What not to do in estate planning

To say estate planning can be problematic is a gross understatement. Administering an estate can be compared to undertaking a renovation—it’s almost guaranteed something will go wrong. It can be relatively minor, or land the estate in court and cause irreparable harm to family relationships.

Most problems can be avoided or minimized and managed via good planning. This involves more than just making a will.

There are other key elements including: powers of attorney, beneficiary designations, trusts, determining most appropriate type of property ownership (sole ownership vs. joint tenancy or tenancy in common), selecting the right executor, probate planning and income tax minimization.

The best way to learn is through mistakes. So here are three common estate planning offences.

1. Failing to prepare a will

The majority of adult Canadians haven’t prepared a will. Surveys also show most adult Canadians appreciate the importance of a will and plan on preparing one sometime in the future. Despite these good intentions, a significant percentage of this group will die intestate; that is, without ever having gotten around to it.

So what happens if you die without having a valid will in place? Your assets are distributable according to the arbitrary formula set out in the applicable provincial legislation.

The Ontario Succession Law Reform Act (SDA), for example, sets out the following schemes of distribution. If the client has…

Spouse only: Entire estate goes to the spouse.

Spouse + one child: First $200,000 goes to spouse. Remainder is split equally between spouse and child.

Spouse + children: First $200,000 goes to spouse. Remainder is split: one-third to spouse; two-thirds to children equally.

Children, but no spouse: Children share equally.

No spouse or children: Entire estate goes to the deceased’s parents or surviving parent. If parents have predeceased, siblings share equally. Children of a deceased sibling share their parents’ share. If only nieces and nephews survive, they share equally.

No lawful heirs: The estate becomes property of the province.

And that’s not all. Consider some of the other factors applicable on intestacy.

• A spouse doesn’t have the right to determine how property should be divided among the children, or at what age(s) they should receive their share. A share payable to a child on intestacy must be paid into court and held until the child attains the age of majority. Upon attaining the age of majority, the share will be paid to the child. This is seldom the parent’s intention or in the best interests of the child.
• A spouse, or any other heir, doesn’t have the right to determine who should handle the administration of the estate.
• Without a will, parents cannot appoint guardians for minor children.
• The distribution of the estate may be more costly and can be delayed until one year from the date of death.
• There is no ability to establish testamentary trusts for special needs beneficiaries.
• Income tax and probate planning opportunities are forfeited.
• “Spouse” is narrowly defined to mean legally married. Common-law spouses aren’t entitled to a share on intestacy. This comes as a surprise to many clients.

Bottom line: preparing a will enables a client to transfer their assets to the loved ones and/or charities they wish to benefit, in the most time-, cost- and tax-efficient manner possible.

2. Failing to keep your will up to date

While many estates are administered on the basis of a decades-old will, significant changes to a client’s personal or financial situation suggest a change to their will. An update is warranted under the following circumstances:

Marital status changes: In Ontario, marriage revokes a will. In the case of divorce, the will is read as if the former spouse predeceased the testator, whereas separation has no effect on the will.

Nature or quantum of assets change: A significant increase or decrease in a client’s wealth and/or a change in type of assets. For example, the acquisition of property in a foreign jurisdiction or the establishment of a business may mean the terms of the will should change or that additional planning options should be considered.

Residence change: An out-of-country or provincial move should prompt clients to revisit their will to ensure the documents continue to be valid and viable (e.g. choice of executor) in the new jurisdiction.

Loss or addition of beneficiaries: Whether it’s the birth of a new grandchild or the death of a current beneficiary, the will should be reviewed to ensure it continues to reflect the client’s wishes.

A change in health: A decline in the health, whether physical or mental, of the testator or a loved one, may suggest the need for planning for incapacity, or perhaps the establishment of a trust to protect the now more vulnerable individual.

On occasion, a change in law may prompt a change to a client’s will. For example, a pre-1986 Ontario will would not have accounted for the Family Law Act.

Simply stated, this clause allows testators to add a degree of protection to a gift in the event of the recipient’s subsequent marital breakdown. Recent (and/or pending) changes to a number of estate and incapacity laws in British Columbia and Alberta may prompt testators to rethink certain provisions in their wills.

For instance, in Alberta, marriage no longer revokes an existing will. The impact of divorce on a will has also changed so that unless a contrary intention appears in the will, a former spouse is now deemed to have predeceased the testator for purposes of gifts and appointments.

In British Columbia, an attorney (under an enduring power of attorney for property) will only be entitled to compensation if the amount or rate is specified in the document.

Bottom line: clients should be encouraged to periodically review their wills every three-to-five years, or whenever they experience a significant change.

3. Creating a DIY will

In Canada, there are three basic types of wills: formal, notarial and holographic.

A formal will is a typed document, signed by the testator in the presence of at least two witnesses. The witnesses cannot be beneficiaries or spouses of beneficiaries and must be present at the same time. Formal wills are generally prepared by lawyers and are the most common.

A notarial will is used only in Quebec and is similar to the formal will—prepared by a notary and signed before the notary and one witness.

A holographic will is a document entirely in the testator’s own handwriting and signed by them. No witnesses are required, and it’s valid in Ontario and some, but not all, other Canadian provinces (holographic wills are not presently recognized in British Columbia, Nova Scotia or Prince Edward Island).

A fourth type of will is one prepared using a printed stationery form or via forms found on the Internet. Because such DIY wills are not entirely handwritten, they do not qualify as holographic wills. This means formal witnessing requirements apply. It’s important to note that an otherwise “good” will may be deemed invalid where the formal witnessing requirements weren’t met.

Estate experts will always recommend a formal (or notarial) will prepared by an experienced lawyer (or notary). The typical problems associated with DIY wills include:

• Failure to name an executor or alternate executor
• Failure to dispose of all assets, thereby creating a partial intestacy
• Gifting more than you have
• Failure to appreciate the rights of spouses and dependants
• Improper wording
• Invalid provisions

Bottom line: The cost of retaining an experienced estate lawyer (or notary) to prepare a formal will is well worth it, especially compared to the costs of dying intestate or with a problematic will. So be sure to direct your clients to estate-planning experts accordingly. Elaine Blades is director, fiduciary services at Scotia Private Client Group.