Estate planning is the process of creating a plan that handles how you want your assets distributed should you die or become incapacitated.
It utilizes legal documents and financial tools to minimize tax liabilities and to ensure your assets are transferred seamlessly to the people or causes that matter to you.
Steps To Start Estate Planning
Estate planning can be a complicated matter.
Nonetheless, you can attempt it yourself if you’re willing to learn.
However, you will probably want to include a lawyer in the process to ensure everything’s in order and legally binding.
You may also want to include a tax specialist and financial advisor in your discussions as they can often offer additional valuable insights.
This is especially true if you own a business as this drastically increases complexity.
1. Determine Your Assets
Start by collecting information on all assets within your estate.
The following are meant to jog your memory, but this list is far from comprehensive:
- Cash in bank accounts.
- Investments in non-registered accounts.
- Investments in registered accounts (RRSP, RRIF, TFSA, RDSP, RESP.)
- Insurance policies.
- Real estate, including investment and foreign properties and holiday homes.
- Vehicles, including watercraft and recreational vehicles.
- Precious metals.
- Fine art.
- Business assets, including cash, inventory, vehicles, equipment, buildings and investments as well as accounts receivable, pre-paid expenses, patents, and goodwill.
2. Where Do You Want Your Assets To Go?
Now that you have a good idea of what you own, it’s time to look at where you want your assets to go.
Don’t worry about how you will go about it at this point.
Just list everyone you want to include in your estate plan.
Consider whether you need to care for a spouse, partner, or minor children.
Do you want to leave money to certain charities or help a friend? If you own a business, can it be sold and who should get the assets?
Also, think about who could become your personal representative when you’re not able to.
For instance, you may need a guardian for your children if you’re a single parent.
You may also want to name an alternative if you’re married, in case your spouse becomes incapacitated or dies.
3. How Do You Want Assets Distributed?
At this point, you have an overview of who you want to include in your estate plan and the assets you own.
Now it is time to ponder which assets should be distributed to which party and at what point.
As an example, you may want a young child to receive a lump sum as they come of age or when they start their post-secondary schooling.
You may also want to leave certain assets to a favourite charity when you die.
What about your registered plans such as an RRSP or RRIF? Do you want these assets to go to your spouse/partner, dependent, or another beneficiary? Do you have a life insurance policy? Who would you like your beneficiary to be?
How and when you distribute your estate can impact taxes, capital gains, and probate fees.
Investigate each scenario carefully and seek the advice of professionals such as a lawyer or accountant when needed.
4. Create a Will
Your will is usually the first document created during estate planning.
It lays out the specifics of who will take control of your assets to ensure proper distribution.
It should also include who will serve as guardians for young children if you and your spouse/partner are unable.
Dying without a will (intestate) could leave your assets in the hands of a court-appointed administrator.
Intestate laws add complexity, increase administrative costs, and may lead to higher taxes.
Loved ones may not receive the treasured items you wanted them to have either.
You can prepare your own will, but the Financial Consumer Agency of Canada Services recommends professional legal help.
Bearing in mind what is it stake, it is well-worth serious consideration.
5. Choose Beneficiaries
Your beneficiary designations dictate who receives the funds in your retirement accounts and insurance policies.
These designations supersede what is in your will.
Consequently, they should be reviewed regularly.
You can choose a family member, friend, charitable organization, or a religious institution as a beneficiary.
However, naming a minor as a beneficiary adds complexity as assets must be held in a trust until they reach legal age.
6. Name Your Executor
Your executor is responsible for the administration of your estate and the distribution of your assets.
It is a position that entails a great deal of time and effort and many fiduciary and legal obligations.
Some people choose an individual as their executor while others rely on a professional such as a lawyer, accountant, or corporate trustee.
It is possible to appoint a family member or friend or professional counsel depending on the approach you’d like.
However, this increases complexity and cost.
When considering an individual for the role of executor, ensure they live in your province or territory to avoid potential tax issues.
They should be responsible, objective, highly communicative, and preferably have some business experience.
Finally, consider someone who is likely to survive you.
Ask them whether they’re willing and able to take on the duty too as it is a significant commitment.
7. Grant Power of Attorney
Power of attorney allows an individual or professional to step in to manage your affairs if you become incapacitated.
They’re legally obligated to act in your best interests, but you must outline what they can and cannot handle.
Naming more than one person as an attorney can complicate financial management.
Granting power of attorney is especially important for singles.
Without it, the court assigns a guardian and they will deal pragmatically with your affairs without concern for your wishes.
8. Advance Care Planning
Advance care planning isn’t obligatory, but often desirable.
It is the process of planning what will be done if you are unable to give “informed consent.”
Examples include falling into a coma or experiencing severe dementia.
This planning focuses on medical and personal care.
Requirements vary between provinces and territories, but may include Advance Directives, Representation Agreements, and Power of Attorney agreements.
9. Final Arrangements
Making final arrangements isn’t essential, but it can avoid much confusion during a very stressful time.
At the very least, express your desires to your executor regarding how you would like your funeral handled and the location of your preferred final resting place.
What About A Trust?
A trust can offer another way to transfer assets to beneficiaries.
A third party, or trustee, assumes a legal duty to hold assets on your behalf.
Many trust types exist under two fundamental groups: testamentary and inter vivo.
Testamentary trusts are created within your will and take effect when you die.
Once these offered significant tax advantages, but 2016 legislative changes eliminated them, except in very specific cases.
Inter vivo trusts established while living may also offer benefits.
However, the choices are vast and complex.
The Canada Revenue Agency currently recognizes 30 inter vivo trust types, all with various purposes and tax rules.
Clearly, professional advice is highly-recommended to determine whether one of these trusts is a worthwhile choice for you.
Trusts are not legal entities and may trigger taxes at the highest possible rates.
Reviewing Your Estate Plan
Legal professionals recommend reviewing your plan every three to five years, whenever you want to make changes, or when life events occur.
Events that could merit a review include:
- Marriage – yours or your child’s.
- Separation – yours or your child’s.
- Divorce- yours or your child’s.
- Conjugal relationship for over one year – yours or your child’s.
- Birth of child or grandchild.
- Death of beneficiary or executor.
- Lost contact with executor.
- Change of executor.
- Change of beneficiaries.
- Move to another province, territory, or country.
- Health deterioration – you, spouse, or child.
- Addiction – spouse or child.
- Adult child becomes dependent.
- Lost contact with adult child.
- Acquisition of additional assets.
- Disposal of assets.
- Beneficiary or dependent becomes disabled.
- Possibility of future financial problems.
- Start, buy, or sell a business.
- Provincial, territorial, or federal legislative changes.
An estate planning professional monitors legislative changes and should contact you if they find they apply to your situation.
If you choose to go it alone, you bear this responsibility.
Frequently Asked Questions
- What is the difference between a will and estate planning?
An estate plan is a very detailed plan that directs your assets to the people and causes you choose in the best possible manner. It also utilizes financial strategies to minimize tax liability and retain maximum value for your beneficiaries. Your estate plan includes legal documents that may apply while you are living and after your death to seamlessly transfer assets at the chosen times. Your will is only one document within your estate plan.
Your will details who will assume responsibility for your assets, who will serve as the guardian of minor children, and who receives specific assets.
- What is the purpose of estate planning?
Estate planning is meant to distribute your assets in the manner you want without incurring excessive taxes. It can also ensure financial and medical decisions are made for you when you are unable to do so.