Keep estate in the family

In today’s world, family can be defined in various ways. But no matter how we choose to define it, most of us want our family to keep as much as possible — and the government as little — of our estates.

The number 1 rule for good estate planning: don’t die intestate. If you die intestate (without a last will and testament), your estate is distributed according to standard provincial rules, as well as complying with any beneficiary designations on plans such as the RRSP/RRIF, insurance and annuity.

Most of us assume our estate will automatically go to our spouse if we die without a will. However, if you’re survived by a spouse and by children (whether they are young or not), your province has a formula for how your estate will be distributed between your spouse and, in most cases, your children. And in reality, many of us would opt to have our surviving spouse receive most, if not all, of the estate so that his or her standard of living is not drastically reduced. And although the federal income tax rules treat a common-law or same-sex spouse as a spouse, the intestacy rules of most provinces do not.

Even though your will is called your “last will and testament you know it may not be your last. To update your will to reflect your current instructions, you can prepare a codicil – which is a formal attachment to your will – or prepare a completely new will.

The role of the executor
Your will provides a toolkit for your executor, giving him or her the power to act in the best interests of your estate. Generally, any advance planning that helps your estate avoid unnecessary paperwork can help keep more for your family. Along with stating how you want your assets to be distributed, a will names an executor to settle your estate. You should also consider naming a backup executor in case your first choice is unwilling or unable to do the job when the time comes.

Every executor or executrix, whether a family member or professional, is entitled to compensation from the estate (before the residue is distributed) for his or her services. This is true whether or not the will lays out any compensation. (Note that Quebec is an exception. Here, the liquidator — similar to an executor — is entitled to compensation for these duties only if it’s stated specifically in the will.)

In most provinces, there is no set dollar amount for executor compensation and how much depends on the time required to administer the estate. Generally, the rate is around three to five per cent of the value of the estate but, in cases where the beneficiaries have challenged the amount of executor compensation, the court has frowned on executors charging high fees based solely on the value of the estate and that have little relation to the actual effort involved.

Professional trustees or trust companies generally based their fees based on the value of the estate, with a minimum fee.  In 2001, one trust company’s trustee rate schedule was:

On first $250,000 of the estate:  4.75 per cent*
On next $750,000: 4 per cent
On balance over $1 million:  3 per cent
 *With a minimum fee of $2,500

This fee may cover on-going estate planning and consultation as well as the cost of administering your estate after death, but it may not include the cost of preparing necessary tax returns and any fees for managing the assets in the estate.

Most professional trustees set a minimum account size and are not interested in smaller accounts. If you do meet that criteria, it may pay to negotiate these fees at the time you prepare your will. For example, if your principal residence is passing through the estate, the fee on that home may be reduced by as much as 2.5 per cent (subject to the minimum fee).

Overall, remember that, in doing his or her job, the executor must recreate the deceased’s financial life: the more organized your financial life, the less time it may take, and this could mean lower executor fees and more for your family.

Next page: Tax planning, and profit-taking

Tax planning for couples
Unfortunately, most of the strategies to save tax are only available to couples. However, even if you are single, your executor can claim medical expenses incurred in the last 24 months, rather than just the 12 months, on your final tax return. And anyone’s executor can avoid penalties and interest by filing the final tax return on time.

For couples, I believe that it is important to combine retirement income, tax and estate planning starting at around age 55 if not earlier in order to maximize the value of your estate. Possible strategies include:

· Making a final contribution to a spousal RRSP. You must have unused RRSP room and a spouse younger than age 70

· Electing to transfer assets that have incurred capital gains to the surviving spouse/partner at the original cost base or at today’s market value or somewhere in between

· Holding on to certain assets, such as a cottage or business, rather than selling immediately and opt to pay the tax (plus interest) for up to 10 years

Defer profit-taking
If you have a spouse or partner, you may also consider leaving assets that have gone up in value to him or her, such as investments or investment property held outside your registered plans. That way, the profit can continue to be sheltered until the asset is sold. However, if there is a substantial profit, you must plan for how the tax bill will be paid before it goes to the next generation on the death of your surviving spouse, if you want to keep it in the family. (Otherwise, the asset or assets could end up being sold to cover the tax bill.)

While these assets may be transferred to a spouse at their original cost base, your accountant may recommend that some of these assets be transferred to the surviving spouse at their current market value or somewhere in between the cost and current value if there are any tax losses or charitable contributions that might offset the tax might otherwise be due. This strategy could then reduce the tax bill before the assets are passed to the next generation.

When it comes to your RRSPs, be aware the beneficiary designation you make does not transfer automatically transfer from your RRSP to your RRIF. You must designate your beneficiary in writing in order to ensure these plans are not included in the calculation of probate. (Be sure to do so on each plan if you have more than one.)

If you have purchased life insurance to pay the final tax bill and maximize what your family receives, designating your “estate” as beneficiary would ensure the money doesn’t end up in the hands of a named individual who may decide to keep it. However, if you purchased life insurance to maintain your family’s standard of living or to make a gift to a family member, be sure to name the beneficiary so these proceeds are not included in the calculation of probate.

Finally, remember, if the money is not yours at the time of your death, it’s not included in the cost of probate and executor fees. So, if you have excess cash, consider giving some away while you’re still alive. The strategies that can help you keep more of your assets for your family can be complex and you may find some make sense for you after discussion with your adviser.