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Estate planning is as important as ordinary tax planning. The well-being of a deceased’s loved ones depends on what he leaves them and in what fashion he leaves it to them. Estate planning is an intricate process that needs careful consideration. If done properly, it can save many future inconveniences. Therefore, it is important to do estate planning while you still have time to do it.
Following is a detailed discussion of what common mistakes people make in doing estate planning in Canada and how to avoid those mistakes:
Common Mistakes in Canadian Estate Planning
- Being Intestate
The first and most common mistake is not preparing the will and the auxiliary documents, also called codicils.
According to a survey, around 52%of Canadians still do not have a will. And around 25% need to learn how to create one.
“Many people are uncertain about planning for the only certainty in life: death.”
If a person dies without leaving a will, the state will decide what to do with his assets and how to dispose of them, and a judge may not share his inclinations, likings, and views, and a portion of the estate might go to someone not to his liking.
Therefore, if you do not want a “monkey wrench” to enter your estate, don’t leave estate planning to tomorrow.
- No Plan for Joint Disaster
Notably, with spousal rollovers available in Canadian Law, many partners nominate each other as joint beneficiaries and do not feel the need to create other beneficiaries.
It is not out of the question that one of the partners has an accident while the other accompanies him.
Hence, it will lead to both being rendered intestate, and their assets will then be at the disposal of government rules and regulations. Hence, it is important to have a backup plan.
- Not Updating Your Plan at Different Stages in Life
Your charm of will-making may last for some time. You might make a will but never update it. For instance, if you contract a new marriage or have another baby, you must remember to nominate them in your will.
Failing to do so can lead to complexities in inheritance.
It can also compel your heirs to file suits to get their shares, which may or may not work in their favor.
You should review your estate plan whenever an event takes place in your life.
- Missing Estate Tax Saving Opportunities
One can utilize several means to save maximum tax on an estate.
It would be a mistake not to take advantage of different policies and avenues that the government provides.
Following are some of the main opportunities that you can avail:
- Life Insurance
In Canada, life insurance is not subject to deemed disposition. Deemed disposition is the concept by which the Canadian Revenue Authority calculates your estate taxes.
According to this concept, all the wealth you possess before your death will be assumed to be disposed of at a fair market value immediately before your death.
All properties and assets–including those “things and rights” you were entitled to receive–will be subject to taxation before going to your beneficiaries.
Life Insurance is one of the few exceptions. When received by the beneficiaries, it is not subject to any taxes. It is highly effective in saving taxes and offsetting other liabilities, like capital gains tax, incurred by your other assets.
Therefore, you should purchase life insurance, and since it is for the benefit of your heirs, you can let them contribute to the premium payment.
- Registered Retirement Saving Program.
It is a plan provided by the Canadian government that entitles every Canadian to deposit money that will stay tax-free. Such money can be utilized later. At the time of the depositor’s death, the funds roll over to the spouse without any tax liability. Therefore, those who do not use it are also in a mistake.
- Undivided Trust Income
Another state planning mistake people make is not dividing the income among the beneficiaries of a family trust.
The need to distribute the income is that after 2016, the highest marginal tax will be incurred on a trust. The best way to save money is to distribute the income and let every family member enjoy the personal tax credit available to every Canadian below the income of $ 15,350.
It is a mistake not to distribute the income coming from a trust.
- Missing Beneficiary Designations
Another mistake is not adequately naming the intended beneficiaries. The problem that arises is that a tax-free rollover is not available at death. In this case, probate fees will apply to all the property. Also, the property will be subject to deemed disposition, resulting in capital gains tax.
- Not Finding any Time to Do Estate Planning
Many people try to avoid the question of estate planning and will-making. In most cases, the underlying notion is that death succeeds a will.
A person might say: I created my will at my Attorney’s office and was stuck in the lift. I knew I was going to die because I already had made my will.
Such erroneous thinking leads a man to escape the question of will-making and estate planning until it is too late.
Therefore, one must make time for it just the way he makes time for his loved ones.
- I Will Never Lose My Will in This Shoe Box: Losing the Will.
It is a grave error to become the sole custodian of your will.
Because if the will maker becomes the custodian of the will himself, at his death, it will be only him who knows where the will is.
The executor and the beneficiaries will have to put a lot of effort into finding the will.
So, the best advice is not to keep it to yourself. Instead, the will maker should entrust it to the office of the Attorney who drafted it.
Or leave it at the surrogate court so the heirs can find it at the time of need.
The law assumes that the person died intestate if the executor does not produce the original will document.
- Pennywise Pound Foolish in the Matters of Estate Planning
Saving attorney fees might seem to be a good option for the time being. But you should not prepare your own will. Because many loopholes will remain, an experienced attorney will point them out to you by saying things like:
When he puts some questions to you:
What if your spouse is also dead?
What if all your children are divorced?
Then, you will panic and realize that you should have spent some money and hired a reasonable attorney instead of doing it yourself.
- Making Errors in the Mode of Preparation and Changing of a Will
Errors and omissions can render your will ineffective.
If you ‘take it easy’ and overwrite with your hand when you must make a change, it will be an error.
You should make any change in the will in the same manner and method you used to prepare the original will, i.e., in the presence of competent witnesses.
Similarly, the witness present should also have the capacity, or your Will will become ineffective.
Moreover, if the will maker does not keep the procedural requirements in mind, it can cause problems for the executor. Consequently, any person can show up and convince the court that the so-and-so person present in the picture exerted an undue influence on the will maker. In such happening, the will can lose its validity.
Hence, self-preparation is not preferable, and professional help is advisable.
- Choosing the Wrong Executor
An executor is a person appointed by the court as per your will, who undertakes the responsibility of taking care of the matters related to your estate.
Choosing the wrong executor is another mistake that can cause multiple problems.
These problems can include:
- Double probate
Double probate is the one in which:
If an executor refuses to carry on the duties after a probate has been granted postmortem, the court will appoint another executor. Such processes can lead to unnecessary complexities.
- Mistakes by the poorly chosen executor in the Administration of the estate
A poorly chosen executor can make errors in the Administration of the estate. For example, he might omit to publish the ad in newspapers before distributing the assets to the beneficiaries. It can lead to claimants arising later, which can become an undue pain.
- Choosing a loner
State administration is the process in which an executor must work side by side with many other professionals, such as accountants, insurance experts, notaries, and advisors. If you choose an executor who is not able to work well with multiple people, you may not be able to get the most out of your state planning execution.
- Factors to consider when choosing an executor.
He should be able to manage investments well. You can look at how he executes his own investments and conducts his financial affairs to see if he would be a good option as an executor.
If you choose more than one executor, you must make sure that they can effectively work together.
Make sure that he has time to do the estate administration and is willing to undertake the task.
Similarly, you should make sure that the executor doesn’t live too far away.
Check whether the executor is likely to outlive you.
- A medical power of attorney missing.
In an estate planning, you must plan for all eventualities. A medical power of attorney grants powers to a third person who could decide on your behalf if you become incapable or mentally unsound. In the absence of one, there will be confusion, and the court might appoint someone you may not like, as your decision-maker. So, it is a mistake not to transact a medical power of Attorney.
Bottomline
Estate planning is just the art of taking care of your loved ones, in your absence. If you undertake estate planning meticulously, it can have the desired effect and accrue benefits to the heirs. So, make sure that you avoid not only the above-mentioned mistakes but also any other kind of omission.