Estate planning is more than just making a Will

While many individuals feel that they do not have “enough” to warrant the cost of preparing a Will, the estate planning process covers many other aspects than just the Will. Read more from the Invesco Tax and Estate team.

One of the main objectives of estate planning is to legally record and communicate your testamentary intent¹ with respect to your property at death. While relationships are the foundation for the plan, “estate planning” often involves inter-vivos² strategies to ensure it is carried out as intended. If executed properly, that testamentary intent is clear while mitigating the risk of litigation from “disappointed” beneficiaries. It is also an opportunity to access specialized help to deal with complex and often arduous tax, probate, and estate settlement processes.

While many individuals feel that they do not have “enough” to warrant the cost of preparing a Will, the estate planning process covers many other aspects than just the Will.

To start, the process itself may uncover the need for a Will. Intestate distributions³ involve situations where the deceased had not executed a valid Will. In these instances, it is the provincial or territorial intestacy laws that will govern the distribution of the deceased’s estate regardless of the deceased’s purported intent.

The estate planning process may bring to light property not previously considered, such as tangible assets (e.g., jewelry, clothing, furniture, and rare stamp or coin collections) and intangible digital assets that hold important sentimental value (e.g., such as online accounts for photos, books, music, personal videos, writings, marketable online gaming profiles, and social media).

It may also uncover the need for insurance to address income and other financial needs of dependents in the event of an untimely death or disability. In addition to discovering the need for insurance, the estate planning process can put in place a strategy to manage a large estate payment triggered by death, such as a life insurance settlement using a testamentary trust. Finally, it provides the testator⁴ with peace of mind.

Often the estate planning process will involve professionals who are in a position to advise the testator of certain beneficiaries’ statutory rights to property and dependency relief claims against the estate. That knowledge can inform the testator, ensuring proper safeguards are in place to reduce the probability of a statutory claim (or some other form of litigation) that may otherwise frustrate the entire estate plan.

The process will often include a plan for potential future incapacity issues to help address mental or physical infirmity through the drafting of other important legal documents such as a Power of Attorney for property and Power of Attorney for personal care.

Plan first, then execute

An important part of the estate planning process is taking stock of an individual’s property, possessions, business interests and assets (to name a few), and determining the strategic approach in terms of who and how to allocate those assets to beneficiaries.

There are different ways to pass on property to beneficiaries. Other than naming beneficiaries under the Will to receive property that forms part of the individual’s estate, it is possible to name specific beneficiaries for various registered plans and life insurance policies, some of which may be distributed outside of the estate. Some beneficiaries may be entitled to benefits by way of a trust arrangement (either inter-vivos or testamentary). No matter how those beneficiaries stand to benefit, it is essential to consider the downstream implications to the overall estate to understand whether the outcome is in line with the testator’s intent.

Revisit the estate plan periodically

The estate plan will need to be revisited periodically to account for material changes to one’s personal situation. Changes to wealth and relationship status may impact the testamentary intent. It is not uncommon for an individual’s financial position to change greatly over long periods of time. The review allows for a consultation on the resulting impact of those changes, including changes to important estate laws, probate, and income tax. Obvious material changes include divorce, separation, new marriage, a birth or death of children, grandchildren, spouse, and receiving a large inheritance.

Invesco has created the following resources to help you better understand the estate planning process and keep track of important information pertinent to executing your estate plan:

• Estate planning: 10 simple steps brochure
• Estate planning: 10-step checklist
• Estate planning: Your estate record keeper

For more resources on estate planning, please call our Client Relations department at 1.800.874.6275.

Example

Consider the following hypothetical (and oversimplified) scenario of Joe. He has a “simple” estate consisting of an RRSP worth $500,000 and a home worth $1,000,000. Joe is widowed and has two children, Geoff and Jasmine. Joe’s Will has all his assets distributed equally to his children. He neglected to update the RRSP beneficiary designation after the death of his spouse many years ago. On that RRSP, he had named Geoff as the sole contingent beneficiary (his only child at the time the RRSP was established). Geoff, therefore, stands to benefit as the surviving beneficiary in the event of his father’s death since the primary beneficiary (Joe’s wife) had predeceased the annuitant. In other words, the RRSP will NOT form part of the estate and will not be subject to the provisions in Joe’s Will. The downstream impact to the overall estate plan is as follows:

• The Will instructed the executor to sell the house and distribute the proceeds equally to Geoff and Jasmine. We have assumed the principal residence exemption eliminates any taxes payable on the sale of the home although a probate administration tax of $14,250 applied
• The net proceeds of the sale of the house will be distributed to Geoff and Jasmine after the estate has paid all debts and liabilities, including a probate administration tax
• The fair market value of Joe’s RRSP on the date of his death is fully taxable to Joe on his terminal tax return as a deemed income inclusion. This results in a hefty tax bill to the estate (approximating it to be about $200,000). In addition, no withholding tax is applied at source for RRSP settlements at death
• While there is a joint and several liability on the tax payable on Joe’s terminal tax return as it relates to the RRSP deemed income inclusion, the estate is primarily responsible for that tax liability
• There is no opportunity for a tax-deferred rollover on the RRSP proceeds since Geoff is not a qualifying survivor (i.e., he is not a financially dependent child). The tax liability reduces the benefit from the sale of the home to at least $800,000 without regard to any other estate liabilities or debts that may further reduce the estate’s distributable amount
• Geoff will be entitled to the entire RRSP proceeds (again, without being subject to any withholding tax) by contacting the RRSP administrator and remitting the necessary estate settlement documents. The proceeds can be paid directly to Geoff without any involvement of Joe’s estate or the executor
• Through the estate and via instructions in the Will, Geoff and Jasmine will receive $392,875 each from the sale of the home:

• Geoff receives the full $500,000 as the beneficiary of the RRSP. This brings his total inheritance to $892,875, compared to Jasmine’s $392,875 estate distribution

The outcome does not satisfy Joe’s intent to benefit his children equally. Though the RRSP proceeds do not form part of Joe’s estate (which would otherwise be included as an estate asset subject to the probate tax), the RRSP tax liability is an estate liability.

Joe had intended to visit with his lawyer shortly after the birth of his daughter, Jasmine, and again shortly after the death of his spouse. Had he done so, the lawyer would have reviewed the overall estate plan, the Will, and all direct plan beneficiary designations to ensure the plan continues to meet his intent given his current circumstances and future plans.

The review could have included an update to the estate plan to account for the income tax obligation and ensure an equal distribution to both Geoff and Jasmine. This situation could also give rise to unintended disputes between the siblings and even litigation by Jasmine, claiming that Geoff was not to receive the proceeds of the RRSP beneficially based on the belief that her father intended to treat both his children equally.