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Lorna Low and Debbie Pearl-Weinberg
June 26, 2019, 1:00 pm to 2:00 pm ET
[10 SIMPLE STEPS TO ESTATE PLANNING, WITH LORNA LOW AND DEBBIE PEARL-WEINBERG]
[PETER]:
Good afternoon everyone and thank you for joining us today.
On behalf of CIBC Investor’s Edge, I would like to welcome you to this webinar. My name is Peter Campbell and I'll be your host for this event. Now, a few things before we get started.
[DISCLAIMER]
CIBC Investor Services does not provide investment or tax advice or recommendations. So, everything we share with you today is for education purposes only.
We are recording today's session and a link will be emailed to any that registered online.
To view this webinar in full screen please click on the expander arrows located at the top right-hand corner of your screen.
If you have any questions during the presentation, please kindly take a note and you'll have an opportunity to submit your question after the presentation.
Our content for today's webinar is going to focus on 10 simple steps to successful estate planning.
Please join Lorna Low and Debbie Pearl-Weinberg as they discuss the 10 key components that make up an estate plan, the benefits of estate planning, and what you can do to ensure you have the right plan for your needs.
Lorna Low is a Wealth Strategist at CIBC Financial Planning and Advice, a Chartered Accountant and a Tax and Estate Specialist.
Debbie Pearl-Weinberg is the Executive Director, Tax and Estate Planning at CIBC Financial Planning and Advice and is a tax lawyer who consults on a variety of personal and small business tax issues for CIBC clients.
With great pleasure, please join me in welcoming Lorna and Debbie to today's presentation.
[DEBBIE]:
Thank you very much, Peter. Thank you everybody for calling in today.
We are very excited to talk to everybody about 10 Simple Steps to Successful Estate Planning. I'm Debbie Pearl-Weinberg and I will be presenting with Lorna Low today.
[WHAT IS ESTATE PLANNING?]
So, the first question you might be asking is "What is estate planning?"
Well, before we get into that, we have to first understand what an estate is. So, an estate refers to all your possessions when you pass away. It includes financial assets, real estate, vehicles, and your personal belongings.
Estate planning is a plan for what will happen with all of your possessions, all of your property after you pass away. We look at it as a blueprint and this blueprint identifies firstly, your assets, which are what you own, and your liabilities, which is what you owe. It’s what you wish to accumulate, what you want to use or own during your lifetime, and very importantly, how you intend to dispose of these assets either during your lifetime or on your death.
Some may wonder whether a will covers this. A will outlines what should happen to your possessions when you pass away, but estate planning is bigger than that. It sets out the groundwork for that to happen in the best way possible.
[DID YOU KNOW...]
[LORNA]:
Let’s start out with some interesting facts.
And I wasn't aware of a lot of these statistics, but did you know that 31% of Canadians are worried about taking care of themselves? They don't want to be a burden to their loved ones. So, I thought that was a bit interesting.
The second one was a bit more startling, is that 51% of Canadians do not have a will. I have to admit, for the longest time, I was one of those people. So, full disclosure here.
And the final statistic is that only 30% of people have a formal estate plan. So that's why we're here today, is to kind of help everybody get over that hump and be part of the 30%. We want to get that number up.
[IMPORTANCE OF ESTATE PLANNING]
[DEBBIE]:
Exactly, so, yes, estate planning is extremely, extremely important. There is a number of reasons that it is so important.
First of all, you need to organize your affairs.
You need to provide for an effective transfer of your wealth. What that means is you need to figure out how to get your stuff to the people you want to get your stuff. It's very simple.
But estate planning, you also want to simplify. You want to reduce the number of administrative tasks that are going to be needed to be done by your loved ones after your death. Proper estate planning helps you consider if there are ways to reduce taxes at the time of your death, protect your assets, to make sure your assets go where you want them to go.
You're going to provide structure so that your wishes can be carried out and provide instructions for your loved ones on how to do this. And this is really going to make this easier for them after you are gone.
And above all, estate planning is going to give you peace of mind.
[HOW TO GET STARTED WITH ESTATE PLANNING]
So, Lorna, can you talk to us a bit about how to get started. Like, where you actually start.
[LORNA]:
So, what we've done is we've identified ten steps. And don't think of this as a top ten list, is it's actually a list and they're in a bit of an order. So, I'm going to go through them fairly quickly but don't worry about it because we're going to go into it in a bit more detail as we go through the slides in the presentation.
So, number one—we need you to identify your team of professionals, let’s call them helpers.
Secondly, we need you to take an inventory of your financial assets, and I would say all of your assets because it's not all about dollars and cents, there's some personal possessions that may not have a monetary value but are definitely important to you and your family.
Third, it’s helpful to understand your life insurance needs.
Fourth, you need to draw up a will because without a will everything falls off the legal rails. So, a will is kind of the legal direction or road map, if you will.
Fifth, and these steps kind of fall together, draw up your will and also establish a power of attorney for property.
Another one is, you may have heard of drawing up a power of attorney for personal care. So sometimes people call that a living will. There's various terms that you may have heard for that personal care.
Then there’s always tax considerations in estate planning as there is in anything else that goes on.
The other thing to keep in mind, is you need to keep track of your accounts and other important information that comes into play.
You need to review and update all of this information regularly.
And, most of all, you need to share your plans with the executors that are going to manage your estate and sometimes with your family members so they have an understanding of what you had wanted, and so that it avoids any misunderstanding that may arise after your death because you won't be able to speak to it from the grave.
[STEP 1: DESIGNATE A TEAM OF PROFESSIONALS]
[DEBBIE]:
That's great. So, the first thing you talked about was designating a team of professionals, and I like how you referred to them as helpers.
We've included some of those helpers here on this slide. So, it can include everybody from your financial advisor, to a lawyer who may be drafting up your will, who may put in place draft trust documents, powers of attorney, an accountant, a trust and estate consultant.
When you talk with your advisor, there's a lot of different areas that you're going to want to cover. You may have a vision for your family wealth, what you think should happen to it in the future. This can include things like philanthropy. Do you want to make charitable donations? Is there a legacy you want to have? Also, at the same time, when you're thinking of this vision, you'll also be thinking about identifying potential hurdles that you need to overcome or that you need to think about.
[FAMILY VISION – WHAT IS THE PURPOSE OF YOUR FAMILY WEALTH?]
So, Lorna, can you take us through the family vision?
[LORNA]:
It sounds like a concept that's way out there. But, you look at your wealth, and let's call it vision for the sake of argument. So, you've got your family wealth, or your money, just for sake of argument. So, there's different pools of capital. We're calling everything capital just because it's sort of a nice easy word to associate with money. It sounds a lot better. So, we're going to call financial independence capital. That's basically the money that you need to survive for yourself and for your family. So, we're calling that financial independence capital. So that's what you need today, while you're still alive.
[DEBBIE]:
So, for you and for your family today?
[LORNA]:
Exactly. And any other people you might be helping along the way. So family, friends, whoever you help out.
Secondly, once you die, there's something that we call the legacy capital. So almost as it sounds, this is the pool of assets that you want to pass on to, we'll call them your beneficiaries or heirs. They're going to inherit this legacy capital.
[DEBBIE]:
So, this should be what you don’t need today.
[LORNA]:
Exactly. So, then there's, I kind of want to look at it as two ways of identifying your beneficiaries.
You can provide the assets out directly, so as the beneficiary will own it themselves once you're gone.
And then there's another category where the asset will be passed on to, we'll call her a steward, to take care of the asset. It could be a minor child, so we have a steward that kind of looks after the asset because you may not be in a position to look after that asset, so there's a steward in place.
[DEBBIE]:
And that could be a trust right?
[LORNA]:
Exactly. I’m gonna talk more about that.
Then there's the social capital. This is kind of, I like to look at it, and on the slide it's referring to assets that are for taxes and charity. It's like, why don't they think of taxes as a social kind of thing? But you would step back and you'd look at it. We know the taxes that the government collects—so, the annual taxes that we file every year, as well as when you die there's going to be date of death taxes. So those taxes, as we know, the government uses to finance social programs. So, things like education, health care, policing, those we kind of put in the pool of social capital. So that's what we mean by social capital.
And then the other thing, which is probably more of a voluntary action, is things, or funds, that you might want to leave to charity. So, things that you're passionate about, causes that you want to help out. You know, cure for cancer, helping out kids, all those sort of things that during your life you may have donated to. You can think about donating during your life or even upon death. And that's part of your estate plan.
[STEP 2: TAKE A FINANCIAL INVENTORY]
[DEBBIE]:
It seems like your helpers, your team of professionals, can help you with this.
[LORNA]:
They should be. If they're an important part of your decision-making process, you definitely want to involve them during your estate planning process. It's always good to keep that in mind.
As a starting point, it's always good to take a financial inventory. So, not necessarily a financial inventory, but all the possessions that you have. So, it's not just the assets that you have in Canada. A lot of people think it's just assets that are in the country that you live in. It's actually your worldwide assets that you need to consider for making up your estate plan. Because you might have — let's say I've got a chalet in Switzerland, I need to take care of that as well. So, it's your worldwide assets.
[DEBBIE]:
I guess you also have to think of how you own assets.
People often just think, well, it's just what I own personally and all by myself. Well, no, it's also the assets you hold jointly with another person. You have to think about property that's held within a trust. Because, even if you don't have it today, at some point in time you may get that. Also, if you own assets, if you own shares of a corporation, there's property inside that corporation. You have to consider what’s going to help with that and include that in your plans.
[LORNA]:
It would definitely be a good surprise if there were assets that I didn't know about in this trust. So that's something that I would look forward to.
[DEBBIE]:
Yes, I think most people would as well.
And remember, when you're starting out and you speak with your financial advisor, they can start the work at preparing this financial inventory for you.
[LORNA]:
They can definitely help you identify what assets and things that need to be included in that inventory.
[STEP 3: UNDERSTAND YOUR LIFE INSURANCE NEEDS]
So, they're a good resource.
Step number three, there's life insurance.
We're all familiar with what life insurance can be used for. So, the traditional thinking is that we use life insurance proceeds to pay for estate expenses. That can be things like, definitely funeral expenses, any debts that you may have had during life have to come out of that, and of course there's taxes that need to be paid. So, the insurance proceeds can be used for estate expenses.
Secondly, it's often used to replace income. So, if you had dependents that you were supporting, so your kids, maybe a spouse, who is going to look after them? Because you were providing income and helping them out during your lifetime. The insurance proceeds can be used as a source of funds for them once you're gone, because they're going to need something to live from after that. So, insurance is also to replace income.
The final thing that life insurance can be used for is kind of leave an insurance. If there's anything left after those first two major expenditures, the remainder can be left out as an inheritance. So that's kind of the third possibility where insurance might fill a need.
[DEBBIE]:
So, if you think you might need…I mean, can we start with our advisors? Can we go there to ask some questions?
[LORNA]:
They would definitely have an understanding of the different types of life insurance policies. You might have an insurance policy that you're not quite sure what it means. Your financial advisor can help you decipher what that policy means and how it can help out your estate. So definitely, I would use my financial advisor as a resource. He or she is a good starting point.
[DEBBIE]:
And they can bring in other experts to assess what you're going to need.
[STEP 4: DRAW UP YOUR WILL]
That's great. Okay Lorna, you talked earlier about drawing up a will, that that was one of the steps, and I'm going to talk about that because earlier on you quoted some statistics about how many people do not presently have a will.
So, what is a will? It's simply a written legal document outlining your intentions for the management and transfer of estate assets. So, what you want, where you want your property to go, your stuff to go, and how you want it to get there. Your will is really a key to setting out how you want your assets distributed, and it involves a number of things.
First of all, you have to think about who you want to name as beneficiaries. Who do you want to get your stuff?
Next, who are going to be your executors and your trustees? That's really important because they are going to be the people who will carry out your wishes.
If you have minor children, name guardians. You can name guardians in your will as to who you want to take care of your children.
You can pre-plan how you want assets to be transferred. You can have a direct transfer, where it goes to the beneficiary outright, or you can do it in what we refer to as a trust. That's going to be a testamentary trust. It's going to be a trust that arises on your death where a trustee will take care of the assets and will manage it in the way you have instructed and will distribute amounts to your beneficiaries how you have instructed, as well.
[LORNA]:
Those are some really important considerations of why you would need a will, Debbie. What would happen if I were to die without a will?
[DEBBIE]:
If that happens, it's up to the provincial law in the province where you live. There's going to be a law of intestacy, every province has this, and that will determine how your estate is distributed. So, you won't get to decide where your stuff goes. And where it goes, under the provincial law of intestacy, may not be what you want. So that's the risk of dying without a will.
Also, potentially excessive taxation. There may have been ways to distribute assets in a more tax-effective manner. There can also be legal challenges. It can cause unnecessary issues with our family, and stress, and certainly additional cost, and take longer for the estate to be settled.
[LORNA]:
I hadn't thought of all that stuff.
[DEBBIE]:
I suspect that's why so many people don't have a will.
[STEP 4: DRAW UP YOUR WILL (CONTINUED...)]
[LORNA]:
Okay, so I'm thinking about doing my will now. How do I know who to include as a beneficiary?
[DEBBIE]:
You can choose whoever you want. That's the thing, it's up to you. You can decide what relatives, friends, charities, whoever you want to choose as the beneficiary of your property. You may want to consider an alternate beneficiary just in case the beneficiary pre-deceases you.
Remember that the beneficiary is not going to be taxed on what they receive once they get the property. Let's say they get a portfolio of stocks, after they own it, then they'll be taxed on the income arising from that property.
But again, remember if you don't list beneficiaries, your inheritance is distributed based on the provincial laws, not on your wishes.
What's very important, as well, is your choice of executor. The executor, remember, is the person who will be carrying out your wishes. They'll be administering your estate, so they have to have the time to carry out these duties, and they have to be willing to do this. At the time, they can accept or reject the appointment. So, we always say speak to people in advance and make sure that the people that you appoint as executor under your will are willing to do that.
They should have objectivity, it's very helpful if they're a Canadian resident. Think about their age. Are they of an age that's proper to appoint them as an executor? If you're 60 years old, you could have a 90-year-old parent that you really, really trust, but at your age and their age, should that be who you appoint as the executor? You've got to think about that.
[LORNA]:
It usually makes sense you appoint your friends that are your same age, but everybody's growing old at the same time so by the time we're 60 or 70, we've really got to think about who we want to include.
[DEBBIE]:
That's right. You know, some people use children, some people may not have adult children.
Experience and reliability. The next thing I'm going to talk about is some people appoint a professional trustee. I've had clients say, "I have nobody. My children don't live near here and I don't want to put this burden on them. I don't want to put it on friends who are the same age as me. So, what am I going to do?" So, they go to a professional trustee at CIBC. We have CIBC trusts. Some people want them involved, as well, if there is a lot of complexity to an estate, or if they want a high degree of impartiality. Sometimes they appoint a professional trustee as a co-executor, even if they have someone else who they want involved, they may want a professional trustee, as well. Again, remember, if you don't appoint anyone, the court is going to do it for you and it may not be who you would have liked.
[LORNA]:
It's a huge responsibility, so it sounds like I've got some options to explore when I set up my will.
[STEPS 5 & 6: ESTABLISH POWER OF ATTORNEY]
[DEBBIE]:
Okay, Lorna, on to you. Steps number five and six.
[LORNA]:
Five and six. So, Powers of Attorney that I had spoken of previously.
A Power of Attorney is somebody, or it could be more than one person, that you identify to handle your affairs when you are no longer able to do so. So that's if you lose your mental capacity or you're physically unable to make decisions. There's two types of Powers of Attorney.
The first one that I'll cover is the financial Power of Attorney. That's for your property and financial matters.
The second is the Power of Attorney for personal care. That's for health and medical decisions. So, somebody who is able to decide the level of care that you may have wanted. Those sort of things are identified in the Power of Attorney itself.
Those are the two basic types of Power of Attorney's. It's important to note that those are only in effect once the Power of Attorney has been activated. The second thing to remember is that once it's activated, that Power of Attorney is only applicable as long as you're still alive. So once you've passed away, the Power of Attorney is not the person in charge anymore. That person now is your executor. It may be the same person, it may not. That's just something to keep in mind, is that the Power of Attorney is only in effect during your life.
[DEBBIE]:
So, just like I said, speak to somebody who you want to appoint as an executor to make sure they're willing to act, should you speak in advance to people you would like to act as a Power of Attorney?
[LORNA]:
Yeah, it's kind of the same thing as the executor and it might be even more important to identify Powers of Attorney during your life because if you're still alive, they're going to be managing your assets as well as taking care of you. So that may come before your estate so it's important to give serious thought to who you would like to appoint as your Power of Attorney because they're in there first before the executor comes in.
[STEP 7: TAX CONSIDERATIONS IN ESTATE PLANNING]
In moving right along to step number seven. It's my favorite: Tax Considerations in Estate Planning.
[DEBBIE]:
It's everyone's favorite.
[LORNA]:
You've probably heard of probate fees, and I'm just going to talk through them quickly and then we'll go in to a bit more detail. So, there's probate fees and then there's taxes on death, and then finally there's the role of trust and how they may be used as part of the tax planning, so we'll go into that in a bit.
[1. PROBATE FEES]
So, in the first slide we'll talk a little bit about probate. So, you wonder what probate is. Probate is actually the court process. What it does is it confirms that the will that is being presented is legally valid and that it is in fact the last will of the deceased. Probate differs from province to province. In some provinces there is no probate if I recall. Is that right Debbie?
[DEBBIE]:
Or it's very low in the timeline.
[LORNA]:
And Quebec has its own laws so it does vary from province to province.
Probate fees are what the courts charge to validate the will. So, it's a provincial fee. It's based on the assets that you own when you die. So, it's the actual assets that you own personally, not the ones that might be in a corporation or ones that might be in a trust. There's kind of ways around that. It's assets that you own on death.
Finally, there's going to be ways that we can try and minimize the probate fees. Some of the common techniques that are used are designating beneficiaries for plan assets. The common ones that you are probably familiar with are RRSPs and TFSAs. The first thing the financial institutions ask you is who is your beneficiary. So that kind of is the first consideration.
The other way to save probate is you might consider gifting assets during your lifetime so that you don't own them at death. You hear of a lot of parents giving away assets like cash or even the house to their kids during their lifetime.
The last one is joint ownership of assets. This one comes up quite a bit Debbie.
[PITFALLS WITH JOINT OWNERSHIP OF ASSETS]
You hear stories in the paper where a parent has put their adult child on title with their house and they're joint owners and that's going to save me a whole bunch in probate. It’s a good thing isn't it?
[DEBBIE]:
Well, I guess it's a good thing to save probate, but we've talked about this before and I could talk about the pitfalls of joint ownership of assets for quite a while. Now, we don't have all day to talk about that today but let me talk to you a little bit about some of the things that people don't consider.
People think it's so simple. I'm just going to put these assets joint with my child. I don't have to worry about probate. Maybe they even think, hey, now I don't have to worry about a Power of Attorney. It's great. Well, it's very unclear when somebody does that, what is their intention? Did they mean to make a gift to that other party, it could be their child, let's say it's a child, or did they want that child really to hold it in trust for them? This is really important for a number of reasons.
If you make a gift to that other person, there's going to be a deemed disposition of half the property at that time. So, let's say you have a portfolio of stocks and you put on your child as a joint owner of that account, if it's a gift to that child, there's tax on the deemed disposition of half of that stock portfolio. You've just given it away to that child.
You should also think about the fact that you've lost control of the asset. So, you're right, there's been a lot of stories that have come out. You think that you can trust somebody that you put on as a joint holder or you wouldn't have done it, but then you find out that they've absconded with your assets. They could have emptied your bank account, sold off certain assets. It's a very scary proposition.
[LORNA]:
My son would never do that to me.
[DEBBIE]:
Neither would my children either, Lorna. But you know, what can we say? We always do bring this up in a meeting to warn people that they really are losing control of those assets and to be careful.
And any loss of control in another way. You could have creditor and family law claims. There's been a recent case where somebody made property joint with a child, an adult child, and then that child was sued and lost, and the creditors came after him and they were successful in obtaining certain assets because the court said, "It's joint, you own half of it. So that's it, it can go to the creditor."
Similarly, family law claims. If spouses or common law partners separate, divorce, if you own assets jointly, there’s potential that that could be included in family property and be subject to division. You could lose asset-tested benefits. If you were getting certain benefits that are only given to you if you have a low level of assets, then that could impact that, as well.
Tax benefits. For instance, the principal residence exemption. Let's say somebody decides they're going to put their house jointly on title with their child, and that child has another house that they plan to claim the principal residence exemption on. You could lose that principal residence exemption on half the property.
[LORNA]:
That's right because each person or each family only gets one principal residence exemption.
[DEBBIE]:
Yep, each couple.
And then, again, unclear intentions. Gift or trust? Lots of disputes can arise. If you have multiple children, let's say and you only put one on as the joint owner. What happens on your death? If you're will says everything is to be split between your children, can that joint owner say, "Well it's not part of my estate. I get whatever's in this account and then I get to split what else is left over." Or should that account form everything that should be split?
Anyways, these are some of the things that actually happen when there is an unclear intention as to why something was put in joint ownership.
[2. INCOME TAXES ON DEATH]
So, income taxes on death, always something that we like to talk about.
[LORNA]:
There is a couple of differences in tax when one passes away.
The one that gains a lot of attention is that when you die, the government considers you to have disposed of all of your property. So, it's kind of like you're having a going out sale. They declare that any property that you own, so that could be things like your principal residence, although there's an exemption on that, things like investments that you may have in a portfolio, like stocks and bonds. Those would all be deemed to have been sold at their fair market value on the date of your death. So, if there are any gains in there, you would be taxed on that gain on your death. That could result in a large tax bill that you may not be expecting because you didn't actually sell anything, but because the government has this deemed disposition, this notional disposition, that can attract a whole bunch of tax.
[DEBBIE]:
And then you have to think about your registered plans. They're not capitol property, so there's no deemed disposition of them, but for RSPS and RRIFs, they're fully taxable to the deceased plan holder on death. The fair market value of those plans are taken into income.
[LORNA]:
So, it's not just the growth?
[DEBBIE]:
No, the entire amount. Now, there are exceptions, that I'm going to talk about in a minute. There are things we call "roll overs" where they go on a tax-free basis to a spouse or common law partner or financially dependent child or grandchild. So those are exceptions to this rule.
[STRATEGIES TO MINIMIZE INCOME TAXES ON DEATH]
Let me talk a little bit about those now. These are strategies to minimize taxes on death.
So, the first is transfer to a spouse or common law partner. Firstly, what Lorna was talking about, the deemed disposition of capitol property. If you transfer property to a spouse or common law partner, then there is a roll over available where the property can be transferred at its cost amount rather than at its fair market value. That means that there's not going to be any capital gain or capital loss that is triggered on that transfer.
The second is when you have an RRSP or a RRIF. When these amounts are transferred to a deceased spouse or common law partner, it can be transferred again on a tax-free basis and go into their RRSP or RRIF and continue on a tax-deferred basis. If the RRSP or RRIF is transferred to a dependent child or grandchild, in all cases it can go on a tax-free basis and can be used to purchase an annuity to age 18. So, what this does is it defers tax and it allows the amount from the RRIF or RRSP to be taken into income over a number of years, depends on the age of the child, up until the age 18.
So, you're spreading out the income inclusion on a year-by-year basis and hopefully that means you're going to pay overall, a lower amount of tax if that child doesn't have other income and you're taking into account graduated tax rates.
The second is if that child or grandchild is dependent on you because of a mental or physical or infirmity. Then you can do a transfer to a RRIF or an RRSP in that child or grandchild's name.
[LORNA]:
Is there an age restriction on that third one, transferring to a disabled/infirm child?
[DEBBIE]:
No. No age restriction.
[TAX FREE SAVINGS ACCOUNTS]
[LORNA]:
That's good to know.
[DEBBIE]:
So, then we get into TFSAs. These are a little different than RRSPs and RRIFs. It's very important because there's a lot of confusion about what happens with these on death. Even though, in most cases, other than exceptions that I'm going to talk about, the TFSA does come into the hands of the deceased plan holder on their death. It is received on a tax-free basis so there is no income inclusion or tax that arises at death. The only time the tax starts arising is that after death, if those funds are still invested, anything that is earned after death is going to be taxable because it's no longer a tax-free savings account.
Now, in terms of minimizing taxes, you can designate your spouse or your common law partner to be your 'successor holder' of your TFSA. This doesn't affect their own contribution room. They take over as the holder of that TFSA and it goes on the tax-free basis. If you don't designate them as your 'successor holder', and they're just the beneficiary of that TFSA, it can still be moved into a TFSA in their own name, it's just not as seamless a process.
[LORNA]:
It just sounds like there's a huge tax savings if you name your partner as a successor because it sounds like I'm adding two TFSA pools together. That's the benefit. So, very important to name a successor holder as opposed to straight out beneficiary when you've got a spouse.
[DEBBIE]:
Absolutely, and you avoid probate as well because it bypasses the estate.
Now, same thing if you designate a non-spouse or a non-partner as a beneficiary. You can't do the same rollover. They can't automatically transfer it to their TFSA unless they have TFSA contribution room. They can make a contribution. But still, the funds should go straight to the beneficiary and there is, if you consider probate fees a form of taxation, then there is a benefit of doing it that way.
[TRUSTS]
So, let's move on to our discussion of trusts. Lorna.
[LORNA]:
So, there's two kinds of trusts.
There is the testamentary trust, and that comes into effect once you die. The testamentary trust is something that's set up in your will. There's a specific instruction that provides for setting up a will.
The second kind of trust is called an inter-vivos trust, or a living trust. That's a trust that you would normally set up during your lifetime. So, there's a trust during your life and one that you set up upon death.
[TESTAMENTARY TRUST]
I'm just going to flip over to the next slide to talk a bit about the benefits of a trust.
As I mentioned, you provide instructions in your will to set up the testamentary trust. There's benefits to setting up a testamentary trust. Most importantly, I think, is to provide support for your loved ones or your spouse when you die. You want to set aside this pool of funds and put it into a trust for them. Assets that are in a trust are protected and sometimes you need to protect assets if you have a spouse who may be not...I'll say capable or comfortable with handling finances because you always took care of it while you were still alive. Sometimes by putting these assets in a trust, you've got a trustee or an executor who is looking after the management, so it alleviates the administrative burden of looking after assets. So that's a benefit for trusts.
As well, you might have some mismanagement of funds. So, say you wanted it for the funds to last for a lifetime of the child or the dependent, by putting it into a trust, it can be at the discretion of the trustee to decide when funds can come out and for what purposes. So, there's a bit of control in a trust that wouldn't exist if the assets were passed out directly to your beneficiaries.
The other thing is that by having a trust, you might be able to save some probate when the beneficiary themselves pass on because they don't own the asset. So, there might be some savings when your spouse passes on, say for example if things were left in a trust for the spouse. So, there might be some probate savings by putting things into a trust.
Now there's pitfalls of setting up, I wouldn't say necessarily pitfall, but there are some important considerations.
So, because of the level of responsibility that a trustee holds, you have to select them very carefully, as we mentioned earlier. So, somebody who has good character, or seeks good financial judgment, understands your family and what would have been important to you. Those are the kind of characteristics that you want to keep in mind when you're selecting your trustees.
It's also important to note that income that is in the trust is taxed at the highest tax rate, and that's because of recent tax changes before testamentary trusts were taxed at graduated rates. Now, for the most part, income is taxed at the highest tax rate. That's a consideration as well.
The final thing is that every 21 years, for most trusts, there is what we call a deemed disposition of assets. So that's kind of the same concept that we discussed previously where the government looks at the fair market value of the assets in the trust on that 21st year, and any unrealized gains that are in that trust, there's a tax that needs to be paid on that in the 21st year. There's some planning that can be done around that. But that's something to keep in mind, that you can't let this thing run indefinitely and ignore it for 21 years. The trustee kind of has to have an active hand in the situation and review the assets and the different things in the trust, definitely before the 21 years.
[TESTAMENTARY TRUST: PROTECTING YOUR INHERITANCE]
[DEBBIE]:
Okay, so I'm just going to run through an example of when people might want to use a testamentary trust. To put it in more concrete terms. This is a fairly typical example that we see and something that we get asked about a lot.
This is a scenario of a second marriage. So, you have spouse A who is now married to spouse B, but spouse A has kids from a previous marriage. If things went perfectly, what they would like to do is, on their death, leave their property to spouse B. After spouse B passes away, it would go to their kids. But what they're concerned about is that when spouse B passes away, instead of whatever is left over going to spouse A's kids in green, instead it goes to spouse B's children from a previous marriage. This is a really big concern and can be solved very simply by putting in place a testamentary trust that we call a spousal or common law partner trust.
What happens is that on spouse A's death, the property goes into this testamentary trust and there's a trustee that looks after it. All the income from the trust goes to spouse B to support them during their lifetime. If they need capital to support them, then the trustee has the discretion to give them capital to support them during their lifetime. So, spouse A knows that their spouse B will be adequately taken care of during their lifetime. And then, when spouse B passes away, whatever is left over goes to spouse A's kids from their first marriage. That's something that we see put in place quite common for second marriages. Would you agree?
[LORNA]:
Yeah, is that something that is automatic or is it something that I have to specify in my will?
[DEBBIE]:
Oh, absolutely, it's something that you have to set out in your will that the trust should be set up and who will be the trustee of that trust.
[LORNA]:
So especially in this second family situation, very important to do that.
[INTER-VIVOS TRUST]
[DEBBIE]:
So, Lorna talked about testamentary trust. I'm going to talk a little bit about inter-vivos trust.
They're very similar to testamentary. The one difference is that they are set up during your lifetime. Again, similar benefits. Provides support for dependents and you have the assets managed by somebody that you trust to manage them. Now, it depends on the province. We have up here prevent inclusion of assets under family law legislation, but it will depend on the provincial legislation and the terms of the trust whether or not those assets are considered family property for purposes of family law legislation.
Again, it's the same considerations, or what we refer to as pitfalls in selecting a trustee, you have to think about it, and how the trust is taxed at the highest marginal tax rate unless income is distributed out to beneficiaries and then it's taxed at their tax rate, and the deemed disposition.
The other thing is when you have an inter-vivos trust, and property is transferred in kind to the trust, there is a deemed disposition of assets at that time.
[LORNA]:
More tax?
[DEBBIE]:
More tax. So, capital gains could be recognized at that time if you transfer property into a trust. Now, there are some exceptions to that. For instance, if you're setting up a spousal trust. So, similar to the trust that I just described, you could have a spousal trust set up during your lifetime, and if it's structured properly, then you would not have the deemed disposition and capital gains recognized when assets were transferred to that trust in your lifetime.
[STEP 8: KEEP TRACK OF ACCOUNTS AND IMPORTANT INFO]
[LORNA]:
I think we spoke about a lot of these steps earlier on. But what you want to do is take an inventory of what you have. Sometimes I don't know where to begin. What would be a good place to start? I know I've got my accounts with the bank, but how do I know what to include? Is it just everything that comes to mind?
[DEBBIE]:
Everything! You can speak to your advisor and they can start with you keeping an inventory. I think one thing that people, and we talked about the type of assets to include, but you should also — don't forget about what you have digitally. You know, what people are going to need digitally after you pass away and keep track of that, and keep an inventory of that.
[LORNA]:
Is that stuff like passwords or intellectual property?
[DEBBIE]:
Everything. Everything that you have. Even have a list of advisors and professionals that you use. And where should you store them?
[LORNA]:
I guess that's true. It's not all about money because a list of advisors…don't forget to include your family doctor, religious leaders that need to know, other specialists. So, it's not all about money. I know you see refrigerator lists so I guess you wouldn't want to put all this personal information on a list on your refrigerator.
[DEBBIE]:
Right next to my shopping list.
[LORNA]:
I guess it depends on how long your list is. But it's definitely an important document, and if the fridge is the place for it, maybe that's where it goes. But store it safely.
[DEBBIE]:
Absolutely.
[STEP 9: REVIEW AND UPDATE REGULARLY]
So, once you have all this, what do you do?
[LORNA]:
Once you have it, you have to make sure as life changes, things happen, you have to review this stuff regularly. We say every three years. I think that's at a minimum. But you kind of know when life throws you a curve and you got to look at it again. So definitely review your estate plan every three years.
I think as you age, things happen a little quickly. Your kids move out of the house or maybe they move back into the house, depends on what's happening. So, at least every three years.
What you should do is have a financial plan drawn up at least once a year. Kind of the financial snapshot of where you are, where you could go. Kind of your plan of your potential of things that can happen. So, do that at least once a year. And then, as I mentioned, life changes. Definitely review when there are significant life events, what have you.
[STEP 10: SHARE YOUR PLANS]
[DEBBIE]:
So, you know, this is something, share your plans, this is something that I think we've been talking about throughout this presentation is that you're going to do all this work, but you need to communicate your plan.
You need to let the right people know where your will is stored, where your Power of Attorney is and where your financial documents are. Your financial advisor can also help, so make sure your executor, your family knows who your financial advisor is. You may want to introduce your advisor to your executor and who has your Power of Attorney.
Again, we talked about this but we can't reiterate it enough. Talk to those people who are going to be involved about their responsibilities so you can make sure they are willing to take on those responsibilities and that they have the requisite knowledge.
That is going to make it a lot easier when the time comes because they will know where things are and who your key helpers are.
[LORNA]:
That's right. Nobody likes to be surprised. You don't want to find out you're an executor...surprise! Or, you've been cut out of the estate...surprise!
[WHAT'S NEXT?]
[DEBBIE]:
So, what's next? You can book a consultation with a CIBC advisor and they can definitely help you understand more about how an estate plan can not only help you but it can also help your family and your loved ones.
[LORNA]:
It really is about peace of mind, isn't it?
[DEBBIE]:
Absolutely.
[PETER]:
Well thank you, Lorna and Debbie for your insightful presentation. I really gleaned a lot of information personally for myself.
While Lorna and Debbie review the questions, I want our audience who joined in later to know you can type your questions in the Q&A panel located on the right-hand side of your screen.
[QUESTION & ANSWER]
If you wish to review this webinar again, a link will be emailed to everyone that registered for this webinar. Also, I'd like to request the audience who ask questions we’re explicit to today's topic on estate planning and to avoid asking questions that are specific to a security or a company.
Well, we have some great questions coming in. So, let me pass this over to Lorna and Debbie now.
[DEBBIE]:
Okay, so the first question that we see coming in is...okay, I'm going to take this.
What happens to TFSA funds when the second spouse dies?
So, I'm going to assume what has happened here is you have two spouses. Spouse number one passes away and designates spouse number two as the successor holder of their TFSAs. So, spouse number two has all these TFSA funds. When the second spouse dies, it really is going to depend on what their circumstances are at their death.
For instance, if they've remarried, and they have a new spouse and they designate that spouse as a successor holder, you could have a further transfer of the TFSA assets on a tax-free basis. That new...I guess third spouse would be the holder of that TFSA. If they don't have that spouse, and let's say they just, it just forms part of their estate, then those funds will now form part of their estate. It will not be included in income, but as those funds now earn income, that income will not be earned on a tax-free basis.
[LORNA]:
These questions are really coming in.
[DEBBIE]:
Yeah, they're coming in fast and furious so we're trying to read them. Okay, I see...
Please confirm that roll over of RRSP and RRIF is done at cost value not fair market value.
[LORNA]:
It is the value of the RRSP or RRIF at death so it is the fair market value that goes into...
[DEBBIE]:
But I think what they're asking about is if there's a roll over to a common law partner or a spouse’s RRSP. Then, yes, there's no income inclusion at that point.
[LORNA]:
No, the assets are added to the spouse’s RRSP portfolio.
[DEBBIE]:
Either it's done directly or indirectly, and you should speak with a tax advisor at the time if you are designated as the successor annuitant of the RRIF it’s done on a seamless basis. If it's not done directly, there is a way to have this roll over occur, but it takes a bit more steps and more information has to be included on your tax return.
[LORNA]:
And you do have to be cognizant of the time within you make, we'll call them elections, because there are time restrictions of when you have to do these things. So, you can't wait a year later to do this. You kind of have to, the executor rather, has to be on top of these various deadlines.
[DEBBIE]:
Okay, we've been asked a question about spousal trust.
Can it have final beneficiaries aside from biological children, nieces and nephews, for example?
It can have anybody. The only qualification for that spousal trust, I mean, there's rules about income distributed, but for the spousal trust, the first beneficiary can only be a spouse or common law partner, but after that spouse or common law partner passes away the beneficiaries can be anyone. Anyone.
[LORNA]:
So, you're talking about the residual beneficiaries in that case.
[DEBBIE]:
Okay, we have another question from Kelly.
If a beneficiary is named for RRSPs, does the beneficiary need to have contribution room in order for those RRSPs to be transferred?
It depends on whether or not the beneficiary is a spouse or common law partner, or a child, or a grandchild, or dependent on for support, or somebody with a physical or mental infirmity. So, if the spouse or common law partner is the beneficiary, then you can do this all on a complete roll over. They don't need to have RRSP contribution room.
[LORNA]:
You have to be named as the beneficiary on your plan.
[DEBBIE]:
Right. So that is if a spouse or a common law partner then they don't need to have contribution room for the amounts to be transferred.
If you name your dependent, a child or grandchild who is under the age 18, it's just going to be able to go to an annuity in their name up to age 18. Again, no room required. And, if you name your child or grandchild who is dependent on you, because of a mental infirmity, then again they don't need to have RRSP contribution room. However, if anybody else is named as the beneficiary of an RRSP, in order for them to make a contribution to their own RRSP using those former RRSP funds of yours, they do have to have RRSP contribution room or they'll be subject to penalties and taxes.
[LORNA]:
Yeah, because those beneficiaries aren't receiving RRSPs at that point. It's the actual assets that are cashed. So, it won't be a direct transfer, they have to have the room.
[DEBBIE]:
Yep, we can do just one more question.
Is a holographic handwritten will valid in Ontario?
Yes it is. A holographic will is a will written by hand. There are rules about it. It is valid in Ontario. But, I am going to caution...
[LORNA]:
Qualify that it will be subjected to the probate process.
[DEBBIE]:
And there's definitely more concern that you're going to have more scrutiny on it. And, if you have, let's say, left out, let's say you had another will and then you made a holographic will where you left out a beneficiary, you can imagine that at the time of your death, there is going to be some squabbling if we can call it that, and fighting over whether or not this holographic will is valid.
[LORNA]:
The one thing I guess we didn't emphasize enough is that for any of these planning ideas, you must consult a qualified legal advisor because of the complexity and some of the tax savings and structures that we spoke of. It's really a legal professional that can kind of walk through the nuances to kind of make sure that what you had intended to happen will happen.
Trusts and wills are very tricky. We're talking about the English language and you hear of things where a comma is misplaced, and kind of the same idea. You need to have a lawyer who knows where to put these commas and put attention to these various things.
So, apologies for not mentioning that earlier but you definitely need to involve a lawyer in these consultations.
[PETER]:
Well, Lorna and Debbie, thank you so much for an amazing presentation today.
[THANK YOU]
Looks like that's all the time we have for today. I'm sure I speak on behalf of the entire audience that I thoroughly enjoyed listening to your insights and thank you again for a great presentation.
If you have any questions or comments, please visit the Investors Edge website. Or please feel free to get in touch with us by phone, live chat, or email.
Thank you so much for joining us today and we are looking forward to our next session.