Should you have a will?

The answer is almost certainly yes.  Nearly 50% of Canadians over the age of 18 do not have a will.  Many of those without a will are unaware that the failure to make a will can leave their family members with no authority to deal with any of their assets.  In most cases, even small bank accounts and personal possessions cannot be legally transferred without an expensive application to a court for the appointment of a Trustee.

 Do you need a lawyer to make a will?

               Once again, the answer in most cases is yes.  A lawyer experienced in drafting wills and estate planning can offer valuable advice in order to avoid unnecessary probate fees,  establish  trust funds for minor children, postpone the distribution of assets beyond the age of majority, provide for grandchildren etc.

               An untrained person may make drafting errors which cause all or part of the plan to fail.  For example, provisions that postpone the distribution of an estate to children at 21 or later will be ineffective without carefully worded clauses which provide for distribution of the child’s share should he or she not live until that age.  Improper drafting will result in a distribution at 18 regardless of the will.    Failure to take into account the provisions of insurance policies and RRSP’s may result in a child being denied access to the family’s major assets until 18 years of age and then receiving the entire amount.   Few, if any, untrained persons are able to draft clauses which sufficiently deal with situations where younger beneficiaries such as children predecease them.

 What about the will kits?

               No kit, no matter how well conceived, can possibly substitute for a properly planned and drafted will.  Each person’s situation is different and only by discussion can a draftsman obtain sufficient information to draw a will which accurately represents a person’s true intention.  Many clients leave my office with a plan which is nothing like their original plan because they were not aware of the many options open to them and failed to ask themselves the proper questions.

THE PROBATE PROCESS

               Under recent amendments to our estate rules, there is no longer a process of Probate.  Instead we now apply for a Certificate of Appointment of Estate Trustee With a Will.      For the sake of simplicity, I will continue to use the term probate in the following discussion.

               Probate is a process whereby the named executors submit the original will to court with a number of supporting documents for approval and certification as the Last Will and Testament of the deceased.  Each of the beneficiaries receives notice of  the application before it is submitted to the court.  If there are no objections filed and if the will is regular on its face, a Certificate of Appointment will be issued to the executors within a few weeks.

               Probate is not required in all cases.  If the entire estate consists of assets held jointly with a right of survivorship or if a direct beneficiary is named, probate will generally not be required.  In most cases a surviving spouse can avoid the probate process by appropriate planning. 

            There are few laws which require that probate be obtained even for the surviving spouse.  In most cases it is the holder of the asset who requires that the executors submit the will for probate before allowing transfer of the asset to the estate or to a named beneficiary.  Banks and trust companies generally require probate for accounts and certificates over a certain amount, generally in the range of $10,000 to $20,000.    Transfer agents require probate in order to transfer stock owned by the deceased.  Mutual fund companies have differing requirements.  Where the estate owns real estate, probate will be required in nearly all cases.

               Probate fees in Ontario are the highest in Canada.  Most practitioners consider that the current “fee” is actually a tax.  Currently assets passing under an estate pay $5.00 per $1000 for the first $50,000 of assets and $15 per thousand on the excess over $50,000.  A modest estate consisting of a home, some RRSP’s and an insurance policy totaling $500,000 would pay a probate “fee” of  $7,000.

               While probate fees are high, most experts agree that too much time can be spent in efforts to avoid probate fees at the cost of proper estate planning.   Parents transfer assets, often including their home, to a child for the sole purpose of avoiding probate.  Not considered in such “planning” are the possible tax consequences of such a transfer including a loss of the principal residence exemption on a subsequent sale.  In addition, the consent of the child is required for any subsequent dealing with the property and the property may be exposed to claims by creditors of  the child.  Lack of proper documentation may lead to serious disputes as to the parent’s true intentions when the parent dies and the surviving child becomes the owner of the property.  Other children may be cut out of the estate entirely by insufficient planning. 

            Those with significant assets may wish to execute multiple wills in order to have only assets requiring probate attract probate fees.  Shares in family owned companies which can generally be transferred under a will without probate can avoid the process and the accompanying fees.  Increased complexity and the ever present possibility of changes to legislation make this strategy appropriate for only a few.

POWERS OF ATTORNEY

What is a Power of Attorney?

            A Power of Attorney is a legal document in which one person, the principal or donor grants to another, the attorney, the power to act on his or her behalf in financial or health related matters either generally or for specific purposes    defined in the document.

Are there different types of    Powers of Attorney.

               In Ontario, we have two very distinct types of Powers of Attorney.  The Power of Attorney for Property deals with all aspects of a person’s financial affairs.  Simple matters such as paying bills and making routine deposits to such important and lasting decisions as sale of the home can all be covered under the Power of Attorney for Property. 

               The other important power is the Personal Care Power of Attorney.    This document deals with decision making in all aspects of a person’s physical and mental care in the case of disability.  A very wide range of ongoing monitoring of a person’s care from simple decisions as to medical treatments to the ultimate decision as to authorizing the withdrawal of life support can all be set out in detail in this document.   

 Who should be named as attorney?

               Most spouses name each other as their first choice as attorney.   A well drawn document will name an alternate in case the spouse predeceases or is unable to act as attorney.  Usually the alternate is an adult child or a trusted friend or associate.  If complex matters are involved, a trust company, lawyer or financial advisor may be an appropriate choice under the property power. Because of the very personal nature of the decisions to be made under a Personal Care Power of Attorney most people choose a close and trusted relative to act in this capacity if there is no spouse available.

 What if I become disabled without a power of Attorney?

               Without a proper power of attorney, administration of a disabled person’s assets can be a complex process, involving a significant amount of government intervention.  Contrary to a surprisingly widely held belief, the government will not seize assets if a person becomes disabled.  The government is, however, the statutory guardian of everyone who fails to plan by executing a power of attorney.  Only when an appropriate person has made a formal application and had a plan accepted by the Office of the Public Guardian and Trustee, can another person be appointed.  The person applying and receiving such an appointment may very well not be one that the disabled person would have chosen had her or she had an opportunity to choose.

FAMILY TRUSTS

            It is not possible in a site such as this to give more than the briefest of summaries of this complex area.  In its simplest form a trust is established when one person, (the donor or settlor) transfers the legal title to an asset to another person (the trustee) for the benefit of yet another party (the beneficiary).  The trust is a distinct entity with its own ability to own assets, and its own abilities to invest, pay out dividends, make decisions as to sale of assets, maximize tax savings etc.

            There are two main types of trust, the “inter vivos” trust and the “testamentary” trust.  The former is established during the lifetime of the settlor while the testamentary trust administers the assets of a deceased person (the “testator”).

            The testamentary trust is by far the most common.  Nearly every will involves trust planning, especially if there are infant children.  Parents appoint a trustee to administer their assets for their infant children and specify what powers should be granted to the trustee.  In addition, the parent specifies the age or ages at which the estate should be paid out to the children.    Most parents feel strongly that children should not receive substantial sums from an estate as soon as they reach the age of majority at 18.  Most prefer that children receive the estate at some later age, such as 21 or 25 or even later.  Some are much more creative in providing for staged payments over a period of several years.  Parents with sizeable estates may specify the type of private schooling which the trust may finance or even the purchase of an automobile for the use of a child.   

            Testamentary trusts are also common in situations where a testator wishes a spouse to have the use of an asset for life or until the happening of some event, with another to receive the asset after the event occurs.  The simplest example is the family cottage which one spouse brings into the marriage and which the couple enjoys during their time together.  Often the cottage has been inherited and it is expected that it will remain in the family and be passed down to the next generation.  Careful drafting is essential to ensure that provision is made for the expenses of maintenance during the lifetime of the surviving spouse, remarriage, vacancy, etc.  Another common situation occurs in second marriages where a spouse may wish to provide an income for life to the new spouse while preserving the capital of the estate for his or her own family on the spouse’s death.

               The inter vivos trust can be used for a number of family planning purposes.   Most commonly, a person may wish to benefit a family member such as a child but does not wish to have the person gain control over the asset.  The trust is the perfect vehicle.  By this mechanism, the settlor can transfer assets to a trust to be administered for the benefit of a child.    The Trustee, if permitted by the trust terms, can exercise a complete discretion to control the flow of funds in the best interests of a child.   Many people use trusts to ensure a proper level of care for disabled children without interfering with the funding otherwise available to them under various provincial and federal plans.

               Trusts, particularly inter vivos trusts, require expert advice to establish and maintain.  The Income Tax Act contains very strict rules, commonly known as attribution rules, particularly on inter vivos trusts established for infant children or spouses and on trusts where the settlor wishes to retain control.  In many cases interest income from the trust will be taxed in the hands of the settlor.

               Adding to the complexity of the family trust is the requirement for accurate  record keeping and annual returns.  Nearly every trust which earns income during a year must file a trust return.  Most people require assistance with this return which adds to the costs.

ESTATE PLANNING

               As you have probably already figured out, most estate planning involves an effort to leave as much of your estate as possible to your heirs and as little as possible to the tax man.  It is in this area that competent professional advice is critical.  Failure to take advantage of available tax strategies can cost an estate large tax bills which might easily have been avoided.

               We have already seen that most parents wish to postpone direct gifts to children past the age of 18.  All trust funds for infant children and those over 18 who have not yet received the capital are subject to income tax on their annual income.  Where the amounts are significant, it is important that a person familiar with taxation of trusts review the trust and advise as to the appropriate amounts to pay out and retain in the trust in order to minimize the tax.  Generally, the trustee will attempt to equalize the income so that the trust and the child both receive the same amount of taxable income, thus ensuring the imposition of tax at the lowest rate.   (Subject, of course, to the terms of the trust document).

               RRSP’s offer a little known but very useful means of reducing income tax in appropriate circumstances.  Under recent amendments to the Income Tax Act, parents can designate dependent infant children as direct beneficiaries under their RRSP’s, thus achieving taxation of the funds in the hands of the child at a much lower rate of tax.  A requirement is that the RRSP be used to purchase an annuity payable over the number of years between the child’s current age and the age of 18.  While this arrangement is not for everyone, it can be a useful tool in appropriate circumstances.

               Perhaps the most important area of estate planning involves the small business owner.  Few owner-managers have thought about succession should they die prematurely.  Many parents have strong feelings on who, if any, of their spouse or children is best suited to continue to operate their business but few have developed a plan to accomplish their wish. 

               One of the last remaining true opportunities for tax avoidance involves the exemption for up to $500,000 of capital gains on the disposition of shares in a qualifying small business corporation or farm property.  A rollover of shares to a holding company or reorganization of the existing capital structure can often permit a realization of the exemption and pass on the benefit of future growth in the company to a future generation.  The requirements for a successful deferral are complex and require expert accounting and tax advice.