In life, two things are certain – death and taxes. We can’t avoid one but we can try to avoid the other. The goal of estate planning is to minimize taxes at death. Estate planning is all about leaving a legacy and distributing your wealth in a tax and efficient manner through several elements such as last will and testament, power of attorney, estate trusts and more.
Wills
One of the first steps to estate planning is having a will. A will also known as a “last will and testament” is a legal document governed by provincial legislation that lists the final wishes of the deceased in how they wish to divide their property. A will typically names an executor, provide guidance on how debts and taxes would be paid, list inheritances, provide guidance on care for minor children and so on. There are various types of wills.
- Holograph Will
- English Form Will
- Notarial Will
- International Will
- Mutual Will
- Joint Will
Choosing an Executor
Part of estate planning is choosing an executor. A will typically names an executor who will be responsible to carry out the wishes of the testator’s will. The executor could be a single individual or multiple. Depending on the complexity of the estate, it can also be a trust company. It’s important that the executor is someone who has financial acumen and the willingness to be part of the estate settlement process as it could take time and resources.
Power of Attorney
A power of attorney gives an individual the authority to make decisions on another person’s behalf. A POA is an integral part of estate planning. There are typically three types of Power of Attorney
- General Power of Attorney
- A general power of attorney is a legal document which gives another individual authority to make financial and property decisions on your behalf while you’re mentally capable.
- Continuing or Enduring Power of Attorney
- If you become mentally incapable, an individual who has enduring or continuing power of attorney may make decisions on your behalf related to financial and property matters.
- Power of Attorney for Personal Care
- If you become incapacitated, the POA has the authority to make decisions about your personal care such as health, housing, meals, clothing, etc
Probate
Probate is the legal process where the will has to go through provincial courts in order to get certified and validated. The process involves fees and the fees vary from province to province. In Ontario, effective January 1st 2020, the probate fees are $15 for every $1,000 which is applied only to estates with a value of $50,000 and above.
Many people hate paying probate fees but with proper planning, they can eliminate or lower the fees by lowering the value of the estate by
- Naming Beneficiaries on Registered Investments
- Naming Beneficiaries on Insurance Policies and Segregated Fund Policies
- Registering Property in Joint Ownership
- Excluding assets into the estate by using trusts
- Gifting property, assets and investments
Probate is an important consideration when discussing estate planning.
Trusts
Using trusts is another way that you can reduce probate. Trusts are a great way to maintain control of assets during and after death. There are many types of trusts and to create one, you would need a trustee and a settlor. The settlor would be the individual who would establish the trust and proceed to transfer property to the trust. The trustee would be responsible to maintain the property for the benefit of the beneficiaries. Below are types of trusts related to estate planning. You may find more detailed information on Types of Trusts.
- Revocable Trust
- When the settlor transfers in property into the trust, the property can be transferred back in the hands of the settlor
- Irrevocable Trust
- When property is transferred to the trust, it cannot be transferred back.
- Spousal Trust
- Set up for the benefit of the spouse and no one else can have access to the trust’s assets.
- Family Trust
- Property is transferred into the trust for the benefit of family members
- Commercial Trust
- Commercial trusts are known to be used for investment purposes. Mutual funds would be considered commercial trusts.
- Alter Ego Trust
- Alter Ego Trust have an age requirement of 65. It’s created for the benefit of the settlor who is the only individual able to be entitled to the trusts income.
- Charitable Trust
- Charitable trusts are set up for the benefit of a charity who would be the beneficiary.
- Bare Trust
- In this case, the beneficiary would have sole interest in the property or assets inside the trust and may take over possession at any time.
- Testamentary Trust
- Testamentary Trusts are created on the day a person dies with instructions written out in the will ahead of time. They’re popular estate planning tool as it allows the trustee to effectively distribute income to minor children or spouse in a tax efficient manner.