Getting your legal house in order

Reinforcing the benefits of a solid estate plan with your clients.

Estate planning is often treated as one of those “I’ll get around to it” things that sit on the back burner for far too long. This neglect is understandable, given the unenviable and substantial task of coming to terms with what to do with acquired wealth and assets after death. But for advisors, estate plan guidance should stay on the front burner alongside the other critical services and decisions that clients should be paying attention to.

Your clients may or may not have an aversion to the conversation, but presenting them with some neutral facts and considerations should help clarify that preparing a solid estate plan well in advance is something they should pursue with serious and timely reflection.

In a recent Solutions to go podcast, John Natale, Head of Tax, Retirement and Estate Planning Services at Manulife, offers valuable insights on the importance of estate planning and some of the “must do” elements that advisors should have their clients consider – in other words, how to help get their legal house in order now for a smoother outcome down the road.

A will is a top priority

At the top of Natale’s list of “musts” is preparing a legal will, primarily for the transfer of accumulated wealth and assets to other people following death. Anyone with real estate, investments or other personal assets will want to make sure these assets are distributed, as per their wishes and intentions, in a timely, cost-effective and tax-efficient manner.

Someone who dies without a will is deemed to have died “intestate,” which essentially means that the distribution of their estate is determined by the government. In this scenario, it’s likely that the assets will be given to the person’s spouse and children (if applicable). The consequences can be dramatic and undesirable in some situations, for example, if the surviving spouse is separated but not legally divorced, or if the kids are minors (under the age of majority).

A will enables the owner to decide who will act as the executor or administrator of their estate and empowers that person to carry out the instructions for the predetermined distribution of assets. A will can also contain the names of the guardians of minor children, should that be an issue.

Natale notes that, alarmingly, about 50 per cent of Canadians currently do not have a will, and that many of those who do haven’t paid much attention to reviewing and updating it in a long time. When life changes, so should the will, to reflect circumstances that can affect the funds and assets involved.

Essentially, clients should understand that a will gives them control of their legacy and allows their assets to find their way to loved ones as they wish.

Choosing an executor

During the creation of a will, choosing an executor is a key step. The role of executor can be demanding, stressful, time consuming and thankless, but it is crucial to overseeing the distribution of an estate. Therefore, it’s sensible to discuss matters with the proposed executor of the estate beforehand, to determine if that person is up to the challenge and willing to accept the responsibility.

If finding an executor is proving difficult, advisors can help with a list of trust companies and lawyers capable of fulfilling the role on standby – although clients should understand that there are usually significant fees associated with the service.

Common wealth transfer mistakes

When it comes to transferring wealth as outlined in a will, one of the most serious mistakes people can make is underestimating or underappreciating the tax considerations applied to the distribution of assets. Natale uses a basic example to illustrate how taxation can make a huge difference. Consider a single parent (a widow or widower) who has three adult children and three major assets: An RSP (valued at $1 million) A home (valued at $1 million) A non-registered account (valued at $1 million)

The parent’s intention is for the total value of these assets to be distributed equally among the three children. The oldest child is named as beneficiary of the RSP, while the will says the middle child will assume ownership of the house and the youngest child will receive the value of the non-registered account, indicating an even split, or so it would seem. But the situation gets more complex because of the associated taxes on each asset. The RSP will be taxed based on the parent’s final tax return. But the taxes will be paid out of the estate, which leaves the youngest child holding the tax bill: The eldest child receives the $1 million RSP tax-free, because the estate has paid the taxes The middle child, who takes ownership of the home (which is transferred with a principal residence tax exemption) also gets a $1 million asset tax-free Assuming the tax payable on the $1 million RSP is $400,000, or more, the youngest child will be left with only $600,000 as opposed to the $1 million for the oldest child – and this doesn’t consider any potential taxes on the non-registered investment account which would reduce their inheritance even more.

The lesson here is that clients need to be aware of what each beneficiary will receive from an after-tax, not a pre-tax, perspective. Tax considerations that they wouldn’t otherwise think about can affect some decisions.

Probate

Drafting a will doesn’t mean it can’t be revoked and redrafted, which means it’s entirely possible that there may two or more wills attributed to a person’s name. So how does a financial institution know that the will they are presented with is, in fact, the final will and testament, and not the first, second or third will? How do they know who the legal executor is and whom the assets should be distributed to?

To be sure, the financial institution will likely demand that the will is brought to court for approval, in other words, probate (for which there is usually a fee). Probate confirms the validity of the will and proves it’s the most recent version, which allows the executor to then oversee the distribution of the estate’s assets. An executor must be prepared to go through probate if asked by a financial institution or other interested party. Probate applies in all provinces except Quebec.

Bypassing probate

For certain types of assets, there are a few techniques that can help avoid having to go through the estate and potentially be subject to probate before being distributed in accordance with the will.

Clients should understand that registered assets, including RRSPs, RRIFs, TFSAs and pension plans, can be paid directly to named beneficiaries, thus bypassing the estate and potentially, probate. In Quebec, a beneficiary can be named only if the asset is with a life insurance company.

For non-registered contracts, in all provinces including Quebec, insurance products, such as life insurance policies, segregated funds and guaranteed investment accounts (GIAs), are the only products that allow you to name a beneficiary so as to avoid your estate and potentially probate, where applicable. Other bank products, such as guaranteed interest certificates (GICs) and mutual fund or stock portfolios, do not offer the ability to name a beneficiary. However, in these cases, there are other strategies to bypass probate, including naming another person as a joint-owner to whom the asset would pass in the event of the first joint-owner’s death without going through the estate. Joint ownership is not applicable in Quebec.

Trusts

Another option to flowing assets through the estate is to transfer the assets into a trust. Establishing a trust allows a person to appoint a trustee, who acts much like the executor of an estate. The trustee manages the funds and assets and determines to whom and when to distribute them based on the terms of the trust. Having a trust is another responsible way to ensure the assets are distributed in the way that the deceased individual intended. Clients should be aware that there are fees associated with many of the steps involved in creating a trust.

Annuity settlement option

With insurance products, such as life insurance policies, segregated funds and GIAs, the policyholder can not only name a beneficiary but specify that the death benefit be settled in the form of an annuity. This is called an annuity settlement option. A term or life annuity can direct instalment payments to the beneficiary over time after the client’s passing. The process is conducted by the insurance company, not a trust.

While the client is alive, and assuming the beneficiary designation is revocable, the terms of the annuity settlement option remain flexible. It can be changed to reflect new intentions, e.g., changing the beneficiary or terms of the annuity, or making part of the death benefit payable as a lump sum and part as an annuity. Unlike a trust, there’s no cost associated with changing your mind or the administration of an annuity.

This option has the advantage of simplicity, in contrast with the more complex nature of a trust. In some cases, however, complexity is preferable: trusts are generally used to handle more extensive features and conditions related to the distribution of assets.

Another big mistake

Having a will is essential, and closely related to that is the need to designate beneficiaries (and update them as necessary). However, a pitfall in the planning process is to put too much effort into worrying about every single dollar. Being overly concerned with too many details can cause a lot of unnecessary stress. Good advice for clients is to step back and approach the estate in broad strokes: focus on making sure that assets are designated for people and/or institutions in the proper order and manner.

Maintaining some flexibility is also helpful in case any legislation or rule emerges that might have a substantial effect on the estate plan. Rewriting an overly detailed plan entirely could be a costly and time-consuming process that a client didn’t expect to encounter, which can be potentially awkward for the professional relationship.

Allowing for flexibility, revisiting the plan from time to time to make sure it reflects current circumstances and updating its various components as necessary is preferable to restarting the process in response to new circumstances. Regular check-ins will help instill clients’ confidence that their legal house is in order and can contribute to their peace of mind as time passes.

Kickstarting the conversation

Estate planning isn’t a simple conversation, but it has to start somewhere. You can help your clients become more familiar with some of the relevant concepts and terminology with the aid of these articles from Solutions magazine (available to share through the free and newly updated Solutions Online email campaign tool).