Estate Planning For Non-Lawyers

(How to work with estates lawyers for the benefit of your clients)

Cynthia J. Kett, CA, CGA, CFPStewart & Kett Financial Advisors Inc.

ckett@stewartkett.com

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Outline

Why is estate planning important? What can you do to help your client

through the process? Should you be an executor/trustee?

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Why Is It Important? Orderly succession

Assets to desired beneficiaries Minimization of family disputes Expeditious transition

Tax minimization Estate liquidity

Payment of taxes Payment of debts Provision for spouse’s/CLP’s and

dependents’ ongoing living expenses

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What Can You Do to Help? Estate Net Worth Cash management Tax planning Retirement planning Investing and risk management Wills

Intestacy Family law issues Outright distribution Trust will Probate and probate fees

Powers of attorney for property and personal care

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Estate Net Worth Complete list of assets and liabilities

Current fair market values and costs Assets held jointly with other individuals – joint beneficial

ownership or assets held in trust? Net asset values as of the date of marriage

Check title and beneficiary designations Differentiate between registered and non-registered accounts

Identify liquid versus non-liquid assets Include life insurance proceeds Include personal assets

Quantify tax liabilities – prior years, current and contingent Other legal liabilities

Support obligations to dependants Contingent business liabilities (personal guarantees)

Estimate probate fees

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Cash Management Identify surviving dependants’ needs

Spouses/CLPs Minor children Disabled dependants

Quantify immediate need for cash on death to cover testamentary expenses

Quantify current cash flow available for purchase of insurance (if required/desired and client is insurable)

Consider charitable giving objectives

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Tax Planning Objective is to execute testator’s/

testatrix’s desired distribution at minimum tax cost

The death of a taxpayer triggers a deemed disposition of all his/her assets at fair market value

Net unrealized capital gains are subject to income tax unless a rollover applies

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Tax Planning Strategies Income splitting

Rollover to spouses/CLPs or spousal/CLP trusts Family trusts Registered proceeds trusts Life insurance trusts Assets left to disabled beneficiaries may

disqualify them from receiving government disability benefits

Henson trusts – not valid in Alberta Registered Disability Savings Plans (RDSP)

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Tax Planning Strategies Estate freezes

Consider future financial needs of the freezor, including potential emergencies

Multiple tax returns upon death of the taxpayer Choice of non-calendar year-end for testamentary trusts Unapplied capital losses in excess of capital gains can

be deducted from any source of income in the deceased taxpayer’s terminal return or in his/her return for the immediately preceding year

Net capital losses and terminal losses realized in the first taxation year after death can be carried back to the final return

Alternative Minimum Tax (AMT) carried forward from previous years can be claimed in the terminal return

AMT does not apply in the year of death

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Retirement Planning

Quantify resources needed to support testator’s/testatrix’s desired retirement lifestyle

Excess or shortfall? Provides estimate of potential size of

the estate Sets parameters for estate planning

strategies

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Investing and Risk Management

Assets in excess of clients’ projected future financial needs may be invested for multiple generations For clients For beneficiaries Impact on asset mix

Consider the appropriate use of insurance products and the impact on the estate plan Life insurance, LTC insurance, critical illness

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Wills and Will Components Will

Legal appointment of an estate executor/trustee Legal declaration of a person’s wishes regarding the disposition of

his or her assets after death Will components

Identification of Testator/Testatrix Appointment of executors/executrices and trustees Registered proceeds and/or insurance clause Payment of debts and funeral expenses Specific bequests Distribution of residue

Primary, secondary, giftover Family law provisions Custody of minor children

The appointment of custodian is only valid for a limited period following the date of death as set out in the relevant statute

The permanent appointment will be determined by the court, but the client’s recommendation will play a significant role in that determination (specify reasons for the choice)

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More Will Components Residue trust provisions

Hotchpotch clause Acknowledge disproportionate gifts made during lifetime

Spousal trust Other income-splitting trusts Henson trust

Powers of trustees To accumulate and distribute income To encroach on capital To make payments to minors To employ agents To deal with real property (sell, lease, mortgage) To distribute in specie To make income tax elections To borrow or to lend To act as the testator/testatrix could act with respect to business interests and shareholdings To deal with claims against the estate To settle trusts on other trustees

Clauses protecting the trustees (limiting liability) Executor’s compensation clause Burial arrangements

Legally the wishes are binding, but intent should be communicated to your executors in advance Memorandum of personal effects

Not binding on trustees unless signed and dated prior to the will and incorporated by reference in the will

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Intestacy

Intestacy If an individual dies intestate (without a valid

will), provincial legislation dictates how his or her property will be distributed

Preferential share The surviving spouse of the deceased receives

a preferential share (varies by jurisdiction) Distributive shares

If the value of the estate is larger than the preferential share, the remainder of the estate is divided between the spouse and the surviving children or grandchildren in the form of distributive shares

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Other Intestacy Issues The distribution of intestate estate by legislation

may not reflect your client’s wishes and may not result in what is best for his/her estate or beneficiaries

If there are no trustees appointed by way of a will, the court will appoint one or more for the estate

Generally look to intestate beneficiaries in the order of their interest in the estate

The appointed trustee(s) will not have the broad powers that the client might otherwise wish them to have

The trustee may have to post a bond unless the requirement is waived by the court

May be difficult to obtain A bond must also be posted by non-resident trustees

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Family Law Act, R.S.O. 1990

Applies in the case of death or marriage breakdown Applies to common law spouses only with regard to support

provisions Major provisions of the Family Law Act (FLA)

Spouses have equal entitlement to possession of the Matrimonial Home(s)

Neither spouse may sell, mortgage, lease or encumber the Matrimonial Home without the other spouse’s consent

Each spouse’s Net Family Property (NFP) is calculated as at the Valuation Date

The spouse with the lower NFP is entitled to an equalizing payment equal to one-half the difference between his/her NFP and that of the other spouse

NFP equals the net value of property owned on the date of separation, divorce or the day before the date of death, less the net value of property owned on the date of marriage, other than property excluded by the FLA

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Outright Distribution versus Trust Will

Two basic alternatives for disposition Outright distribution

All assets are left outright to beneficiaries Beneficiaries have complete responsibility for administration

and investment of funds once they receive them Subsequent income is taxed in the hands of the beneficiaries

Trust will Assets are left to one or more trustees who are charged with

the responsibility of administering and investing funds Upon the death of the primary beneficiary, estate capital is

passed onto the residual beneficiaries Income retained in a testamentary trust is subject to

marginal personal tax rates Maximum accumulation of income is 21 years from the date

of the Testator’s death (The Accumulations Act - Ontario) Limitation on the length of the trust: life in being at the time

of death + 21 years = distribution (The Perpetuities Act - Ontario)

Deemed disposition every 21 years unless transferred to beneficiaries at tax cost (The Income Tax Act)

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Outright Distribution

Advantages Simplicity Freedom from ongoing administration costs If the spouse is the beneficiary, deemed capital gains can be

deferred until the death of the surviving spouse If the spouse and others are beneficiaries, trustees may have

some flexibility with respect to the deemed disposition of estate assets

Capital gains can be triggered to utilize the deceased’s unrealized capital losses or his/her remaining capital gains deduction (small business shares or farm property)

Disadvantages No control over estate assets after they have been distributed

to beneficiaries Beneficiaries may lack the ability to manage the inherited

capital Less flexibility than trusts with respect to income splitting

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Testamentary Trusts Trusts categorized by intended beneficiaries

Spousal trusts Family trusts Spendthrift trusts Henson trusts

Reasons to use trusts Control of assets Provision of ongoing asset administration for

beneficiaries (minors, disabled beneficiaries, financially uninformed beneficiaries, multiple beneficiaries with potentially conflicting objectives)

Minimization of taxation Tax deferral Income splitting

Protection from creditors of the beneficiaries

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Deemed Disposition Upon Transfer to Trusts

Deemed disposition upon transfer No deemed disposition if it’s a rollover trust

Spousal/CLP trusts Alter ego trusts Joint partner trusts

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Spousal/CLP trusts

The spouse must be the only income beneficiary

Until his/her death, no one other than the spouse may be entitled to capital distributions out of the trust

Rollover No deemed disposition upon transfer Capital gain taxes are deferred until the

death of the spouse

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Probate & Probate Fees What is probate?

Probate is the process whereby a provincial court

Confirms the authority of the personal representative or administrator, in the case of intestacy, to administer the estate of the deceased

Certifies the validity of a will (if one exists) Why is probate needed?

Probate is generally required before third parties (banks, mutual fund companies, and investment dealers, for example) will allow the executor to access and administer the assets of the estate

What are probate fees? Estate fees charged by the courts to probate a

will or to appoint an administrator

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Probate & Probate Fees In some Canadian jurisdictions, the probate

fees are reasonable (Alberta, for example, has a maximum of $400)

Probate fees in Ontario are significantly higher The fees are charged on the total value of the

assets of the estate at the time of death, less any mortgages on real estate

The rate in Ontario is rounded up to the nearest $1,000

0.5% on the first $50,000 1.5% on the remainder

How to avoid and minimize probate fees The basic rule

Non-estate assets are not subject to probate fees

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Avoid and Minimize Probate Fees

Gift Assets Before Death These assets will not pass through the estate, thus

avoiding probate fees However, income tax and other consequences should be

considered: Deemed disposition upon gifting

Gift tax-friendly assets like cash or GICs, since these won't trigger a capital gain

Gift investments that have not appreciated significantly in value since purchased

Gift assets that have appreciated in value over a number of years to avoid a tax hit all in one year

Income attribution Gift assets to children age 18 or older to avoid income attribution

The gift is irrevocable and control of the asset will be lost The asset will become available to creditors of the beneficiary US gift tax may be applicable (US citizen or US assets)

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Avoid and Minimize Probate Fees

Hold assets in joint tenancy Assets held in joint tenancy will automatically pass to the surviving co-

tenant and will not form part of the estate, thus avoiding probate fees Tax and other considerations:

Deemed disposition upon transfer from sole ownership to joint tenancy Income attribution Control of the asset is shared The asset becomes available to creditors of the other owners on title If there is a question of the transferor’s intent, the asset may be assumed to

be transferred in trust or treated as held as tenants in common Confirm intent using a Declaration of Trust or by confirming a gift by legal

document May be challenged by other estate beneficiaries if the transfer results in an unequal

distribution of estate assets Two Supreme Court of Canada decisions – May 3, 2007

Pecore v. Pecore Found in favour of the daughter; dismissed appeal by daughter’s ex-husband

Madsen Estate v. Saylor Found in favour of siblings; dismissed appeal by daughter who was joint

account holder

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Avoid and Minimize Probate Fees

Name beneficiaries directly for registered plans and life insurance

Establish multiple wills Primary – everything that requires probate Secondary – “Only these items” such as personal

effects; shares of private corporations/bare trustee corporations; an interest in an inter vivos trust controlled by the family; assets held in trust in joint name with the deceased

Use of inter vivos trusts Alter ego trusts Joint partner trusts

Use of Alberta trusts

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Alter Ego Trusts & Joint Partner Trusts

Created after 1999 The transferor is at least age 65 (partner can be <65 years old) Under the terms of the trust:

The transferor, or the transferor and his/her partner, are entitled to receive all of the income derived from the trust property during his/her lifetime, or during the period ending on the death of the survivor of the two of them

During the transferor’s lifetime, or the trust period, no person other than the transferor, or the transferor and his/her partner, is entitled to receive or otherwise obtain the use of any income or capital of the trust

Advantages Privacy Less likely to be challenged than a will

Disadvantages Income retained in the trust will be taxed at the highest marginal

tax rates No testamentary trusts for income splitting

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Powers of Attorney For property

The client designates someone to act on his/her behalf in his/her absence, inability or incapacity

The attorney will be able to do anything your client can lawfully do with respect to his/her financial affairs except make a will and make testamentary disposition decisions (such as beneficiary designations)

As such, the document is very powerful and should be safeguarded Consider specifying that the attorney can designate a beneficiary

for a RRIF if the beneficiary is consistent with the one for its predecessor RRSP

For personal care The client designates someone to make personal care decisions

for him/her if he/she becomes incapable of doing so Types of decisions might include

Health care (including authority to refuse or consent to medical treatment)

Shelter Nutrition Clothing Safety Hygiene

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Powers of Attorney

Considerations regarding your client’s choice of attorney include:

His/her degree of trust in the person The attorney’s ability to understand all aspects of the client’s

financial affairs and to manage the client’s assets (for property) or to understand the client’s philosophy of life (for personal care)

The proximity of the attorney’s residence to the client’s His/her willingness to act as the client’s attorney If joint attorneys are appointed, ensure that they are compatible The naming of an alternate attorney is strongly recommended

A power of attorney may be revoked at any time while the client has capacity

Someone can apply to the court to be appointed guardian in place of the named attorney

A power of attorney becomes null and void upon the client’s death

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Should You Be an Executor/Trustee?

Considerations Conflict of interest Potential liability

To creditors To CRA if all assets distributed without Clearance

Certificate To beneficiaries To spouse under family law if assets are

distributed too soon Duties Compensation

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Duties of Executor/Trustee Duties include:

Carrying out directions specified in the will Acting personally except where authorized

Can delegate administrative functions Can delegate decision-making in certain circumstances

Written agreement with the party to whom delegated Retain responsibility for the results

Acting honestly and with the level of skill and prudence expected of a reasonable person of business administering his or her own affairs

Acting in the best interests of the beneficiaries Maintaining an even hand with regard to beneficiaries

Exercising discretion without extraneous bias Maintaining accounts regarding the estate/trust administration and

reporting to beneficiaries Consult an estates lawyer, who will be paid for by the estate,

to ensure that you are aware of all the requirements of your role as executor/trustee

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Compensation No pre-determined formula As agreed with the testator/testatrix or

the beneficiaries Otherwise, guided by the provisions of

the applicable Trustee Act S. 61(1) of Ontario’s Trustee Act reads:

“A trustee, guardian or personal representative shall be entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice”

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Ontario Compensation Guideline

The sum of: 2 ½% of capital receipts and disbursements; 2 ½% of revenue receipts and disbursements; 2/5%/year of the value of assets under administration

where trusts are involved On a $1 million dollar estate with assets held in trust and

yielding a 5% rate of return, the approximate compensation under this formula would be:

$50,000 (once all assets have been distributed) $2,500, annually $4,000 annually Compensation is divided equally amongst the

executors/trustees unless you agree to a different allocation The cost of preparing and passing accounts is borne by the

executors/trustees (courts have been awarding reasonable costs out of the estate)

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Alternate Compensation Arrangements

Consider whether to negotiate payment based on hours spent x your professional billing rate (ideally at the drafting stage of the will, when you can discuss the matter with your client)

You may ask that the will specify that you are only to perform the duties within your capacity as a professional

If you choose not to act (whether based on compensation or for other reasons), do so at the start

Moral obligation to act if you had previously agreed to do so Once you begin to act, you may be restricted in your ability to

resign your duties – especially if you’re the sole executor/trustee

Instead of acting as executor/trustee, you could choose to be an advisor to the estate

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Summary You have the background and expertise to guide your clients

through the estate planning process Depending on your business focus, you may be able to provide

“expert” advice in certain areas You know their financial and family circumstances You have gained their trust during your professional

relationship with them Therefore, you can help to make them more comfortable with:

Their mortality The legal process Their fears regarding the well-being of dependent survivors

You may gain significant personal satisfaction by helping your clients with their estate plans

Assets to desired beneficiaries in an expeditious and cost-effective manner

Estate planning may provide profitable business opportunities for you