Estate Planning For
Non-Lawyers
(How to work with estates lawyers for the benefit of your clients)
Cynthia J. Kett, CA, CGA, CFP
Stewart & Kett Financial Advisors Inc.
ckett@stewartkett.com
Outline
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Why is estate planning important?
What can you do to help your client
through the process?
Should you be an executor/trustee?
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Why Is It Important?
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Orderly succession
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Assets to desired beneficiaries
Minimization of family disputes
Expeditious transition
Tax minimization
Estate liquidity
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Payment of taxes
Payment of debts
Provision for spouse’s/CLP’s and dependents’
ongoing living expenses
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What Can You Do to Help?
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Estate Net Worth
Cash management
Tax planning
Retirement planning
Investing and risk management
Wills
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Intestacy
Family law issues
Outright distribution
Trust will
Probate and probate fees
Powers of attorney for property and personal care
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Estate Net Worth
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Complete list of assets and liabilities
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Check title and beneficiary designations
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Include life insurance proceeds
Include personal assets
Quantify tax liabilities – prior years, current and contingent
Other legal liabilities
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Differentiate between registered and non-registered accounts
Identify liquid versus non-liquid assets
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Current fair market values and costs
Assets held jointly with other individuals – joint beneficial ownership or
assets held in trust?
Net asset values as of the date of marriage
Support obligations to dependants
Contingent business liabilities (personal guarantees)
Estimate probate fees
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Cash Management
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Identify surviving dependants’ needs
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Spouses/CLPs
Minor children
Disabled dependants
Quantify immediate need for cash on death to
cover testamentary expenses
Quantify current cash flow available for
purchase of insurance (if required/desired
and client is insurable)
Consider charitable giving objectives
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Tax Planning
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Objective is to execute testator’s/
testatrix’s desired distribution at
minimum tax cost
The death of a taxpayer triggers a
deemed disposition of all his/her assets
at fair market value
Net unrealized capital gains are subject
to income tax unless a rollover applies
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Tax Planning Strategies
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Income splitting
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Rollover to spouses/CLPs or spousal/CLP trusts
Family trusts
Registered proceeds trusts
Life insurance trusts
Assets left to disabled beneficiaries may disqualify
them from receiving government disability benefits
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Henson trusts – not valid in Alberta
Registered Disability Savings Plans (RDSP)
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Tax Planning Strategies
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Estate freezes
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Consider future financial needs of the freezor, including potential
emergencies
Multiple tax returns upon death of the taxpayer
Choice of non-calendar year-end for testamentary trusts
Unapplied capital losses in excess of capital gains can be
deducted from any source of income in the deceased taxpayer’s
terminal return or in his/her return for the immediately
preceding year
Net capital losses and terminal losses realized in the first
taxation year after death can be carried back to the final return
Alternative Minimum Tax (AMT) carried forward from previous
years can be claimed in the terminal return
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AMT does not apply in the year of death
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Retirement Planning
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Quantify resources needed to support
testator’s/testatrix’s desired retirement
lifestyle
Excess or shortfall?
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Provides estimate of potential size of the
estate
Sets parameters for estate planning
strategies
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Investing and Risk Management
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Assets in excess of clients’ projected future
financial needs may be invested for multiple
generations
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For clients
For beneficiaries
Impact on asset mix
Consider the appropriate use of insurance
products and the impact on the estate plan
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Life insurance, LTC insurance, critical illness
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Wills and Will Components
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Will
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Legal appointment of an estate executor/trustee
Legal declaration of a person’s wishes regarding the disposition of his or her
assets after death
Will components
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Identification of Testator/Testatrix
Appointment of executors/executrices and trustees
Registered proceeds and/or insurance clause
Payment of debts and funeral expenses
Specific bequests
Distribution of residue
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Primary, secondary, giftover
Family law provisions
Custody of minor children
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The appointment of custodian is only valid for a limited period following the date of
death as set out in the relevant statute
The permanent appointment will be determined by the court, but the client’s
recommendation will play a significant role in that determination (specify reasons
for the choice)
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More Will Components
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Residue trust provisions
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Hotchpotch clause
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Acknowledge disproportionate gifts made during lifetime
Spousal trust
Other income-splitting trusts
Henson trust
Powers of trustees
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To
To
To
To
To
To
To
To
To
To
To
accumulate and distribute income
encroach on capital
make payments to minors
employ agents
deal with real property (sell, lease, mortgage)
distribute in specie
make income tax elections
borrow or to lend
act as the testator/testatrix could act with respect to business interests and shareholdings
deal with claims against the estate
settle trusts on other trustees
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Clauses protecting the trustees (limiting liability)
Executor’s compensation clause
Burial arrangements
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Memorandum of personal effects
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Legally the wishes are binding, but intent should be communicated to your executors in advance
Not binding on trustees unless signed and dated prior to the will and incorporated by reference in the will
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Intestacy
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Intestacy
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Preferential share
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If an individual dies intestate (without a valid will),
provincial legislation dictates how his or her property
will be distributed
The surviving spouse of the deceased receives a
preferential share (varies by jurisdiction)
Distributive shares
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If the value of the estate is larger than the preferential
share, the remainder of the estate is divided between
the spouse and the surviving children or grandchildren
in the form of distributive shares
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Other Intestacy Issues
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The distribution of intestate estate by legislation may
not reflect your client’s wishes and may not result in
what is best for his/her estate or beneficiaries
If there are no trustees appointed by way of a will,
the court will appoint one or more for the estate
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Generally look to intestate beneficiaries in the order of their
interest in the estate
The appointed trustee(s) will not have the broad powers
that the client might otherwise wish them to have
The trustee may have to post a bond unless the requirement
is waived by the court
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May be difficult to obtain
A bond must also be posted by non-resident trustees
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Family Law Act, R.S.O. 1990
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Applies in the case of death or marriage breakdown
Applies to common law spouses only with regard to support
provisions
Major provisions of the Family Law Act (FLA)
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Spouses have equal entitlement to possession of the Matrimonial
Home(s)
Neither spouse may sell, mortgage, lease or encumber the Matrimonial
Home without the other spouse’s consent
Each spouse’s Net Family Property (NFP) is calculated as at the
Valuation Date
The spouse with the lower NFP is entitled to an equalizing payment
equal to one-half the difference between his/her NFP and that of the
other spouse
NFP equals the net value of property owned on the date of
separation, divorce or the day before the date of death, less the net
value of property owned on the date of marriage, other than
property excluded by the FLA
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Outright Distribution versus Trust Will
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Two basic alternatives for disposition
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Outright distribution
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All assets are left outright to beneficiaries
Beneficiaries have complete responsibility for administration and
investment of funds once they receive them
Subsequent income is taxed in the hands of the beneficiaries
Trust will
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Assets are left to one or more trustees who are charged with the
responsibility of administering and investing funds
Upon the death of the primary beneficiary, estate capital is passed
onto the residual beneficiaries
Income retained in a testamentary trust is subject to marginal
personal tax rates
Maximum accumulation of income is 21 years from the date of the
Testator’s death (The Accumulations Act - Ontario)
Limitation on the length of the trust: life in being at the time of
death + 21 years = distribution (The Perpetuities Act - Ontario)
Deemed disposition every 21 years unless transferred to
beneficiaries at tax cost (The Income Tax Act)
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Outright Distribution
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Advantages
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Simplicity
Freedom from ongoing administration costs
If the spouse is the beneficiary, deemed capital gains can be
deferred until the death of the surviving spouse
If the spouse and others are beneficiaries, trustees may have some
flexibility with respect to the deemed disposition of estate assets
Capital gains can be triggered to utilize the deceased’s unrealized
capital losses or his/her remaining capital gains deduction (small
business shares or farm property)
Disadvantages
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No control over estate assets after they have been distributed to
beneficiaries
Beneficiaries may lack the ability to manage the inherited capital
Less flexibility than trusts with respect to income splitting
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Testamentary Trusts
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Trusts categorized by intended beneficiaries
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Spousal trusts
Family trusts
Spendthrift trusts
Henson trusts
Reasons to use trusts
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Control of assets
Provision of ongoing asset administration for
beneficiaries (minors, disabled beneficiaries, financially
uninformed beneficiaries, multiple beneficiaries with
potentially conflicting objectives)
Minimization of taxation
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Tax deferral
Income splitting
Protection from creditors of the beneficiaries
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Deemed Disposition Upon Transfer to Trusts
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Deemed disposition upon transfer
No deemed disposition if it’s a rollover trust
 Spousal/CLP trusts
 Alter ego trusts
 Joint partner trusts
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Spousal/CLP trusts
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The spouse must be the only income
beneficiary
Until his/her death, no one other than the
spouse may be entitled to capital
distributions out of the trust
Rollover
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No deemed disposition upon transfer
Capital gain taxes are deferred until the death
of the spouse
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Probate & Probate Fees
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What is probate?
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Probate is the process whereby a provincial court
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Why is probate needed?
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Confirms the authority of the personal representative or
administrator, in the case of intestacy, to administer the
estate of the deceased
Certifies the validity of a will (if one exists)
Probate is generally required before third parties
(banks, mutual fund companies, and investment
dealers, for example) will allow the executor to
access and administer the assets of the estate
What are probate fees?
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Estate fees charged by the courts to probate a will or
to appoint an administrator
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Probate & Probate Fees
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In some Canadian jurisdictions, the probate fees
are reasonable (Alberta, for example, has a
maximum of $400)
Probate fees in Ontario are significantly higher
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The fees are charged on the total value of the assets of
the estate at the time of death, less any mortgages on
real estate
The rate in Ontario is rounded up to the nearest $1,000
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0.5% on the first $50,000
1.5% on the remainder
How to avoid and minimize probate fees
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The basic rule
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Non-estate assets are not subject to probate fees
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Avoid and Minimize Probate Fees
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Gift Assets Before Death
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These assets will not pass through the estate, thus avoiding
probate fees
However, income tax and other consequences should be
considered:
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Deemed disposition upon gifting
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Income attribution
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Gift tax-friendly assets like cash or GICs, since these won't trigger a capital
gain
Gift investments that have not appreciated significantly in value since
purchased
Gift assets that have appreciated in value over a number of years to avoid
a tax hit all in one year
Gift assets to children age 18 or older to avoid income attribution
The gift is irrevocable and control of the asset will be lost
The asset will become available to creditors of the beneficiary
US gift tax may be applicable (US citizen or US assets)
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Avoid and Minimize Probate Fees
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Hold assets in joint tenancy
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Assets held in joint tenancy will automatically pass to the surviving cotenant and will not form part of the estate, thus avoiding probate fees
Tax and other considerations:
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Deemed disposition upon transfer from sole ownership to joint tenancy
Income attribution
Control of the asset is shared
The asset becomes available to creditors of the other owners on title
If there is a question of the transferor’s intent, the asset may be assumed to be
transferred in trust or treated as held as tenants in common
Confirm intent using a Declaration of Trust or by confirming a gift by legal document
May be challenged by other estate beneficiaries if the transfer results in an unequal
distribution of estate assets
Two Supreme Court of Canada decisions – May 3, 2007
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Pecore v. Pecore
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Found in favour of the daughter; dismissed appeal by daughter’s ex-husband
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Madsen Estate v. Saylor
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Found in favour of siblings; dismissed appeal by daughter who was joint account
holder
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Avoid and Minimize Probate Fees
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Name beneficiaries directly for registered plans and
life insurance
Establish multiple wills
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Use of inter vivos trusts
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Primary – everything that requires probate
Secondary – “Only these items” such as personal effects;
shares of private corporations/bare trustee corporations; an
interest in an inter vivos trust controlled by the family;
assets held in trust in joint name with the deceased
Alter ego trusts
Joint partner trusts
Use of Alberta trusts
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Alter Ego Trusts &
Joint Partner Trusts
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Created after 1999
The transferor is at least age 65 (partner can be <65 years old)
Under the terms of the trust:
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Advantages
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The transferor, or the transferor and his/her partner, are entitled to receive
all of the income derived from the trust property during his/her lifetime, or
during the period ending on the death of the survivor of the two of them
During the transferor’s lifetime, or the trust period, no person other than
the transferor, or the transferor and his/her partner, is entitled to receive or
otherwise obtain the use of any income or capital of the trust
Privacy
Less likely to be challenged than a will
Disadvantages
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Income retained in the trust will be taxed at the highest marginal tax rates
No testamentary trusts for income splitting
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Powers of Attorney
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For property
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The client designates someone to act on his/her behalf in his/her
absence, inability or incapacity
The attorney will be able to do anything your client can lawfully do with
respect to his/her financial affairs except make a will and make
testamentary disposition decisions (such as beneficiary designations)
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As such, the document is very powerful and should be safeguarded
Consider specifying that the attorney can designate a beneficiary for a RRIF if
the beneficiary is consistent with the one for its predecessor RRSP
For personal care
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The client designates someone to make personal care decisions for
him/her if he/she becomes incapable of doing so
Types of decisions might include
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Health care (including authority to refuse or consent to medical treatment)
Shelter
Nutrition
Clothing
Safety
Hygiene
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Powers of Attorney
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Considerations regarding your client’s choice of attorney include:
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His/her degree of trust in the person
The attorney’s ability to understand all aspects of the client’s financial
affairs and to manage the client’s assets (for property) or to understand
the client’s philosophy of life (for personal care)
The proximity of the attorney’s residence to the client’s
His/her willingness to act as the client’s attorney
If joint attorneys are appointed, ensure that they are compatible
The naming of an alternate attorney is strongly recommended
A power of attorney may be revoked at any time while the client
has capacity
Someone can apply to the court to be appointed guardian in place
of the named attorney
A power of attorney becomes null and void upon the client’s death
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Should You Be an Executor/Trustee?
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Considerations
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Conflict of interest
Potential liability
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To creditors
To CRA if all assets distributed without Clearance
Certificate
To beneficiaries
To spouse under family law if assets are distributed too
soon
Duties
Compensation
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Duties of Executor/Trustee
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Duties include:
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Carrying out directions specified in the will
Acting personally except where authorized
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Can delegate administrative functions
Can delegate decision-making in certain circumstances
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Acting honestly and with the level of skill and prudence expected of a
reasonable person of business administering his or her own affairs
Acting in the best interests of the beneficiaries
Maintaining an even hand with regard to beneficiaries
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Written agreement with the party to whom delegated
Retain responsibility for the results
Exercising discretion without extraneous bias
Maintaining accounts regarding the estate/trust administration and
reporting to beneficiaries
Consult an estates lawyer, who will be paid for by the estate, to ensure
that you are aware of all the requirements of your role as
executor/trustee
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Compensation
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No pre-determined formula
As agreed with the testator/testatrix or the
beneficiaries
Otherwise, guided by the provisions of the
applicable Trustee Act
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S. 61(1) of Ontario’s Trustee Act reads:
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“A trustee, guardian or personal representative shall be
entitled to such fair and reasonable allowance for the
care, pains and trouble, and the time expended in and
about the estate, as may be allowed by a judge of the
Superior Court of Justice”
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Ontario Compensation Guideline
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The sum of:
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2 ½% of capital receipts and disbursements;
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2 ½% of revenue receipts and disbursements;
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2/5%/year of the value of assets under administration where trusts
are involved
On a $1 million dollar estate with assets held in trust and yielding a 5%
rate of return, the approximate compensation under this formula would
be:
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$50,000 (once all assets have been distributed)
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$2,500, annually
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$4,000 annually
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Compensation is divided equally amongst the executors/trustees
unless you agree to a different allocation
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The cost of preparing and passing accounts is borne by the
executors/trustees (courts have been awarding reasonable costs
out of the estate)
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Alternate Compensation Arrangements
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Consider whether to negotiate payment based on hours spent x
your professional billing rate (ideally at the drafting stage of the
will, when you can discuss the matter with your client)
You may ask that the will specify that you are only to perform
the duties within your capacity as a professional
If you choose not to act (whether based on compensation or for
other reasons), do so at the start
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Moral obligation to act if you had previously agreed to do so
Once you begin to act, you may be restricted in your ability to
resign your duties – especially if you’re the sole executor/trustee
Instead of acting as executor/trustee, you could choose to be
an advisor to the estate
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Summary
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You have the background and expertise to guide your clients through
the estate planning process
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Depending on your business focus, you may be able to provide “expert”
advice in certain areas
You know their financial and family circumstances
You have gained their trust during your professional relationship with
them
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Therefore, you can help to make them more comfortable with:
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You may gain significant personal satisfaction by helping your clients
with their estate plans
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Their mortality
The legal process
Their fears regarding the well-being of dependent survivors
Assets to desired beneficiaries in an expeditious and cost-effective manner
Estate planning may provide profitable business opportunities for you
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