Where there’s a Will…

One of the first questions I ask any new client I meet is, do you have a Will? If so, when was the last time you looked at it?

A surprisingly high number of Canadians do not have an up-to-date legal Will. This has significant ramifications for both the family and the community of the deceased. It has been estimated that over $1.5 trillion will pass through estates in the next 20 years. Without a current Will, at best, these assets may not pass according to the deceased’s most recent wishes, or at worst, be allocated by the government based on intestate laws.

Intestate laws are determined by your province. Because of this, the variance in the preferential amount received by the surviving spouse ranges from the first $40,000 – $200,000 of the estate. After this amount is distributed, the remainder is divided among the surviving spouse and children, who inherit their amount at the age of majority. Also, who qualifies as a spouse varies from province to province, but most do not recognize common-law spouses.

When drafting a Will, one of the primary decisions is who will be your executor. The executor is the individual or corporation responsible for making the decisions for the estate. Some examples of this would be: ensuring that taxes and debts are paid, applying for probate or determining that it is not required, making the distributions to the beneficiaries, etc. Though the executor can appoint agents to assist them in their task, the ultimate legal responsibility rests with them.

Typically the surviving spouse is appointed as the executor of the Will. It is prudent to consider alternatives in case the executor predeceases or is otherwise unwilling or unable to act. Often, adult children, siblings or other close family members or friends are appointed. In all cases, the executor may charge the estate a fee for their services, but this will be a certainty if a corporate executor is employed.

Once the taxes and debts have been paid, the remaining assets in the estate are distributed to the beneficiaries named in the Will. Naming contingent beneficiaries, such as siblings or charities, is a practical action, as it will direct your estate to those you choose in the event that someone predeceases you.

The most common way assets are distributed is through an outright distribution. This is where the named beneficiary receives the asset directly. Though less complicated, this may cause problems especially when the beneficiary is a child. Any outright distribution to a minor is held in trust until the age of majority at which point the beneficiary receives the asset completely unencumbered.

It has been a while since I was 18, but I am sure I would have made the wrong decision with any inheritance coming my way at that time. To limit the access to the inheritance until an appropriate age is reached requires another form of distribution. This is where the testamentary trust comes in.

Instead of naming an outright beneficiary in the Will, the testator states that they would like a trust to be set up to hold the funds for the benefit of that beneficiary. This will allow the testator to dictate when the beneficiary can receive funds from the trust and how much the beneficiary can receive.

In addition to controlling the estate distributions, the testamentary trust has other non financial advantages. As the beneficiary does not own the assets outright, they do not form part of the net family property in the event of a marital breakdown. Also, if the beneficiary dies before the trust is exhausted, the residual beneficiaries (i.e. grandchildren) receive the benefit instead of following the Will of the beneficiary.

The testamentary trust also has a key financial advantage, income splitting. The trust is treated as a separate taxpayer from the beneficiary. This allows for the efficient distribution of income and tax minimization that is not available in an outright distribution. Because of this, these trusts are not only useful for children, but can serve as a tax saving mechanism for the surviving spouse if their own income is already very high.

A properly drafted estate plan is a cornerstone of your overall financial plan. It will give you the peace of mind that your loved ones will be provided for when you take your leave of this world.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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