Estate planning 101

A reluctance to tackle touchy subjects can prove costly. I remember a long-ago conversation with one of my earliest personal tax clients about aging parents and estate planning. The client — let’s call him Bob — was the only child of a well-to-do couple. Bob had no children of his own, and was relatively well off in his own right. His parents’ financial legacy really didn’t concern him. As his parents got older, he simply assumed that the settling of their estate would be relatively straightforward. After one of his parents died, assets would pass to the surviving spouse, and when that parent died, the estate would go to Bob and a selection of his parents’ favourite charities.

And it did, although the legacy left by Bob’s parents was not nearly as large as it could have been. In this case, the proceeds were not passed along as efficiently as they might have been, leaving a much-reduced inheritance. Had Bob chosen to initiate an adult conversation with his parents about estate planning, and obtained some advice, they would have discovered a number of opportunities to manage their affairs more effectively.

Unfortunately, cases like Bob’s are common. You can help your clients by emphasizing the importance of estate planning. At its best, estate planning tries to ensure that families will not face financial hardship and that income tax costs and probate fees are as low as possible.

A person’s last will and testament is the foundation of any estate plan. It is not the whole plan by any means, but it is significant and no matter how large a client’s estate may be, that individual should have one.

A will is essentially a wish list that documents how an estate’s assets are to be distributed after a person’s death. Normally it includes the following basics:

• It names the estate’s executor(s), the person or persons responsible for settling the estate;
• It identifies beneficiaries;
• It records how each beneficiary will share in the estate. For example, if a person wishes to make specific charitable donations or gifts to relatives or friends, there should be specific provisions in a will to take these bequests into account;
• It helps determine tax savings or deferral strategies that can be implemented by the executor(s); and
• It also designates who will be the guardian(s) of a client’s underage children in the event of the client’s or spouse’s death.

Wills as evolving documents

No will is static. They change over the years as assets are acquired and disposed of, as relationships change, and as family members pass away and are born. Consequently, wills should be updated every few years, with a number of possible additions for consideration:

• A clause that protects beneficiaries’ inheritances from being included in any future family property division resulting from a marriage breakdown;
• A so-called “disaster provision” that specifies how an estate should be settled if both spouses were to die together;
• A 30-day survival clause, so if spouses die within 30 days of each other, the estate will not be probated twice (for example, probated after the first death, with assets then transferred to the surviving spouse, and then probated again when the second dies); and
• A personal effects clause that distributes personal property according to a memorandum attached to the will. Such a memorandum is not legally binding, but it would provide guidance about the deceased’s specific wishes. For example, a person might wish to leave a specific piece of artwork or jewelry to a child or grandchild for sentimental reasons. If additional pieces of personal property are purchased, the memorandum could simply be updated without the need to update the will itself.

When a person dies without a valid will (typically a will that the person failed to sign and have witnessed by two independent parties) or a will cannot be located, he or she is considered to have died intestate. In these circumstances, the estate will be administered under the relevant provincial or territorial intestate succession legislation. The rules outlining intestacy and how it is dealt with vary from province or territory. In general, when a person dies intestate, the estate is administered by a government appointee who administers the assets after death, and decides how the estate will be distributed among the heirs. There is a long-standing misconception that the assets of someone who dies intestate revert to the government, but this would only apply if there were no surviving family members.

Just as a will provides for a person’s estate after death, powers of attorney for financial and personal care see to it that a person’s interests are looked after before they die. Both are essential estate planning documents.

Power of attorney for property

This is a legal document in which individuals name one or more people — usually trusted relatives or friends — to act as “attorneys” on their behalf in financial matters in the event of physical or mental incapacity. If more than one person is named, their responsibilities may be divided, or one person may be named as primary power of attorney for property with another as a substitute. In either case, the person making the power of attorney can limit the decision-making authority of the persons named and the circumstances under which they can use that authority.

However it’s accomplished, a valid power of attorney for property is important. Without it, family members will have to apply to court to gain control of an incapacitated relative’s finances from the provincial or territorial government.

Power of attorney for personal care

Again, power of attorney for personal care is a legal document, although in this case an individual names one or more people to make personal care decisions on his or her behalf in the event of incapacity. Personal care covers everything from major health care and medical treatment issues (including medical procedures, medication, admission to care facilities and personal assistance services) to nutrition, shelter, hygiene, overall safety and even clothing.

It’s definitely in an individual’s interest to arrange a power of attorney for personal care. If a person doesn’t have one, and is judged by a doctor or evaluator to be incapacitated, provincial or territorial governments will get involved and either make personal care decisions or appoint someone, usually a relative, to make decisions on the individual’s behalf.

Taken together with wills, powers of attorney form the basic building blocks of estate planning. Any knowledge you gain about them can definitely benefit your clients, and by extension, improve and expand your business relationships. However, a good estate plan takes other things into consideration, and next time I’ll discuss some key issues that should be explored.