Category: Legacy Planning

Planning for a Disabled Child

Posted on by Chantel Gibbs

Parents of disabled children often spend sleepless nights worrying about what might happen to a disabled child if they are gone. Estate planning is very important for everyone, but particularly for parents of a disabled child because special considerations may need to be made for that child over the other children. This article outlines some of the planning opportunities, depending on what the parent wants to leave for their child’s provision.

Real Estate Property

Property like a home can be left for a disabled child in one of three ways – through the will, in a trust, or through joint title. Often when using a trust, the trust might not come into existence until after the parents pass away, but the details of how the trust will work are already prewritten – usually in the will. The will might also just simply specify that the house is left to the disabled child, giving them full control. A trust is advisable if the child’s disability is a mental one, but if it is a physical disability and they can manage their own finances, then letting the child have full control is fine. The downside of a trust is that it needs a trustee to manage it and it will need to file a tax return separately for every year that it is in existence (typically a $1000 accounting/legal fee yearly).

By far the simplest way to leave a family home to a disabled child is to add them joint on title because then it won’t even need to be part of the parents’ estate and will. This is best if the disabled child is living with the parents, is not mentally disabled, and doesn’t have another property, otherwise the principal residence tax exemption might be partially lost.

Leaving Funds

Funds can also be left for a disabled child in one of four ways – by beneficiary designation, by setting up and contributing to a RDSP, through a trust, or through the will. 

Accounts like RRSPs, TFSAs, segregated funds, and life insurance allow beneficiaries to be named so that those funds are paid out directly on death instead of having to go through the will and the estate. This can be a simple way to give extra to a disabled child while still having the will distribute the rest of the estate equally between all children. Beneficiary designations can be easily updated with the financial institution without having to update the will. 

A RDSP account is a savings accounts for people who qualify for the disability tax credit federally and the government gives matching grants depending on how much family contributes to the account every year. The RDSP is in the name of the disabled child, however, and would be part of their estate if he/she passes away. 

Funds can also be put in a trust, either while the parents are alive or created in the will upon the parents’ deaths. As mentioned earlier, a trust has additional administration and fees to maintain, but is the best for a child with a mental disability. Alternatively, the will can simply leave a higher percent of the residual estate to a disabled child, assuming the child can manage their own finances.

Communication

Whatever strategy you decide to use to provide for a disabled child, it is recommended to have a family discussion, especially if a sibling is expected to be a trustee or expected to help in managing the assets set aside for the disabled child. The only instance where parents might decide to keep it quiet is if the other children might resent the extra that a disabled child gets. In that case, gifting a life insurance policy or funds through direct beneficiary designation is the best way to quietly give extra to one child. Some insurance companies will even allow the death benefit to be paid out as a monthly allowance for the rest of the child’s life – almost like a trust but without the management cost.

If you would like to explore ways to set aside assets for a disabled child, reach out and book a meeting with me today!

Getting Your Estate Documents Done

Posted on by Chantel Gibbs

Getting Your Estate Documents Done

No one likes to think of their own mortality and getting your estate documents done is probably one of the least fun activities out there. Personally, it took me about a year to have my will and POA documents done and signed. Part of that roadblock might be that the average cost of seeing a lawyer and having those documents done is $1000. However, the cost of dying without a will for your family is usually far more.

Dying without a will – otherwise known as intestate – means that your assets are distributed according to provincial law. Some provinces have everything go to a surviving spouse while others give a portion to children immediately. With no spouse or children, it goes to parents and siblings first, then grandparents, and finally aunts and uncles if there is no immediate family. Inheritance for a person under 18 is usually administered by the Public Trustee for a fee until the beneficiary is old enough.

A survey in 2018 found that 51% of Canadians do not have a valid signed will.

 

The administration of an estate without a will tends to drag out and pile up in costs. First, one of the family members needs to volunteer to administer the estate and may need to put up bond to personally guarantee that they will do it properly. This step alone can drag out and in the meantime, the deceased’s bank accounts and assets are all frozen. If a deceased person owned a business, this is especially bad. Secondly, the court needs to determine who the beneficiaries are going to be and there can be family squabbles over that. All this goes to show that it is better to have the will done ahead of time.

The main steps in getting a will done is to pick an executor/administrator, determine if there are any specific gifts you want to give (like a lump sum to charity), and then divide whatever is left in the estate pot between named beneficiaries according to a percent. For instance, you might have three children and no spouse, so the estate pot would go 33% to each child. You also need to think about who would get a person’s portion if they died before you. For example, if one of your children pre-deceased you, would their portion go to their children or to your other surviving children?

Picking an executor can be difficult. You want someone trustworthy and decent at administration. It is best to pick someone who lives reasonably close since the job of an executor often includes sorting through household items and visiting banks. Don’t pick someone who lives in the USA if you can help it for reasons too complex and annoying to get into. If you pick a family member, remember that being an executor can be a lot of work so they should be allowed to take a fee from the estate over and above their inheritance. If you use a trust company as executor, they will tell you the fee calculation ahead of time and you will need to approve it and add clauses to your will permitting them to have certain rights and abilities. You can also name an alternate executor in case your first choice can’t do it. In my experience, most spouses will name each other as the main executor and then maybe another family member as alternate.

Power of Attorney documents are also highly recommended and come into affect while you are still living if for some reason you are unable to make certain decisions or do certain tasks. The Power of Attorney for property allows a named person to run your finances and pay your bills for you. They can’t change your will or beneficiary designations, but can otherwise do most financial things for you – which means you need to name someone trustworthy. The Power of Attorney for personal care, otherwise known as representative for personal care, names someone to make medical decisions on your behalf if you can’t. You can spell out your general wishes like “Do not resuscitate” to help guide the decision maker. Most provinces provide the default forms for these so you can complete them without a lawyer if you so choose. The link for the province of BC’s forms can be found here: POA for BC

If you know exactly what you want in your will and if your situation is straight-forward, you may consider using a will kit instead of having a lawyer draft the will for you. I still recommend sitting down with a lawyer for a review once you have a draft that you are happy with. There may be things you missed or didn’t think about. The benefit of a will kit is that it is far less expensive than seeing a lawyer and in every province except Quebec, you do not need a lawyer or notary to sign your will; you can use friends and neighbours as witnesses. For a user friendly online will kit, try LegalWills.ca

Estate planning, however, is not just about getting your documents done. For instance, a person may have more taxes at death than at any other time during their lives? How should that be planned for? Who should care for children and hold children’s inheritance in trust until they are old enough? What about accounts like the RRSP and TFSA where you can name beneficiaries directly on them so that they don’t even go through the will and the estate? For these considerations and others, feel free to contact me for a free initial consultation to discuss your estate planning.

Giving Your Kids Money Now vs Later

Posted on by Chantel Gibbs

Giving Your Kids Money Now vs Later

Many elderly parents are downsizing their homes, simplifying their affairs, and getting their estate planning done. Often they end up with extra cash from liquidating property that they feel they likely won’t require for their lifetime and the question arises whether they should give some of it to their heirs now instead of later. There isn’t really a right or wrong answer to this question. As long as the parent isn’t giving away property with unrealized gains and is just giving cash, there are no tax consequences in Canada. In fact, it may even help save future tax and administrative costs. However, there are non-financial reasons why giving away money now may not be the best idea. The below is a chart of some of the pros and cons of giving an advance on the inheritance.

 

If parents do want to go ahead and gift some of their money while living, how do they make sure that each child is treated fairly? Some children might be begging for money now while others are doing just fine financially.

Let me give you some suggestions for how to give an advance while keeping things equal and fair between all the children.

 

#1 – Make it a Loan Instead of a Gift

Instead of making it an outright gift of money, give a loan to those children who are in need of money now and make it official. That’s right – get a lawyer to put it on paper and have it properly signed with interest and repayment terms. If no repayment is required or if there is a balance still outstanding when the parents die, then it must be deducted against that child’s share of the inheritance in order to keep things fair for the other children. Loan balances should be carefully maintained and kept with the will documents. There have been many estate disputes in the courts where one child claims there was a loan to another child and that child claims it was a gift. Without documentation, it is basically one person’s word against the other.

I would also recommend setting an interest rate at least equal to inflation on the loan, even though this ends up creating some income for the parents. This ensures there isn’t a benefit for the children who got money immediately compared to the children who waited.

 

#2 – Set Money Aside for Children Who Did Not Receive an Advance

In BC, if the will does not distribute the estate equally to all children, the children can use the wills variation act to try and get a better result. It is highly recommended to treat all children equally in the will. So how can parents make sure that children who did not receive an advance on the inheritance get extra in the estate to make up for not receiving any earlier?

A simple solution would be to put that money aside in segregated funds for the children who did not receive any money up front. A segregated fund is available through insurance companies in Canada and allows beneficiaries to be named on an account so that the money goes straight to them instead of passing through the will. While usually beneficiaries can only be named on retirement accounts like a RRIF or on a TFSA account, segregated funds can have beneficiaries named even on non-registered accounts, making it ideal for proceeds arising from the sale of a home. Because it does not pass through the will, it is not subject to probate and the wills variation act and it is entirely confidential. The segregated fund will earn an investment return on the money in it, making up for the time value of money that the children who received the money up front got. Money is not locked in to a segregated fund (unlike annuities) and the parents can still withdraw money if they need it.

For instance, let’s say an elderly couple sells a home for $1 million. They keep $500,000 for themselves, but feel that they can afford to give the rest of the proceeds to their four children. Of the four children, two are quite eager to have the money now, but the other two are financially stable and don’t need it immediately. If they give $125,000 to each child that needs it now, then they should put $125,000 for each of the other children into a segregated fund where that child will be the beneficiary upon the parents’ passing. If the investments in the segregated fund do particularly well, the parents can withdraw some of the funds for themselves while they are still living and leave the rest for the children. This is because segregated funds can hold mutual funds much like regular investing, so it is likely that it will return more than is needed to make up for inflation.

 

At the end of the day, estate and inheritance planning is not simply about having a will in place. The will only deals with the assets that actually need to go through the legal process of probate, but anything that is in joint title or has beneficiaries named will bypass the will and the legal estate and must be planned for separately. This is why it is important to have advice both on the legal side for the will itself, but also on the financial side for the accounts and insurance products that can bypass the will. Speak with me for a free consultation to discuss estate planning and the issues that are relevant to your family situation.

Bypassing the Estate

Posted on by Chantel Gibbs

 

Bypassing the Estate

There are several good reasons for trying to pass on assets outside of the estate. Probate fees in BC are a percent of the entire estate, not just a flat fee. It typically amounts to 1.4% of the assets, so a $1,000,000 estate would have $14,000 in probate fees. The probate process typically takes about 6 months while the estate is on hold until any potential creditors are notified and family members are given an opportunity to contest the will. This might mean that assets are frozen until probate is concluded. Also, the probated will is a public document that anyone can access from the courts for a small fee.

The downside of bypassing the estate and the will, of course, is that the will carries no authority over those assets, so the person’s assets may not be distributed according to their wishes. In one case I was told about, a daughter was named as the beneficiary of the RRSP and TFSA accounts and was on joint title for the home. The will said the estate was to be divided equally between all children. When the last parent passed away, most assets rolled over to the daughter with very little actually passing through the estate. The daughter shared nothing of those assets with her brothers. This likely was not the parents’ intention.

The below table documents a few ways to bypass the estate and the pros and cons of each method. It is important to consider any unintended consequences of having an asset bypass the estate and go straight to a beneficiary.

 

 

Estate and legacy planning becomes especially complicated in the case of a second marriage or blended family. For tax reasons, it is encouraged to roll assets to a surviving spouse and defer all tax until that spouse passes away, but in a second marriage, the question becomes whether that spouse will then give the children from the deceased spouse an inheritance or not. In some situations, the use of trusts or specially segregated accounts can help to ensure assets go to the children of the first marriage.

As always, please contact me if you would like help creating your own estate and legacy plan.

Death and Taxes

Posted on by Chantel Gibbs

TIPS FOR REDUCING TAX AND FEES

  • Have a will signed and in a place where the executor can find it
  • Try to use up your RRSP / RRIF savings before life expectancy. Put extra in the TFSA instead.
  • Have an exit plan for your business
  • Keep your will simple. Specific gifts can be done outside the will.

DEATH AND TAXES

In Canada, we do not have an estate tax like in the US, but that does not mean there are no tax consequences at death. A resident of Canada who dies is deemed to have disposed of everything they own at fair market value, so if there was any gain in value on property or stocks, that gain would all be taxed in year of death. Even worse, any amounts left over in a retirement account like a RRSP / RRIF would all be added to income. Imagine a person passing away with $400,000 left in their RRSP. That would be $400,000 extra taxable income in year of death! In BC, anything over $220,000 income is taxed at 53.5%.

It gets even worse for an incorporated small business owner. If the business has increased in value, at death there is a capital gain on any shares held by the owner. The problem is that to take money out of the company, it is a dividend, which is a completely different layer of tax. Unless the executor can find someone to buy the shares directly from the estate, there will be double tax on the value of the business shares held by the estate – first the gain on the shares, then the dividend to strip the value out of the company and wind up the business. Only exception is if the company itself buys back the shares from the estate for a deemed dividend within one year of death. Then the capital gain portion of the tax can be avoided.

The main exception to the deemed disposition rules is if the deceased had a spouse that inherited the assets. The tax rules allow for a rollover at original cost to a surviving spouse or common law partner. This could include the RRSP, TFSA, investment property, and business shares amongst other things. The tax would then be avoided until the surviving spouse passes away.

Income tax isn’t the only tax a person can face at death. Each province in Canada has its own fees for overseeing the will. In BC, that fee is about 1.4% of the entire value of the estate. For an estate worth $1,000,000, that would be a fee of about $14,000.

There are ways to have amounts bypass the will and go straight to a beneficiary, avoiding the provincial fee. There are also ways to plan to reduce your estate income tax or the double tax on a corporation. Every person’s situation is different and needs to be carefully considered.

Contact me to discuss how a legacy plan can save tax and administration costs and help make sure your stuff goes to the people you want it to go to.