Most of us are hesitant to discuss what should happen to our assets when we die. It's important to overcome this, especially if you want your loved ones to have a smooth transition.
Estate planning assists you in protecting your assets, keeping your family safe, reducing taxes upon death, and avoiding potential family feuds. Its importance cannot be overstated.
So, where do you start when creating an estate plan? Continue reading to find out more.
What Is Estate Planning?
Estate planning is the process of creating a detailed plan for how your estate will be distributed after your death. Your estate, whether you are dead or alive, includes all of your assets, such as your:
- home and other real estate
- bank accounts
- retirement accounts
- stocks, bonds, mutual funds, etc.
- life insurance policy
A well-defined estate plan can ensure your assets are distributed to the people you want to receive them. Estate planning doesn't stop there, though. It should also take care of issues such as:
- the guardianship of your kids
- probate fees and estate tax
- protecting your assets from creditors
- protecting your assets in the event of a divorce
- deciding who manages your finances if you are unable to do so due to illness or injury
- choosing who makes health care decisions on your behalf if you become incapacitated
- how to ensure the financial wellbeing of a disabled family member after your death
Who Needs an Estate Plan?
Almost everybody needs an estate plan.
If you have a simple estate, a will may be the only document that you need. However, for a complex and large estate, you will most likely need additional estate planning tools such as a trust, life insurance, and power of attorney.
Remember that even if you don't make an estate plan, your estate will have one; it just might not be what you had in mind. If you pass away without leaving a will, the probate court will decide how to divide up your possessions. Probate laws vary from one province to another, but, without exception, are inflexible.
For example, if you pass away in Ontario without making a will and have assets worth less than $200,000, your entire estate will go to your surviving spouse, even if you wanted a different arrangement.
To summarize, if you want your assets distributed as per your wishes, prepare a will.
Estate Planning Checklist
Ready to create an estate plan? Here is a checklist of some key points to keep in mind:
1) Prepare a list of assets
Your estate includes both tangible and intangible assets. Your house, your car, your personal belongings, and any collections (coins, artwork, or antiques) are all tangible assets. Stocks, retirement funds, bank accounts, stock ownership in a company, and life insurance policies are examples of common non-tangible assets.
Once you write down all of your possessions on paper, assess your overall worth by estimating the value of each item. External valuations may be required for some assets, such as a home or a business.
The next step is to find out your net worth, which equals the total value of your assets, minus your debts.
2) Create a distribution plan for your assets
Determine how you want your assets to be distributed among your loved ones upon your death.
- Do you want to pass specific assets to specific family members? If so, which ones?
- Do you want to leave a certain sum of money to charity? If yes, how much?
- How important is it to you to save money on estate taxes? Reduced estate taxation may be critical for high-net-worth individuals. Otherwise, estate taxes may significantly reduce the size of your estate.
3) Protect your family’s needs
Here are some key strategies to consider:
- Consider life insurance coverage – If you pass away unexpectedly, the proceeds of your life insurance policy can help your family pay for everyday living expenses and cover expenses, like college tuition fees. Without it, your loved ones may have to rely entirely on your savings to make ends meet. As to the question of how much life insurance is enough, there is no one-size-fits-all answer. It all depends on factors such as whether you have children and whether your family has two incomes. Certain situations, like having a special-needs child, may increase your life insurance needs.
- Appoint a guardian for your kids – If you have children under the age of 18, designate a primary and secondary guardian. If your first choice is unable or unwilling to take on the responsibility, the secondary guardian will care for your children. If you pass away without naming a guardian, the court will appoint one for you. The entire process can take several weeks, and there's always a potential that the court might choose someone you don't think is the best candidate.
- Leave a set of instructions for the guardian – Your guardian might not share the same parenting style as you. If you want the children to be brought up in a certain way, leave clear written instructions for your guardian.
4) Set down directives
Estate planning might not be complete if it does not include important legal directives, such as:
- A medical power of attorney – This legal document gives another person legal authority to make healthcare decisions on your behalf, in the event you are not able to do so yourself. These choices could include end-of-life care, treatment options, surgery, medication, and other factors.
- A financial power of attorney – It gives the appointed person authority to make financial decisions on your behalf.
- A Trust – Large and complicated estates may require a trust. Broadly speaking, trusts are of two types: revocable and irrevocable.
An irrevocable trust protects you from creditors, allows you to avoid probate, and reduces the estate tax. However, you have little influence over the management of the assets you previously owned. A trust that has already been established cannot be cancelled or its beneficiary names changed.
If you don't want to give up control, consider establishing a revocable trust. You can name yourself as trustee, but if planning for incapacity is one of your goals, make sure you also name a successor trustee. If you become incapacitated, this person will manage the trust. The assets held by the trust will be distributed to your heirs without the need for probate after your death.
5) Review the beneficiary designations
When you buy a life insurance policy, you can name a beneficiary. Retirement accounts have their own beneficiaries. Make sure to periodically examine these beneficiary designations, especially following a significant life event like a marriage, divorce, death, or childbirth. Unless the beneficiary is your estate, assets with beneficiary designations are exempt from probate. For this reason, experts advise against designating the estate as the beneficiary of your life insurance policy or retirement savings plan.
Don't forget to include a contingent beneficiary as well. The insurer will transfer the funds to the contingent beneficiary if your primary beneficiary passes away before you do, or if they cannot be located.
6) Plan to reassess
Estate planning is not something that is set in stone. When your circumstances change, for better or worse, revisit the estate plan. This may include a change of job, marriage, or birth of a child.
How to create an Estate Plan
An estate plan can be as basic or comprehensive as you want. If you have a small estate, a simple will may suffice. Those with a large or complicated estate may need additional estate planning tools like a living trust, an irrevocable trust, power of attorneys, and more.
You have the power to write your own will. Be sure you have considered all of your assets and liabilities prior to doing so. Also, do not forget to sign your will in the presence of two adult witnesses, who must also sign the document. Otherwise, your wishes will not be legally-binding.
Consider dealing with an estate planning expert like Dundas Life if your estate is large. They will walk you through various tools available to you and assist you in setting up a trust should you need one.
Common Estate Planning Mistakes to Avoid
Mistakes made when creating an estate plan can prove costly. Worse, they can affect the well being of those who depend on you.
Here are some common estate planning mistakes you should avoid:
- Thinking that a will is all you need LLarge, complicated estates frequently require a comprehensive estate plan — one involving several estate planning tools).
- Not reviewing and updating your estate plan after a major life event, like a marriage, death, or job change.
- Not appointing a guardian for your children younger than 18
- Not considering ways to minimize probate fees.
- Not understanding your tax liability at death.
- Not buying enough life insurance.
- Not planning for estate equalization when bequeathing a specific asset (like a home or business) entirely to one heir.
- Not passing some of your wealth to your loved ones while living to reduce the value of your estate at death.
- Not appointing power of attorneys.
Writing a Will
A will is a formal document that states your intentions on the distribution of your assets. Creating a will gives you peace of mind that comes with knowing your assets will be distributed as per your wishes.
You can write your own will on paper or have it typed up on a computer. However, if you have a large, complicated estate, consulting with an estate planning lawyer may be beneficial. It is not necessary to have your will notarized in order for it to be legally-binding, but you must sign it in the presence of two adults, who must also sign it after you. A beneficiary of your will or a beneficiary's spouse cannot serve as witnesses.
Estate Plan Vs Will
There is more to estate planning than the will. A comprehensive estate plan usually includes several tools besides a will, such as:
- A trust
- Power of attorneys
- Life Insurance
Your will determines:
- The manner in which your assets will be distributed among your heirs after you pass away
- The person responsible for securing your estate and distributing your estate according to your final wishes
- The person responsible for taking care of your children younger than 18
- Your wishes for your memorial or funeral service.
With a sound estate plan, however, you can cover many other things. For example, trusts can help:
- lower your estate tax
- ensure some of your assets will not have to go through probate
- lower your family’s overall tax liability by assigning part of your income to one or more family members who are in lower income tax brackets than you
- distribute some of your assets while you are still alive.
Power of attorneys are frequently included in estate planning. If incapacity planning is a priority, be sure to establish both a financial and a medical power of attorney. The former handles financial decisions on your behalf in the event of your incapacitation, whereas the latter handles medical choices.
Estate Tax Preparation
Benjamin Franklin got it right when he said: “Nothing is certain in life except death and taxes.” But did you know that after-death taxation can significantly reduce the size of your estate?
Look for ways to avoid estate tax if you want your family members to inherit as much money as possible. Here are a few ideas to consider:
- Set up an irrevocable trust. Assets placed in an irrevocable trust are no longer part of your estate. Consider creating one to lower your tax liability, especially if your estate is large.
- Buy life insurance. Life insurance proceeds are paid directly to your beneficiary, who can use the money as they as see fit.
- Designate your spouse as the beneficiary of your Registered Retirement Savings Plan (RRSP). Your spouse has the option to transfer your RRSP assets to their own retirement account after your passing. No taxes are payable at the time of transfer. For instance, if you leave your spouse your $100,000 RRSP, they can transfer the funds tax-free to their RRSP. If no beneficiary is designated, the RRSP will go to your estate. This raises your estate's tax burden and consequently lowers the amount your heirs would inherit.
- Gift some of your wealth to family members while living. Passing down wealth during your lifetime can reduce the size of your future estate and lower the tax liability at death. You can give as much as you want, but ensure whatever you give away does not impact your financial well being after retirement.
- Make a donation in your will. Charitable donations after death not only create a lasting a legacy but also reduce your income tax liability upon death.
Using Life Insurance in Estate Planning
Life insurance is an important tool for estate planning. It can assist your family in paying estate taxes, probate fees, and other final expenses. It can also help create an immediate estate for your beneficiaries, since life insurance proceeds do not have to go through probate. Other than that, life insurance can prove useful when estate equalization is a problem.
You may want to leave certain assets, such as a business, to a single family member. Let's say you have two children, Sara and Joe, but only Sara is involved in your company. While it is natural for you to want to leave the business to Sara, leaving an equal inheritance for Joe may be difficult, especially if your estate lacks liquidity. In this case, life insurance can be the solution. You can purchase a policy with a death benefit equal to the value of your company and name Joe as the sole beneficiary.
Estate planning helps you put your financial affairs into order and arrange the distribution of your assets to your family members when you pass. It can also help you protect your young children, lower your estate tax liability, care for a special-needs child, and plan for your incapacity due to illness or old age.
Writing a will, establishing power of solicitor, establishing a living or irrevocable trust, and purchasing adequate life insurance are all important components of a good estate plan. Dundas Life works with some of the top Canadian insurers and can help you find the right insurance policy for your needs.