who must then sign the document to show they witnessed you signing.
When writing a will, you must name an executor – the person in charge of monitoring your estate's probate. After you pass away, the executor will secure your assets and transfer them to your heirs in accordance with your intentions. Given the importance of the position, you should select someone in whom you have complete confidence. It is a good idea to name a contingent executor in addition to a primary executor. If the principal executor is unwilling, incapable, or unavailable, this person will take over.
After you die, your will is probated, which is the legal process of certifying a will. After that, the executor begins distributing your assets in accordance with your wishes. Probate is paid for by your estate, and the entire procedure normally takes six to eight weeks. Yet, if the will is challenged, the probate process might take much longer.
If you pass away without a will, you are said to have died intestate. In this scenario, the local court appoints an executor for your estate. This person may or may not be someone you had in mind for the job. Also, intestacy laws of your province — not you — will decide how your assets are distributed. Intestacy laws are rigid and do not take into account the unique dynamics of your family. That means your assets might not go where you want them to.
In short, it is always better to leave a legal will. That way you can rest easy knowing that, after you are gone, your financial affairs will be handled exactly as you want.
Estate Planning vs Will
It is common for people to believe that estate planning begins and ends with the creation of a will. This, however, is not correct. While a will is a vital estate planning instrument, there are other others that are equally so (if not more). A strong estate plan may contain tools such as trusts and power of attorney in addition to a will.
A will dictates:
- how assets will be distributed after your death
- who will oversee the distribution of your estate
- who will be the guardian for your minor children
- your wishes for your funeral or memorial service.
An estate plan, however, covers much more ground. It may include one or more trusts for:
- distribution of assets while you are alive and/or after your death
- reducing your family’s overall tax liability
- reducing the estate tax
- ensuring your assets do not have to go through probate.
An estate plan may also include a financial power of attorney and/or a health power of attorney. A financial power of attorney manages finances and assets on your behalf. A health power of attorney, by contrast, makes medical decisions on your behalf if you are too ill or incapacitated.
In spite of what estate planning entails, its focus may be as broad or narrow as you see fit. If you have a simple estate, a will alone might be enough. Complicated estates, on the other hand, generally require a combination of estate planning tools.
What is a Trust?
A trust is a legal relationship in which a third party hold assets previously held by you. The third party keeps and uses these assets solely for the benefit of your beneficiaries.
There are three parties involved in a trust:
- Grantor: The individual who puts assets into a trust. If you are setting up a trust, that would be you.
- Trustee: The individual who manages the trust and distributes the assets as per the instructions outlined by the grantor in the trust document.
- Beneficiary: The person for whose benefits the trust funds will be used and who will inherit them eventually.
Like a will, a trust is an important estate planning tool. However, there are key differences between them, as the following comparison table shows.
Using Trusts for Estate Planning
A trust can be a smart estate planning tool for two reasons:
- Assets placed inside a trust can bypass probate. While the average probate process takes a few weeks, it might take several months or even a number of years. This typically occurs when a family member contests your final will and testament. In such a case, not only is the probate process lengthy, but it is also costly. Because the probate fees are borne by your estate, a complex, protracted probate might eat into your asset and life insurance payout. A trust can help you avoid probate and all of the headaches and fees that come with it.
- Reduces your estate tax. Your tax liability does not end with death. It is true that Canada does not have inheritance tax — tax that the beneficiaries pay on their inheritance. But that does not mean the assets you leave behind for your family will not be taxed. These taxes must be paid by your estate before your assets are handed to your heirs. In a sense, the deceased pays the tax rather than their heirs. Creating a trust is one option to reduce the estate tax. When you transfer assets to a trust, they no longer form part of your estate. As a result, the size of the estate and, by consequence, the amount of tax payable after death are reduced.
There are many different types of trusts, but all trusts can be broadly divided into two categories: revocable and irrevocable.
A revocable trust, sometimes known as a living trust, is one that you establish while you are still alive. As a grantor, you maintain the authority to change how assets are managed once the trust is established. You can also add or remove beneficiaries at any time.
A living trust gives you a lot of flexibility, because you can change its provisions to reflect changes in your financial or personal situation. But it will not be of much help if you die owing debt. The court can remove assets from your trust and pass them to a creditor if the latter decides to take legal action.
An irrevocable trust is one whose terms the grantor cannot change once it has been created. That means you cannot add or remove beneficiaries, nor do you have a say in how the assets held by the trust are handled. Also, the assets placed in the trust are no longer considered your property and consequently are immune from your creditors.
Estate Planning Tips
Regardless of the size of your inheritance, having an end-of-life plan is necessary. Without proper estate planning, your loved ones may face undue emotional and financial stress during a difficult time.
Here are some tips for making a comprehensive estate plan:
- Make a will and review it from time to time. Major life events, like a marriage, divorce, childbirth, or death may call for a review of the beneficiary designations.
- Consider hiring an estate planning lawyer if you have a complicated estate. Complex estates require more than a will, but a trust is something that you can create on your own. An estate planner will walk you through all your options and help you choose a trust type that best suits your family and financial circumstances.
- Consider creating a durable financial power of attorney, which gives a person or an entity the ability to make financial decisions on your behalf, even if you become incapacitated. You may also want to consider naming a trusted person a durable health power of attorney. This person will make medical decisions for you, if you are unable to do so yourself.
- Name a guardian for your minor children.
The bottom line
Everything you own is included in your estate. A comprehensive estate plan is essential for ensuring that your assets are dispersed in the manner you choose, among other things. You can give legally binding directions for estate distribution in a will, but you may also need a trust to cut estate tax and probate costs.
Don't forget that life insurance can be an important part of estate planning. Work with a Dundas Life insurance or estate planning advisor today to get started.