Your Will and Estate Planning Guide

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1 Your Will and Estate Planning Guide 1

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3 Your Will and Estate Planning Guide

4 Your Will and Estate Planning Guide Copyright 2011 Mennonite Foundation of Canada. All rights reserved. Contents of this book may be used freely by individuals and in study sessions, workshops and seminars of the Foundation s sustaining conferences. For all other uses, written permission must be obtained from Mennonite Foundation of Canada. ISBN: Published in Canada by Mennonite Foundation of Canada Markham Road Winnipeg, Manitoba R3T 4J6 Design by Helen Dimitrijevic Printed and bound in Canada by (to be determined when we get print quotes) 2 w w w. m e n n o f o u n d a t i o n. c a

5 Contents Introducing Mennonite Foundation of Canada 4 Introducing Your Will and Estate Planning Guide 5 Chapter 1: Getting started on estate planning 7 Chapter 2: Your will 11 Chapter 3: Dying without a will 15 Chapter 4: Role of an executor or trustee 19 Chapter 5: Role of guardians 23 Chapter 6: Tax considerations in estate planning 27 Chapter 7: Records of assets and liabilities 31 Chapter 8: Leaving a legacy 33 Chapter 9: Incapacity documents 39 Chapter 10: Trusts 43 Chapter 11: Personal effects 45 Chapter 12: Your family and your estate 47 Chapter 13: Succession planning 53 Chapter 14: Probate 55 Chapter 15: Final tax returns 57 Chapter 16: Implementing your estate plan 61 Glossary 63 Appendix 1 70 Appendix 2 71 Appendix 3 72 Appendix

6 Introducing Mennonite Foundation of Canada Giving you the financial stewardship tools you need People often ask why Mennonite Foundation of Canada (MFC) gives away books like Your Will and Estate Planning Guide and why it provides free counselling on charitable gift and estate planning. We provide these services as part of our stewardship ministry of promoting faithful, joyful giving. In 1974, several Mennonite groups started MFC as a national public charitable foundation that uses dollars pooled by like-minded individuals, churches, and charities to help support a variety of charitable causes. They did it with a vision to support a ministry of teaching, preaching, and counselling related to Christian stewardship of finances. Since its inception, MFC has been helping people understand that having their affairs in order is an act of good stewardship. Over time, MFC has grown to an organization with five offices across Canada that serves many more groups and individuals from a variety of denominations. In the past decade, MFC has distributed $50 million on behalf of its clients, to help them support registered Canadian charities that matter to them. Today, MFC s trained consultants can provide you with the following financial stewardship services: counselling about will and estate planning helping give gifts to charities in the most effective way simplifying the distribution of charitable gifts from a will setting up gifting accounts providing educational resources such as seminars, sermons, and books creating and administering foundations for individuals and families managing funds for charities. For additional information, visit our website, call , or 4 w w w. m e n n o f o u n d a t i o n. c a

7 Introducing Your Will and Estate Planning Guide A step-by-step guide for estate planning and record keeping Thoughtful, informed, and prayerful planning for how your estate will be handled and disbursed after you have passed away is fundamentally an act of good stewardship. Whether your estate is large or small, careful planning serves your loved ones and the institutions you care about. It also allows you to consider the tax implications of various alternatives, so you can make the most of what you leave behind. Yet, even if you agree that estate planning is a good thing to do, you may be tempted to put it off. Some people avoid making a will because they feel uncomfortable thinking about death or find it difficult to decide how to distribute their assets. Others want to wait until they have the assurance that they understand what s involved. If you don t write a will, you are leaving the responsibility of dealing with your assets and belongings to your children, relatives, or the government, when the time comes. Studies suggest that close to half of Canadian adults don t have a will. To help make writing a will and estate planning easier for you, Mennonite Foundation of Canada has developed Your Will and Estate Planning Guide as a valuable resource. This guide draws not only on our experience in assisting people from many walks of life understand will and estate planning issues, but on our wealth of knowledge about Christian stewardship of finances and related legal issues as well. Your Will and Estate Planning Guide takes away some of the mystery of the estate planning process by providing you with practical information and tools. It can help you consider how to provide for your family and leave gifts for charities. It gives you guidance on how to ease the burden of settling your estate and reduce expenses to the estate, including taxes. Using this guide will help you understand how to develop an estate plan that carries out your wishes. By planning now, you give yourself and your family peace of mind. MFC is here to help you. If you have any questions about the contents of this guide, contact an MFC Stewardship Consultant to find out more. Call or The purpose of this guide is to provide general information only and users are recommended to seek qualified professional advice in relation to both legal and tax matters, as Mennonite Foundation of Canada does not provide tax or legal advice in relation to specific matters. If you have assets outside of Canada, it is important to get specialized advice from someone experienced in international law

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9 Chapter 1 Getting started on estate planning Where do I begin? Simply put, estate planning is a thoughtful, caring act. Putting your plans in place is an intentional act of stewardship that expresses your faith and values and shows what is important to you. It allows you to care for those you love in the way you want to. Estate planning also lets you express generosity through charitable giving and show your commitment to being generous, just as God has been generous to you. For Christians, estate planning can be an expression of gratitude to God. In the words of Psalm 24, The earth is the Lord s and everything in it. The Apostle Paul affirms this when he writes to Timothy that God richly provides us with everything for our enjoyment (1 Timothy 6:17). It is by God s grace and mercy you have gathered what you now have. What is an estate plan? The components of an estate plan are as follows: a will, which is the cornerstone of your estate plan and would include instructions: - to an executor, who is someone you trust and is capable of carrying out your wishes - to guardians for any minor children or dependants - regarding the distribution of your assets - regarding trusts, if any - regarding your charitable giving plan - regarding the distribution of your personal effects. a document naming the person(s) authorized to carry out your financial affairs if you are not able to do so a document naming the person(s) authorized to carry out your wishes if you are incapable of making those decisions due to serious health issues instructions for the executor and family on where your important documents are stored. Will A written document that lays out the wishes of the deceased with regard to the distribution of his or her assets and personal property. Executor A person named in a will to administer the estate of a deceased person (executrix, if female); referred to as an estate trustee in some provinces. See also Personal representative in the glossary. Guardian A person who has the legal authority to oversee the affairs of a minor and has the legal responsibility to care for that minor until he or she attains the age of majority. Also a person who has the legal authority to oversee the affairs of an adult dependant. Trust A legal relationship whereby a person or persons holds title to an asset (including money), but the benefit of the asset belongs to someone else

10 How do I develop an estate plan? Putting your plans in place is an intentional act of stewardship that expresses your faith and values and shows what is important to you. Step 1: Set goals Before you decide on any details of your estate plan, identify what you want to achieve through the process. Establishing a clear set of personal and family goals for the outcome of your estate planning will help you focus on what s really important to you. Your goals might include the following: to provide for your family, particularly your spouse, children, or anyone else who is dependent on you to be a good steward (manager) of what God has given you to ensure that your assets are distributed according to your wishes and beliefs to reduce stress for your family to reduce the cost and time required to settle your estate to arrange your assets so as to reduce taxes and make the most of what you will pass on to your chosen beneficiaries to make charitable gifts, now and/or through your estate. Step 2: Read Your Will and Estate Planning Guide Your Will and Estate Planning Guide is designed to provide an overview of the basic issues in estate planning and to walk you through the planning steps. To get the most out of it, read this guide carefully and, as you do: make notes and a list of your questions ask yourself questions such as: - Will my spouse have enough to live on if I pass away? - Who should make financial and medical decisions for me if I am not able to myself? - How much is enough, or too much, to leave my children and grandchildren? - What kind of legacy do I want to leave? - How much tax will have to be paid when I die? 8 Step 3: Fill in the Planning Your Will worksheet The Planning Your Will worksheet, located in the pocket of this guide, is another practical tool in your estate planning. Filling it in will help you consider the key decisions you need to make. It will also provide you with most of the details that a legal professional requires to draft your will, making your meeting with that person more productive. Complete as much of the Planning Your Will worksheet as you can. If you want a reminder of what a term or question means, review the appropriate section of the guide or the glossary. Each section of the form refers to a section in the guide, where you will find more background information. Keep notes and a list of your questions. w w w. m e n n o f o u n d a t i o n. c a

11 Step 4: Meet with an MFC Stewardship Consultant Meet with an MFC Stewardship Consultant to review and finalize your will instructions for your lawyer. A consultant will meet with you at a time and place that works best for everyone. Based on the information you provide, the consultant will prepare notes and questions you will need when you meet with your lawyer and will give you that information. Our consultants do not charge for assisting you. To find the MFC office closest to you, go online at call , or Have this guide, including your filled-in Planning Your Will worksheet, and any other notes at the meeting. Step 5: Meet with a lawyer Having a lawyer offer advice, and prepare your will and other estate planning documents is wise and will reduce the risk that your will might be challenged. If you do not have a lawyer in mind, an MFC Stewardship Consultant may be able to suggest a few names. When you make the appointment with the lawyer, ask about the cost of having a will prepared. Ask what the process involves. Take the will memo an MFC Stewardship Consultant has prepared for you to your meeting with the lawyer

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13 Chapter 2 Your will The cornerstone of your estate plan A proper will is the basis of a good estate plan because it is the main tool you have to ensure that your wishes will be carried out with the least possible expense and delay. A will is a written document that lays out your wishes with regard to the distribution of your assets and personal property after you die. Your will does not come into effect or become public until your death. Provided you are mentally competent, you can change the terms of your will or revoke it completely up to the time of your death. You should review your will every three to five years to ensure that changes in your family situation or in government legislation have not made it out of date. In some situations, a badly outdated will may be worse than no will at all. Types of wills Formal Formal wills are drawn up by lawyers who are trained to draft documents that are complete, meet your needs, and accommodate family births and deaths without becoming obsolete. Sign only one copy, as only the original, signed document is valid. For a will to be legally valid, a number of technical requirements must be satisfied. Each province has different requirements. These may include execution of the document in the presence of two proper witnesses. To ensure your will is legally valid, you should obtain the assistance of a legal professional. Usually a lawyer will require the two witnesses to sign additional documents known as affidavits. Affidavits establish the identity of the witnesses and may be useful if there is any question later about the will s validity. People who are named to receive gifts from your will (often known as beneficiaries) or their spouses should not sign as witnesses. Doing so may disqualify them from receiving an inheritance from your estate. Holograph A holograph will is one that you write entirely in your own handwriting and sign without any witnesses. This type of will is valid in all provinces and territories except for British Columbia and Prince Edward Island. Writing a holograph will is not advisable, because you may not have the information you need to make it clear or complete. If your instructions are not clear or are incomplete, the will may be partly or entirely ineffective, which could result in much higher costs in wrapping up your estate, and result in assets not being distributed as you wish

14 Kits Will kits are packages of information and forms that allow you to draw up your own will. They are available in many bookstores, on websites, and as computer software packages. Self-help will kits do not usually explain differences in provincial laws concerning estates information you need to write a proper will. Some people use will kits because they want to save on legal fees. However, using a will kit might leave your wishes open to misunderstanding; a challenge by your beneficiaries might result in costs to the estate that are much greater than the legal fees for drafting a will. Review your will every three to five years to ensure that it s up to date. A poorly drafted or incomplete will may be legal, but if its provisions are challenged, a court may not interpret them as you intended. Special situations Wills for couples Since wills are personal documents, you and your spouse must each have your own. Some spouses have reciprocal (or mirror) wills. Some write wills that are quite different from that of their spouse. In the latter case, both you and your spouse should be aware of this and agree to the differences. International wills If you own assets such as a vacation property or investments outside of Canada, consult with your lawyer about making an international will. Whether an international will is effective depends on the laws of the country in which the will is made, the laws of the country where assets are located, and whether the countries are parties to international treaties dealing with wills and succession. Changing a will You can update your will either by replacing it with another, or by changing it with a codicil. A will may be revoked by destroying it, but that can lead to confusion if executors are uncertain as to whether you intended to revoke it or whether the will was lost or accidentally destroyed. If you wish to revoke your will without replacing it, you should obtain legal advice. Adding codicils A codicil is a formal document that makes specific (and limited) changes to your existing will. Do not write the changes on your existing will, as it may cancel part of your will. Given the ease of modifying an electronically stored version of a will, some lawyers prefer not to do codicils, but to revise the provisions of the will. 12 Cancelling You may cancel a will by destroying it or by replacing it with a new one. Your new will should contain a clause cancelling any previous wills you have made. When you w w w. m e n n o f o u n d a t i o n. c a

15 make a new will, destroy the old one or clearly record that it has been replaced with a new one. When you get married, your marriage may automatically revoke your existing will, unless the will contains specific information indicating that it was made in contemplation of marriage. It is recommended that you review your will with a legal adviser before you get married in case any changes are required. The interpretation of a will may also be affected by a separation or divorce, so in those events, you should also obtain legal advice. Storing your will You should store your will in a safe place that is easily accessible, because only the signed original will be accepted after your death. You may choose to store the original (signed) copy at your lawyer s office (some will provide this service for free), in your home or office, or in a safety deposit box at a credit union, bank, or trust company. Make sure your executor knows where the original will is located and has access to it after your death. Some provinces have central registries where a notice can be filed about the date and location of your will. Keep a copy of your will at home. Make a note on the copy indicating where the original will is stored to help your family or executor find it without delay. File the copy in a safe place along with your other important papers, including a completed copy of MFC s Personal Information Directory. This book can be an important reference for you, your family, or your executor. A copy of this directory is inside the front cover of this guide and is available online at resources/publications

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17 Chapter 3 Dying without a will Intestacy causes problems If you are like most people, you do not particularly enjoy thinking about the prospect of your death. However, you should not let that keep you from writing a will. Making plans for your estate and writing a will while you still have the health and ability to do so is wise. If you die without a will (or intestate, which is the legal term), the consequences can be devastating for those you leave behind. It could result in your assets being squandered. Your wishes may not be followed If you die without a will, your estate will be distributed according to the laws of your province or territory, which may not reflect your wishes. These laws cannot be changed by a court. Decisions on beneficiaries You may want your spouse, partner, or children to receive much or all of your estate upon your death. If you do not make a will, this may not happen because the laws throughout Canada vary widely. Please refer to the chart on page 17 for a summary of the provincial and territorial laws that outline the distribution of assets of an estate when a person dies without a will. Writing a will while you still have the health and ability to do so is wise. In some provinces and territories, a common-law partner is treated the same as a married spouse for estate purposes. The relationship may have to have lasted a certain length of time, however, for the partner to qualify. In other provinces and territories, common-law relationships are not treated as the equivalent of a formal married relationship for estate purposes, even though they may be treated as equivalent under other areas of the law. In some parts of Canada, separated spouses may still be considered spouses for estate purposes. That may mean that a separated spouse would receive the first share of the estate. In some situations, more than one person could be considered a spouse under estate law. Only biological or adopted children are able to inherit under estate law. If you wish to leave any of your estate to stepchildren, you must state this in your will. If you do not have a will and have no surviving spouse or children, your estate will be given to other family members. Priority will first be given to surviving parents, then siblings, followed by nieces and nephews. In the event that no living blood relatives are found, the estate will go to the government. If you want to make an end-of-life charitable gift, you need a will. (Exceptions to this are beneficiary designations on life insurance policies, RRSPs, RRIFs, and TFSAs, as described in Chapter 8.)

18 Choice of a guardian You may want a particular person(s) to be the guardian for any minor children or dependants. However, if you die without a will or without indicating in your will whom you want to be the guardian, a court will select someone for this role. That may not be in the best interests of your children or dependants and may result in conflict among surviving family members. Troubled legacy Bob and Alice were happily married with two small children. The young couple took the time to purchase life insurance and felt good that their retirement plans were on the right track. However, they had never made wills. They had good intentions, but the question of guardianship for their minor children always seemed to stall the process. On their 10th wedding anniversary, tragedy struck when their car collided head-on with a drunk driver. Bob died instantly and Alice two days later. With no will in place and no recommendations as to who should care for the children, many people stepped forward and disagreements ensued. Lawyers were hired and the matter was settled by a judge at a cost of thousands of dollars over several long and tedious months. Distribution of assets is delayed If you die without a will, before any estate assets can be distributed, a court has to appoint someone to oversee your estate. Until that happens, no one can write cheques or make withdrawals from your bank account. If no family members or friends apply to do this job, a court may put this in the hands of the Public Guardian and Trustee for your province or territory. Once this happens, your estate will be distributed according to the one-size-fits-all approach of whatever the law is where you resided. Dying without a will results in higher costs to the estate, with the costs being paid from money you leave behind. The value of your estate will decrease as a result of paying higher taxes. With a will you can plan so that your estate pays less tax. 16 w w w. m e n n o f o u n d a t i o n. c a

19 Summary of provincial and territorial laws regarding division of an estate for people who die without a will: Province / territory Spousal share* Spouse and one child** Spouse and children** Can common-law spouses inherit? British Columbia $65,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children Yes minimum 2-year cohabitation required Alberta*** Saskatchewan $100,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children Yes minimum 2-year cohabitation required Manitoba Greater of $50,000 or 50% of estate All to spouse (if spouse is parent of the child) All to spouse (if spouse is parent of all the children) Yes minimum 3-year cohabitation required OR 1 year with child together Ontario $200,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children No Quebec Nil 1/3 to spouse 2/3 to child 1/3 to spouse 1/3 to children No New Brunswick Marital property ½ to spouse ½ to child 1/3 to spouse 2/3 to children No Nova Scotia $50,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children No Prince Edward Island Nil ½ to spouse ½ to child 1/3 to spouse 2/3 to children No Newfoundland & Labrador Nil ½ to spouse ½ to child 1/3 to spouse 2/3 to children No Yukon $75,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children Yes minimum 1-year cohabitation required Northwest Territories $50,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children No Nunavut $50,000 ½ to spouse ½ to child 1/3 to spouse 2/3 to children Yes minimum 2-year cohabitation required OR child and relationship of some permanence * A spouse receives the first portion of the estate. The size of this share varies according to province. Others inherit only if the estate is larger than the amount of the spousal share. In some provinces and territories, a common-law relationship is treated the same as a marriage for estate purposes. In other parts of Canada, common-law relationships, although equal under other areas of the law, are not treated as equal to a marriage for estate purposes. Also, separated spouses may still be considered spouses for estate purposes. That may mean that a separated spouse would receive the first share of the estate. In some situations, more than one person could be considered a spouse under estate law. ** Only biological or adopted children are able to inherit under estate law. If you wish to leave any of your estate to stepchildren, you must indicate this in a will. *** Under new legislation coming into effect in January 2012, there is an all to the spouse rule in the case of intestacy where a person leaves both a spouse and children of the relationship with that spouse or partner. This change covers the cells of the chart referring to spousal share, spouse and one child, and spouse and children, except if there are children of more than one relationship who survive. In that case, the spouse gets a preferential share of at least 50 per cent of the net value of the intestate estate. Because of the constantly evolving nature of the law, please verify this information with your local 17 MFC office or a local lawyer

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21 Chapter 4 Role of an executor or trustee Someone to carry out the terms of your will An executor is the person who is legally authorized to carry out the terms of your will, so choosing a suitable executor is one of the most important estate planning decisions you will make. An executor is responsible for ensuring that your estate and trust assets are well managed, debts are paid, income tax returns are filed, and estate assets are distributed according to the terms of your will. Depending on the complexity of your estate, the job might last only a few months or might continue for years following your death. Job description of an executor Upon your death, your executor will: locate your will quickly and review it to determine whether you left any directions regarding your funeral or burial arrangements. While your family may plan the funeral, the executor is legally responsible for the arrangements. It would be wise to make your wishes known to your executor as well as to your family. Some churches keep these records for their members, as do funeral homes locate (and secure) all of your property and assets to make an inventory of the estate settle all bills and outstanding debts and collect all debts owed to your estate apply for insurance proceeds and other outstanding benefits and pension credits arrange for probate of the will, if required ensure that a copy of the will and an inventory of assets are sent to all beneficiaries, if appropriate. Many people hire a lawyer to perform this task sell or distribute your assets and investments in a way that is consistent with the instructions in your will manage any trusts created by your will report to all beneficiaries on how the estate administration process is progressing file all necessary tax returns distribute your estate and get releases from all your beneficiaries. How to choose an executor Acting as an executor is a big job. You want to be sure that the person you name to carry out this role is willing and able to do it. Many spouses name each other, their adult child or children, or a trusted friend

22 Pick an executor who is: completely trustworthy and capable of doing the job willing to do the job and has the time to do it close to your age or, preferably, younger. As you move into your senior years, finding someone younger than you to act becomes increasingly important. A 70-year-old friend is just as likely to die before you as he is to still be living and able to act as executor at the time of your passing familiar with your affairs and preferably living in the same province or territory as you. Consider making provisions in case the executor you have named is unable or unwilling to serve or predeceases you. You may appoint: an alternate executor. If appointed as an alternate, the person serves only if the person of first choice cannot serve joint executors. If named to act jointly, the executors need to work together and sign any documents several people to act together or independently of each other. If your estate is complicated, or you have difficulty finding a suitable executor, consider naming a professional, such as a lawyer, accountant, or trust company. Choose a person or a company in whom you and your family have a high level of trust and with whom you feel comfortable. A professional acting as an executor must meet certain legal requirements that a friend or family member may not have to. You may appoint the professional to work alone or as co-executor to serve alongside a family member or other person. If you are thinking of appointing a professional, before you write your will, consult several professionals to get information about their services and fees. Various trust companies owned by banks and credit unions offer this service. Some trust companies have a minimum fee or will act only if the estate is of a certain size. 20 Help your executor as much as possible by preparing the person for the task ahead: Give the executor a copy of your completed will so that he can review it and ask questions. If you are giving your executor leeway in how he carries out the job, provide written instructions regarding your wishes and intentions (for the distribution of personal items, for instance) and the location of important papers. Include instructions regarding the guardians for minor children or other dependants. Include instructions for the management and use of a trust for minor children or other dependants. Give the executor instructions on your funeral arrangements. w w w. m e n n o f o u n d a t i o n. c a

23 Expenses Your estate pays all costs for settling your estate. Your executor is responsible for ensuring this happens. These costs may include fees to manage trust funds and fees associated with any legal and tax assistance the executor requires. The estate may also have to pay fees to a court for estate administration, which is also known as probate or estate administration tax. Because of the work involved, your executor is allowed by law to receive payment for services from your estate. Although the amount paid often depends on the size of the task and the degree of professional assistance your executor hires, the maximum fee is established by provincial law. If your executor is a member of your family who is also a beneficiary, or a close friend, it is unlikely that any fee will be charged. Ask your lawyer what the law is regarding executor s fees in your province

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25 Chapter 5 Role of guardians Someone to care for your minor children and other dependants If you want to influence how your minor children or dependants will be cared for when you and your spouse die, you must make a will and name a guardian for them in it. The term guardian refers to the person or persons named to care for, in the event of the parents death, minor children or dependants who are mentally incapable of caring for themselves. Persons named in your will as guardians may serve immediately in that capacity upon your death (provided no one else has custody), but that appointment does need to eventually be confirmed by the court. While the court has the final say, it will give serious consideration to the wishes you express in your will. The person(s) you recommend will likely be appointed unless the court has good reason to believe that it is not in the best interests of your minor child(ren) or dependants. It is a good idea to review your choice of guardians every few years. You also need to name someone in your will to act as a trustee of any assets you leave to a minor child because minors cannot take control of their inheritance until they become adults (see Appendix 1, page 70). You will want to do the same for a mentally incapacitated dependant. Job description of a guardian and a trustee The person you choose as a guardian must be an adult and willing to assume all the duties guardianship entails: ensuring that the child is looked after properly providing food, clothing, shelter, transportation, health care, education, recreation, and spiritual care. The person you choose as a trustee must be an adult and willing to assume all the duties that being a trustee entails: holding the assets of a minor child or mentally incapacitated adult in trust using the inheritance for the child(ren) s or dependant s needs, as specified in the will. A common example of this is for educational costs distributing the inheritance as specified in your will. You may direct that a child receive an inheritance when that child reaches the age of majority. Or you may delay any distribution until, for example, age 21, 25 or even 30, or direct that the inheritance be paid in instalments. 23 You may appoint the executor of your estate or another person to be the trustee

26 How old is old enough to inherit? Even when they are legally considered adults, many young people are not mature enough to make good financial choices. If you don t specify otherwise in your will, your children will receive their entire inheritance as soon as they reach the age of majority. At one estate planning seminar, an MFC Stewardship Consultant was questioning the wisdom of letting children inherit as soon as they become adults. Suddenly, a young woman leapt out of her seat and agreed. She said that when her father died, she and her brother each received $60,000. Within two years, her brother had depleted his share, wrecked vehicles, ran up debts, and left a string of unpaid bills. She did little better in spending her portion, and is determined not to repeat the mistake with her children. How to choose a guardian Choosing a suitable guardian to care for your children or dependants is a serious decision. You are, after all, entrusting your guardian with what is of greatest value to you your children. You want to be sure that the person you name to carry out this role is willing and able to do it. Choose someone trustworthy who: is both willing and able to take on the responsibility of caring for your children has a faith, values, and lifestyle that are similar to yours lives near your children so as to minimize disruption in the children s lives should they live in the home of the guardian has a trusting and loving relationship with your children, and is someone with whom your children would be happy to live. You may name someone related to you to be the guardians but this is not essential. Naming guardians who meet the above criteria is more important. In your will, you may state reasons for naming specific guardians (or why you are not naming someone else), or you may simply name the people you have chosen. Choosing suitable guardians is about doing what is best for your children first and foremost, not necessarily about satisfying the wishes of other family members. You may name alternate guardians in the event that your first choice is unable to fulfill the role. 24 Some people name their executors to also be guardians of their minor children. Though it is legal and may be convenient, it may remove a degree of accountability on how money is spent. As your children get older and their financial desires and requirements change, they may have greater leverage over their guardians. As well, disputes with their guardians become more complex if the guardians are also the executors of the estate. Under these circumstances, naming people other than the executors to be guardians is a good idea. w w w. m e n n o f o u n d a t i o n. c a

27 Because children s needs and people s circumstances change over time, it is a good idea to review your choice of guardians every few years. It is good to review your choice of guardians as your children get older because the guardians you name when your children are young may not be the best choice when they are older. It is wise to involve your children in the discussion of who would be suitable guardians. Be sure to check with your guardians every few years to ensure they are still willing to serve. When the people you choose to be guardians go through major life changes (marriage or remarriage, birth of children, a growing family, relocation for school or work), it is important to ask if they are still willing and able to act as guardians for your children. Expenses Being guardians is a relationship that could last for several years and will certainly involve extra expenses. It is a good idea to give discretion to the trustee to cover reasonable and ongoing expenses involving your minor children so your guardians do not have to bear all the costs themselves. If the guardians will need to add on to their house or buy a larger vehicle to care for your minor children, it is recommended to grant the executor the right to use trust funds for this purpose. A guardian s legal responsibility may end when the children reach the age of majority, but trust funds created for the well-being of the children may last much longer

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29 Chapter 6 Tax considerations in estate planning Making the most of your assets You have worked hard throughout your life to increase the value of your assets, and you want to use them to secure the well-being of your family and to help charities you support. Since capital gains taxes can reduce the value of those assets at your death, it is important to know how tax laws could affect your assets. It is also important to know which financial tools you can use to reduce tax costs to your estate. Good planning may prevent an unnecessarily large tax bill. Capital gains taxes Capital gains tax can significantly reduce the value of your estate because Canada s tax laws deem (assume) that your registered assets and capital assets are sold at fair market value (FMV) immediately upon your death. Registered assets include Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). Capital assets include stocks, mutual funds, and property. The deemed sale of assets can trigger a capital gain, 50 per cent of which is taxable. The estate pays the capital gains taxes. Capital gains taxes could apply, for example, to shares of a private company, shares of a public company, and real estate (other than your principal residence, normally the house you live in). Exemptions exist for some assets. If property is owned with someone else (held in joint title) or willed to your spouse, it is not deemed to have been sold upon your death. A family farm or small business assets that are rolled over to eligible family members are not subject to capital gains taxes at your death. Tax planning There are a number of legal ways to reduce or defer taxes, both while you are alive and after your death. These include gifting assets to charities, setting up RRSPs and RRIFs, or using Tax-Free Savings Accounts (TFSAs). Tax terms Capital gain The profit that results from investing in a capital asset, such as stocks, bonds, or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller. RRSP A plan to hold deductions from taxable income, within certain limits, in a tax-deferred state with various investment options and a tax deferral on investment income and gains. RRIF A maturity option for RRSP assets, to provide a stream of income upon retirement. The plan holder invests the withdrawn RRSP funds in the RRIF, and each year must withdraw and pay income tax on a set fraction of the total assets of the fund. Gifts of shares or mutual funds If you have charitable intent, you could eliminate the capital gains tax that would be payable on publicly traded shares or mutual funds by gifting them to a charity through a will. If you decide to do this, make sure your lawyer puts special wording into your will to allow your executors to make the gift. This will enable you to leave a charitable legacy and reduce the taxes payable by your estate

30 Property ownership If you and another person own property, you are considered either Joint tenants If you own something as a joint tenant, your interest will normally be transferred to the surviving tenant(s) and won t become part of your estate when you die; or Tenants in common If you own something as tenants in common, the portion you own (your interest in the property) forms part of your estate at your death and is distributed to your beneficiaries according to your will. Most couples hold their personal property as joint tenants. When couples own property as joint tenants, upon the death of one spouse, full ownership of the property is given to the surviving spouse without passing through the will. Joint bank accounts and any other assets held jointly with the right of survivorship are treated the same way. Though joint tenancy is a popular way for assets to be transferred, having another name on the title can sometimes lead to problems. Think carefully before you put property in joint title, because you will be giving up exclusive control of the asset. When one spouse has business interests, couples sometimes choose to have the family home owned by the other spouse. This protects the home if the businessowning spouse is sued or suffers business failure. If one co-owner files for bankruptcy, separates, divorces, or is sued, creditors can also start a lawsuit to try to get at the other named owner s share of the asset. It is important to obtain legal and tax advice before making joint ownership a key component of your estate plan, because transfers to joint ownership can lead to legal and tax complications. Registered Retirement Savings Plans The use of Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) provides good opportunities to defer taxes while you are living. It may also help defer taxes upon your death if you have a spouse or minor child to roll it over to. The contributions you make to an RRSP reduce your taxable income in the year in which you made them. The money is then allowed to grow on a tax-deferred basis until withdrawn. RRSPs must be converted to RRIFs when you turn 71 and begin paying out annual income in the year in which you turn 72. When you die, in most cases, RRSPs and RRIFs are treated as income and any funds that remain in them become taxable income in your estate in the year you die. However, you can reduce and/or defer the tax impact by doing the following: 28 If you are married and/or have minor or disabled children, you can have the investments transferred without tax to your spouse or to a dependent minor child or adult child in certain circumstances, by means of direct beneficiary designations. w w w. m e n n o f o u n d a t i o n. c a

31 If you are married and wish to make a charitable gift, you can name your spouse as the first beneficiary and your estate or charity as a secondary designation to receive part or all of the money. Any RRSP or RRIF balance that remains after the death of the surviving spouse must be included as income in that spouse s final return. When a charity is designated as the beneficiary, the charity may issue a charitable receipt to the estate of the person who owned the fund. If you are single, the tax treatment of RRSPs and RRIFs means that it is usually a good idea to name your estate or charity as the beneficiary rather than family or friends. Tax-Free Savings Accounts Canadians 18 or older can use a Tax-Free Savings Account (TFSA) to help reduce taxes on assets that increase in value. You can contribute up to $5,000 a year into a TFSA. Advantages Using a TFSA as a vehicle for savings can help your money go further. Your contribution limit is indexed to inflation, meaning the Canadian government will make increases in $500 incremental changes, as inflation requires. Money in a TFSA can grow tax-free, and no tax is payable when it is withdrawn. Unused contribution room can be carried over to future years. Taking money out of a TFSA will not result in claw-back of a senior citizen s Old Age Security or Guaranteed Income Supplement, as is the case with other income. TFSAs can be used as collateral for a loan. TFSAs If Sue Smith contributes $2,000 to a TFSA in 2010, she has $3,000 to carry forward, and would be able to contribute up to $8,000 to her TFSA in Money taken out of a TFSA in a given year can be replaced the next year, on top of that year s $5,000 maximum annual contribution. Using a TFSA can help you reduce the taxes the estate may pay. All Canadian provinces (except Quebec) allow a TFSA to be passed on tax-free and outside of an estate to a surviving spouse, or to charity, provided the owner of the plan completes a beneficiary designation form. Donating a TFSA to charity will result in your estate receiving a charitable receipt for the value of the gift. That receipt can be used to offset or eliminate other taxes owing. Disadvantages TFSAs do have some drawbacks. The most relevant one for estate planning purposes is that capital losses on investments held inside a TFSA cannot be declared for tax purposes. This benefit is available for people who hold stocks or mutual funds in a regular investment account; if they suffer a loss, they can claim that loss to offset capital gains from the sale of other stocks or mutual funds

32 Life insurance Life insurance can be used to provide for a person or a charity without incurring tax costs to the estate. The person(s) or charity you name as beneficiary(ies) of your life insurance policies will receive the proceeds in a tax-free lump sum. This money is not considered part of your estate, and as such is not subject to probate. Think carefully about the beneficiary designations on your life insurance policies. In some cases, it is worth naming a secondary, or backup, beneficiary who would receive the insurance payout if your primary beneficiary (often a spouse) dies before you or at the same time. If thinking about naming an adult child as a beneficiary, consider whether it might be problematic for that child to handle the lump sum payment. It may be fine for older beneficiaries with experience in handling large sums of money; it may not be a good idea for those who have become adults without such experience. If the proceeds of the insurance policy go into the estate, that money becomes vulnerable to the claims of creditors. There are significant advantages to naming a beneficiary other than your estate. If you designate your estate to receive the proceeds of the insurance policy, that money is subject to the trust and distribution instructions left in your will, as well as to probate costs. If you have paid up your insurance but no longer need insurance protection, you may have an excellent opportunity to name your favourite charity(ies) to receive the proceeds of your policy. The charity will then issue a charitable receipt to your estate. In some cases, people choose to transfer ownership of an insurance policy to MFC while they are still living, in order to benefit a number of charities after they pass away. This often happens when it is more useful for a person to get a charitable receipt (or receipts) while they are living than for their estate to get a large receipt after they have passed away. If the policy is not fully paid up, MFC will also provide charitable receipts for ongoing premium payments. For more information on the tax advantages of charitable giving, see MFC s First Things First publication. Reasons to purchase life insurance 30 As part of your estate planning, you may find it useful to purchase life insurance to: provide income for your family in the event of your death cover your debts increase the size of your estate make a significant gift to charity provide funds so your farm or business can continue to operate leave an inheritance to heirs who will not receive an interest in your farm or business. w w w. m e n n o f o u n d a t i o n. c a

33 Chapter 7 Records of assets and liabilities Provide your executor with detailed information You can save time and reduce the possibility of problems for your executor by making a detailed list of everything you own in your name alone or with some other person (assets), of what you owe (liabilities), and of the location of documents needed to settle your estate. Record of assets Assets include anything you own, such as savings, TFSAs, RRSPs or RRIFS, stocks, bonds, land, a house, a cottage, a car, farm property, a business or interest in a business, coins, or collectibles. Make a list of everything you own for your executor. Keeping records of who owes you money, including the interest rates and terms of any loans, can be very helpful to the person looking after your affairs. To avoid misunderstandings, it is important to have clear records about any loans, including money given to children or beneficiaries. If the loan was made to a child or beneficiary, state whether the money was: a loan to be repaid to the estate. Leave a record of the amount, the interest rate, and the terms of the loan an early inheritance with the amount to be subtracted from the inheritance at the time of the distribution of the estate not to be repaid upon your passing. If the loan is to be forgiven at death, it is important that that is reflected in your will. This is because forgiveness of the loan at death could be interpreted as being a testamentary instrument, in which case the document needs to comply with all the requirements for a valid will. Some families have adult children write and sign letters acknowledging the loan and the terms under which it is to be repaid (or not). Record of liabilities Liabilities include money owed on credit cards, lines of credit, loans, promissory notes, guarantees, mortgages, reverse mortgages, and lease agreements. Keeping a list of people or institutions to which you owe money as well as the amount, interest rates, and terms of any loans can be very helpful to anyone who has to look after your affairs

34 Personal Information Directory Your executor will need a number of documents to carry out his duties, and if the executor cannot quickly find them, he may have to do detective work to locate them, which could delay the settling of the estate. To avoid this, you can assist your executor by leaving a list of all the documents and information needed to settle the estate or by leaving all the documents in one file. To help you prepare such a list, MFC has enclosed the MFC Personal Information Directory in the front pocket of this guide. Complete the directory and give a copy to your executor and to the person who will look after your affairs if you become incapacitated. If you don t want to give them a copy, at least advise these people (and your family) where they can find the directory. Leave your executor and family a list of the location of the following: personal papers, including your will and birth certificate information on company benefits or private benefits plans and statements for life insurance policies account statements from credit unions, trust companies, banks, or other financial institutions papers related to ownership of property, including vehicle registrations, property titles, and information on assets held outside of Canada, a farm, or other business holdings information related to RRSPs or RRIFs, TFSAs, annuities, GICs, term deposits, Canada or provincial savings bonds, stock certificates, bonds, mutual fund statements, tax-sheltered investment statements, loan or mortgage agreements location and number of any safety deposit boxes, the names of persons who have the right to open the box (your executor and whoever will handle your affairs if you are incapacitated should be on that list), and the location of the keys the names, addresses, and phone numbers of your accountant, lawyer, tax preparer, financial planner, trust officer, insurance agent, and stockbroker in case your executor has to work with them. If you have prearranged your funeral and your cremation or burial, list the name, contract number, and address of the funeral home and/or cemetery. Leave a receipt or a copy of the receipt to prove that payment has been made. You may also leave additional funeral wishes that are not part of your prearranged plan. (See Appendix 4, page 73, for a funeral arrangements form you can use to leave a record of your wishes.) Regularly updating your records ensures that no significant information is overlooked. Some people like the discipline of doing it at the same time as tax filing or end-of-year statements are done. Simplify banking 32 If you have accounts at more than one credit union or bank, stock brokerage, or mutual fund dealer, consider putting all your accounts with the same organization or reducing the number of accounts you use. This will make your executor s job easier. w w w. m e n n o f o u n d a t i o n. c a

35 Chapter 8 Leaving a legacy Making end-of-life gifts to charity Gift planning is an important part of estate planning. Many of us are in a position to make a gift from our estate to help support the church and other charities we care about. This final act of giving is also an expression of thanks to God for the gifts God has allowed us to gather during our lifetime. How much is enough? Some people hesitate to make end-of-life charitable gifts because they feel an obligation to leave their whole estate to their family and/or dependants. Often, however, it is possible to provide for your family and dependants and to make an end-of-life charitable gift. In some cases, family members may not need to inherit your whole estate. For example, if your adult children are already doing well financially, you have an excellent opportunity to make a more generous gift to your favourite charity(ies). Some people have found that asking themselves How much is enough? helps them to decide on the size of their end-of-life charitable gifts. To come to a decision, you could think in terms of: age and stage: Given the current size of your estate, what would your gift mean for each recipient? Would it be too little, too much, or just right for them at the age they will likely be when they inherit? An inheritance could be very useful to a younger person with a mortgage, family to raise, and bills to pay. It may be less important for someone nearing retirement current help: Helping your loved ones financially during your lifetime may ensure you give gifts when they are most useful. In some cases, people don t make charitable end-of-life gifts because they don t know how easily it can be arranged and what help is available to them. The following sections provide a good overview of ways to make end-of-life gifts. You can ask an MFC Stewardship Consultant for more detailed information and assistance

36 Gifts to charity may be large or small Whether you make a large or small charitable end-of-life gift, you will be helping others. You can use a variety of methods to make your gift, but typically you would designate a percentage or share of your estate to charity, rather than a specific amount. Leaving a specific dollar amount means the value of the gift will not change as the value of your estate grows or shrinks, so the size of the gift may not ultimately reflect your wishes. Options include: choosing to leave the bulk of your estate to charity considering charity as an extra child that will receive the same amount or, in some cases, more than your biological children leaving a tithe (10 per cent of the estate) leaving a smaller portion than a tithe, owing to family obligations dividing the estate in half one portion for family and the other portion for charity particularly if you are single leaving everything to charity, particularly if you have no family obligations. Tax considerations for end-of-life charitable gifts There are considerable tax benefits to making an end-of-life charitable gift. As discussed in Chapter 6, while there are no estate taxes in Canada, any taxes that apply during your lifetime also apply at your death. If you leave a gift to a registered charity, your estate can use the receipts issued to reduce or eliminate taxes owing. During your lifetime, you can use charitable receipts for up to 75 per cent of your net income in a year to offset taxes owing. However, your estate can use charitable receipts for up to 100 per cent of your net income in the year of your death. Your executor may re-file your tax return for the year prior to your death if there are more charitable receipts than are required to eliminate taxes in the year you passed away. Tax laws also allow you to minimize or eliminate taxes to your estate through in-kind donations of mutual funds or stocks, as well as direct designation of life insurance policies, RRSPs or RRIFs, or TFSAs. Tax credits gained through charitable donations provide a valuable and responsible tax-planning tool during your lifetime and for your estate. 34 w w w. m e n n o f o u n d a t i o n. c a

37 Charitable bequests Charitable gifts made through a will, also known as charitable bequests, are the most common form of end-of-life gifts. Many Christians leave charitable bequests as a testimony to their values and to make a final show of support for causes they care about. Ways to give include the following: cash gifts life insurance Registered Retirement Savings Plan (RRSP)/Registered Retirement Income Fund (RRIF) Tax-Free Savings Account (TFSA) publicly traded stocks, mutual funds, and bonds property. Cash gifts Gifts of cash are typically stated in your will in one of three ways: tithe 10 per cent of your estate another percentage of your estate residue (remainder) of your estate. The residual value of the estate is the amount remaining after payment of all outstanding debts, expenses, income taxes, and any specific bequests. Life insurance If you have life insurance policies that you no longer need to protect your family or an asset, you could use them to make end-of-life gifts. If they are whole life or universal life policies, they may have a substantial cash surrender value. If you make MFC the beneficiary, the Foundation will give you a form on which you can list the names of the registered charities you wish to benefit from this gift at your passing. You can update this form, without cost, at any time. Upon your death, MFC will distribute the gifts as you directed. Having MFC distribute the gifts is another way of reducing the costs of settling your estate. You can make a gift of an insurance policy now by changing the beneficiary and ownership of your policy to Mennonite Foundation of Canada. If you make a charity the beneficiary and owner of a policy, the charity will issue a charitable receipt to you when it is notified by the insurance company that it has become the beneficiary and owner of the policy. The receipt will be for the donated policy equal to the value of the policy (cash value plus dividends on deposit plus interest). You, as the donor, may have to report a portion of the policy value as ordinary income if the cash surrender value exceeds the adjusted cost base of the policy. This information will be provided to you by the insurance company

38 When you name a charity as a beneficiary of an insurance policy, the policy is not considered a part of your estate and so is not subject to probate. As a result, the proceeds will be forwarded to the charity more quickly than if the money were to go through the estate, which is another advantage of making a gift this way. Whether a charitable gift or not, a life insurance benefit is not subject to tax. Using insurance as a way to give Will and Jean Stoltz found a creative way to look after their family in their estate planning, and make a significant gift to charities they care about. First of all, we want to provide for our children and to pass on to them what we can, says Will, who worked as a Mennonite pastor, then as a prison chaplain prior to his retirement. But we also wanted to make a provision for the church and its mission, he says. We were able to take out a charitable insurance policy with MFC as the owner and beneficiary, and then designate proceeds payable at our passing to the charities we want to support. The insurance policy requires them to pay annual premiums, for which they receive a charitable receipt. For some people, it is more useful for their estate to receive a receipt when the policy is paid out rather than getting receipts now. In that case, they retain ownership of the policy but name MFC as the beneficiary. RRSPs, RRIFs, and TFSAs You can direct assets such as RRSPs, RRIFs, and TFSAs to MFC. Although your estate must still declare the registered retirement funds as income, the tax credit generated by the charitable receipt can offset any taxes that are due on the income. As is the case with life insurance policies, making a charity the beneficiary of a retirement fund means that the money will usually get to the charity much more quickly than if it flows through an estate and is not subject to probate. Publicly traded stocks, mutual funds, and bonds You can make a gift of publicly traded shares (stocks), mutual fund units, and bonds through your estate. This can provide the estate with significant tax savings, if these investments are worth more at the time of your passing than when you purchased them. Make sure your will gives your executor the option to make donations in-kind. Property You can make a gift of property (for example, real estate or art) to a charity, either while you are alive (called a life interest) or at your passing. If you make a life interest gift of property, you are allowed to continue to use that property during your lifetime. Gifting property, particularly in a life interest arrangement, can be a complex process that should not be undertaken without carefully considering all the implications and consulting various professional advisers. 36 When thinking about when to make a gift of property, consider whether it would be more useful for you to use a charitable receipt now by making a gift while you are alive or for your estate to use the receipt after your passing. This depends on your tax situation. w w w. m e n n o f o u n d a t i o n. c a

39 Family endowment If you want your giving to continue to support causes you care about for years after your passing, consider setting up a long-term family endowment fund, also known as a family foundation. The money is invested and the annual earnings are distributed to your chosen charities each year. MFC administers foundations for individuals, families, and charities across Canada. Using MFC to establish an endowment provides all the flexibility you need to achieve your charitable goals, without the costs and annual paperwork that go along with setting up a private foundation. Some people that set up endowments with MFC making provision for their children or grandchildren to be involved in decisions about annual distribution of endowment earnings after they are gone. In many cases, subsequent generations make gifts to these funds. Talk to the MFC office nearest to you for more information. MFC s role in your gift planning MFC Stewardship Consultants are available to work with individuals, couples, and families on their estate planning. Planning MFC Stewardship Consultants have detailed knowledge of charitable gifting and tax matters, and can highlight tax issues where you may wish to obtain further professional advice. An MFC Stewardship Consultant can meet with you without charge and help you plan your end-of-life charitable giving. The consultant would also prepare a memo that guides your lawyer in developing or updating your will and other estate planning documents. Distribution of charitable gifts Mennonite Foundation of Canada can also distribute gifts to any registered Canadian charity, which includes churches, on your behalf. As mentioned earlier, you would leave instructions for MFC regarding gift distribution, using the MFC distribution form. You can use the distribution form to: name the registered Canadian charities that you want to receive gifts designate what percentage of the amount given to MFC is to go to which charity designate whether MFC is to distribute the gift(s) all at once or over a specified period indicate whether you want to give anonymously. In your will, you would indicate the percentage (or share) of your estate that you are leaving to Mennonite Foundation of Canada, to be distributed to charities. After you die, your estate sends a cheque to MFC for the amount. The Foundation then issues a charitable receipt for the gift and distributes the amounts to the specified 37 charities accordingly

40 Using MFC to distribute your end-of-life gifts has a number of benefits: The distribution form makes it easy to help multiple charities and reduces work for your executor. You can change the distribution form at any time, without incurring fees, as you would in redoing your will. Using this form enables you to make gifts anonymously, if you wish. If a charity you have named ceases to exist, your gift would not fail, as could happen if it were named in your will. MFC would work with your executor to find another suitable cause. Check with an MFC Stewardship Consultant, your financial adviser, or a tax preparer to get information on which method of charitable giving would be most beneficial to you. 38 w w w. m e n n o f o u n d a t i o n. c a

41 Chapter 9 Incapacity documents Planning for care when you cannot take care of yourself People often think of death as a worst-case scenario, but some suggest that losing the ability to talk and reason due to illness or accident is even worse. When someone suffers a crippling stroke, is in a lengthy coma, or becomes mentally incapacitated for another reason, that person has to depend on someone else to make decisions. He or she needs to have someone who can write cheques to cover expenses, file tax returns, make investment decisions, and make medical decisions. If you were to become mentally incapacitated, you would likely want someone you had chosen ahead of time to look after your assets and your health. To ensure that is the case, you need to make and legally document your decisions while you still have the mental capacity to do so. The sooner you do it, the better. As you plan for the possibility of your own mental incapacity ( mental incompetence is the legal term), you need to consider two separate, though related, decisions: whom you will appoint to look after your property (money, investments, real estate, insurance) and whom you will appoint to look after your health and medical concerns. The person you appoint to take care of your assets must act only in your best interests. Legal documentation Legally, the person you name to act on your behalf is acting as your attorney. Attorney in this sense does not mean a lawyer; it means an agent, someone whom you trust to look after your interests when you cannot do so. After you decide on the person(s), you need to prepare a legal document to record the appointment. The best plan is to have a lawyer draw up a document in which you name someone to act on your behalf. The name of the document varies across Canada (see Appendix 3, page 72), as does how the document is set up and signed. It is important to have a lawyer draw up this document for you because poorly worded or improperly signed documents may not do what you intend them to do

42 Be prepared You should be prepared for the possibility you could become incapacitated. If you are unable to conduct your financial affairs and have never prepared documents giving someone the authority to act for you, A potential nightmare awaits the family, suggest lawyers Barry Fish and Les Kotzer in their book The Family Fight: Planning to Avoid It: A no nonsense guide to wills and estates. An Ontario couple lived that nightmare. When the husband suffered a stroke, his wife was unable to complete the sale of the family home, yet needed the money for a condominium they had agreed to purchase. His share of the proceeds from the sale of their home was held for a time by the Public Guardian and Trustee. She had to spend a lot of money and suffered considerable grief before getting the situation resolved. Financial issues If you don t legally appoint someone to act on your behalf and are incapable of caring for your financial affairs, your spouse and other family members will be quite limited in what they are able to do. According to the law, if you have a joint bank account, your co-account holder(s) can access the account to pay your bills and deposit your cheques. But they don t have to and no one will force them to do so. Your spouse and other family members will not be able to tell your financial adviser or broker how much or when to invest, or when to withdraw or sell investments. They will not be able to file or access your tax returns or discuss your tax situation with Canada Revenue Agency. They will not be able to sell or buy real estate for you. They will not be able to mortgage or refinance your property. If you appoint someone to handle your financial affairs in case you become mentally incapacitated, that person will be able to write cheques to cover expenses, file tax returns, and make investment decisions on your behalf. Your choice, the court s choice, or a government official There are three options for someone being put in place to deal with the property of someone who no longer has the legal capacity to handle it: While still mentally able to do so, a person can appoint someone else to legally act on his behalf if he should become mentally incapacitated. 2. A close family member of the person may go to court for an order that allows him to manage the incapacitated person s assets. This can be a lengthy and expensive procedure, since the appointed person must occasionally report to the court. 3. A government official (in most provinces called the Public Guardian and Trustee) will take control of all of the incapacitated person s assets and manage them according to the laws of that province or territory. The government official may not properly appreciate the preferences or expectations the incapable person may have had while capable. w w w. m e n n o f o u n d a t i o n. c a

43 Giving someone the right to act for you for financial and personal reasons should not be seen as something you do only when you get old. It is excellent protection for any adult regardless of age or health. Do the planning now and put the documents in place to avoid possible complications later. Thinking ahead and planning for a time when you may not be able to take care of yourself is a responsible exercise. Appointing a person to care for your financial affairs The person you appoint to take care of your assets must act only in your best interests. He or she may not take advantage of your investments or assets to make money for him- or herself. The person should have the following qualifications: complete trustworthiness, usually someone who shares your values willingness and ability to act for you in most cases, someone who lives nearby able to do careful and thorough record keeping willing to be accountable to someone else, such as a family representative, lawyer, or accountant. You may appoint one or more persons to act for you. You may want your spouse or common-law partner to perform this role. Be aware that in most provinces, there are limits on what attorneys can do if acting on behalf of their spouse or partner. If you appoint more than one person, you must also consider whether they should act together, whether the second one acts only if the first one cannot, or whether to make some other arrangement. There are different types of powers of attorney (see Appendix 3, page 72, for terms used for PoA in various parts of Canada), for financial affairs to cover various situations. These include the following: Enduring PoA remains valid if the person who signs it becomes incapacitated (which is exactly when most people want a PoA). General PoA covers the broadest possible scope of authority under which an attorney may act. This is like giving a blank cheque to your attorney, along with the right to manage all your assets, not just your bank account. Limited PoA applies only to a particular asset (e.g., a bank account, investment, or a particular piece of real estate) or for a limited period of time. Springing PoA gives authority for the attorney to act only after some event occurs. Most often, it is incapacity, in which case it is important to identify whose job it will be to say when the signer has become incapacitated. You can discuss whether any or all of these possibilities apply to you with an MFC Stewardship Consultant, and if you still have questions, with your lawyer. Once you become incapacitated, you will no longer be able to sign a valid PoA, so do it while you can. You can usually cancel a PoA at any time, as long as you have ability to do so. A PoA usually ends at the death of the signer, at which time that person s will takes over. Health and personal issues You have the right to make decisions about your medical treatment and personal care as long as you are healthy and of sound mind. But if you cannot give physicians your

44 consent to provide or withhold medical treatment, they would likely be required to do everything reasonably necessary to keep you alive. As medical science and technology advances, keeping you alive may feel much more like prolonging your death. If family members all agree with a recommended treatment, often physicians will respect and follow the family s wishes. When family members disagree, or if the family s thinking runs contrary to medical recommendations, then medical professionals must revert to their ethical duty to keep you alive. The best course of action is to appoint someone ahead of time to make decisions about your health care. This person would make medical decisions regarding issues such as treatment, end of life, and personal care on your behalf. Using a health care document All Canadian provinces allow you to put your wishes about treatment in writing. The name of the document in which these issues are addressed varies from province to province (see Appendix 3, page 72). You can usually use the health care document to do the following: Appoint someone else (a third party or parties) to receive medical information and to make treatment decisions. Leaving general instructions is a good choice because you don t know all the treatment possibilities to which you may be exposed in the future. General instructions give the person you have chosen the right to use her or his judgment to determine your treatment. Give specific instructions about daily-living needs, serious health situations, or types of treatment. The person who acts on your behalf is guided by your instructions as long as your instructions are not contrary to what is medically reasonable. Appointing a person to manage your health care The person you appoint to make health care decisions on your behalf must act only in your best interest. Keep in mind that life-and-death decisions may need to be made. The most difficult part of thinking about future medical care is end-of-life matters. Handing over decisions that need to be made at that time to someone you love and trust may be the greatest expression of faith or it may be a disaster. To avoid a disaster, choose a person with the following qualifications: complete comfort with the role (the person may have to make decisions in the face of possible family disagreement, or even family conflict) complete comfort with your preferences for care willingness and ability to act for you in most cases, someone who lives nearby. You may appoint one or more persons to act for you. You may want your spouse or common-law partner to do this. If you appoint more than one person, you must also consider whether they should act together, whether the second one acts only if the first one cannot, or whether to make some other arrangement. 42 After you decide on the person(s), you need to prepare a legal document to record the appointment. As discussed earlier, working with a lawyer is a wise decision. w w w. m e n n o f o u n d a t i o n. c a

45 Chapter 10 Trusts An effective asset-protection tool A trust is a legal arrangement in which a person or corporation holds property for the benefit of another person or persons. Trusts can be fixed, wherein the terms and amounts are spelled out, or they can give the trustee discretion to manage and distribute income and assets as circumstances determine. People typically set up trusts to protect assets, to provide someone with an income for life, to avoid having assets go through probate, and to help defer taxes. Who does what in a trust Three parties have a role in a trust: Settlor places assets or property into a trust names the conditions and beneficiary of the trust determines how the trust is to be ended, and who gets what is left when it is ended Trustee manages the trust assets for the benefit of the beneficiary as outlined by the settlor files the trust s income tax return Beneficiaries receive trust income, property and/or assets. Types of trusts You can set up two types of trusts: a testamentary trust and a living trust. A testamentary trust is set up through your will and takes effect when you die. It is the easiest and least expensive trust to create, as you pay only the cost of writing your will. A living trust (inter-vivos trust) takes effect while you (the settlor) are still alive. It is more complicated than a testamentary trust and usually not worth the cost unless the value of the assets being transferred is quite large. One advantage that living trusts offer over testamentary ones is that they remain private. Another is that the assets do not become part of your estate and so do not have to go through probate, which saves time on distribution of the assets. Purpose of trusts 43 You can set up a trust as part of your estate planning to benefit others and yourself

46 To provide income for minors or others unable to care for property to provide for the care, upbringing, and education of children or grandchildren. Minors cannot receive an inheritance except through a trustee (usually your executor) to provide for beneficiaries who are not able to look after the property because of the following circumstances: age (i.e., minors) mental incapacity ( discretionary trust or known in Ontario as the Henson trust) infirmity lack of business experience. To provide an income for a spouse You can set up a spousal trust to provide an income for your spouse during his or her lifetime without transferring ownership of the property that generates the income. Upon the death of your spouse, the property in the spousal trust passes to the beneficiaries (such as your children or charity). Property can normally be transferred to a spousal trust on a tax-deferred, rollover basis. This kind of trust can be useful if you have a blended family and you want to make sure that children from previous marriages receive an inheritance. To manage taxes You can use a living trust to freeze assets at their current value. This results in any future growth in the value of those assets being passed on to your beneficiaries (e.g., your children or a charity). This may make it possible for you to limit your capital gains tax liability (in the case of private company shares you own) and to defer taxes for your beneficiaries until the last one dies. When you leave publicly traded shares or mutual funds to a charitable beneficiary, the capital gain isn t taxed. To transfer property and continue to enjoy its use You can use a living trust to transfer property (land, family home, cash, and cottage) to other people or charity without giving up full control of that property. You may be able to continue enjoying the property during your lifetime or receiving income from the trust. If a living trust lists a charity as a beneficiary, you may be able to receive a charitable receipt for a portion of it and receive income during your lifetime as well. This type of trust allows any capital gains to be passed on to the beneficiaries and the property can pass outside your estate when you die, which reduces the costs for your estate. Legal documentation 44 Trusts and the rules surrounding them are often complex and detailed. Talking to a lawyer and an accountant concerning any plans to create a trust, whether through your will or during your lifetime, is an important step in deciding whether or how to set up a trust. w w w. m e n n o f o u n d a t i o n. c a

47 Chapter 11 Personal effects Dividing your personal possessions When a person passes away, she or he usually leaves personal possessions (items such as furniture, household goods, clothing, collections, photo albums, books, and tools) to be distributed to others or to be disposed of. Although not legally binding if written outside of a will, leaving written instructions that clearly explain what you want done with your things will help make your wishes clear to your executor and beneficiaries. If you don t leave distribution instructions Most often, an executor will oversee the distribution of your personal possessions. If you don t leave specific instructions in your will, your executor will likely allow family members (children, grandchildren, parents, and siblings) to divide your personal items among themselves. This could lead to misunderstandings or disappointment. Studies show that disputes arising from an estate s distribution are more often over items that have sentimental value than over money. If you have no family or your family is not interested in the things you have left, the executor may sell what is of value and add the proceeds to your estate. Sentimental value Bob and Sara were getting older and had recently updated their wills. But they had not yet discussed who might want their dishes, jewellery, and home furnishings. Sara remembered those decisions had been difficult when her parents died. Following a family holiday dinner, Bob and Sara began a conversation about distributing their personal effects and were surprised when their four adult children quickly started to argue. After calling a brief time out, the couple began again, this time slowly sorting through the emotions and relationships with their children before moving on to tackle their belongings. It was a very open and healing conversation. For Bob and Sara, it was important to deal with the distribution of their possessions while they were still alive. Leaving it until they had passed away or were no longer able to have the conversation could have left their children with painful memories of a family feud. They now believe their children are comfortable with the decisions made about their parents personal effects and will remain close friends after their passing

48 Benefit of leaving instructions for distribution A carefully prepared will can go a long way toward reducing the chance of arguments among those who have a claim to your estate. Giving items to the people who enjoy them most and ensuring that your beneficiaries see the process as fair are both important considerations when deciding who will receive your personal effects. Here are some ways you might deal with having your personal possessions distributed: Write specific distribution instructions into your will. Some choose to designate certain items, such as family heirlooms, to be given to particular persons so they stay within the family. However, this might cause issues with distribution in the event some of these items have been sold or otherwise disposed of during your lifetime and the will has not been changed. Give away those items you no longer need to family members, friends, or thrift stores while you are still living. This can save your executor and family much time and energy. It will also give pleasure to the recipients and to you, as you see them enjoying the gifts. Put name tags on items you want particular persons to have. The problem with this is that the tags may fall off, become unreadable, or be switched between now and when the time comes for the items to be distributed. State your wishes in writing in a letter or memo separate from your will and file it where your executor will find it. If you have no spouse, children, or grandchildren, naming a charity (or a thrift store) to receive your personal possessions might be an excellent option. The charity will turn your good-quality, saleable personal effects into money it can use in its programs, and your executor will have less work to do. 46 w w w. m e n n o f o u n d a t i o n. c a

49 Chapter 12 Your family and your estate Planning for the unexpected and family matters No one likes to think of all members of a family dying at the same time. However, given that this can happen, it is prudent to leave instructions that would apply if tragedy strikes. Similarly, because changes in marital status can have an effect on the distribution of your estate, it is wise and caring to make arrangements that take such changes into account. Common disaster: What if all beneficiaries die? If you and your family should perish at the same time, does the wording of your will cover the disaster? This is especially important to consider if you and your minor children travel together. Even if your children are older and are unlikely to be in situations where disaster could strike your whole family, it is wise to prepare for the unexpected. You can do this by including a clause in your will that gives clear instructions on how your estate is to be distributed if your family should all die at the same time. Changes in marital status can have an effect on the distribution of your estate. You have a number of options for the distribution of your estate. If no immediatefamily beneficiaries were left: You could leave all or part of your estate to your favourite charity(ies) your church or denomination, relief and service agencies, mission agencies, Bible college, university, or hospital to continue your legacy of caring. MFC Stewardship Consultants can assist you with the distribution of your gift to charity. You could leave something to siblings, parents, nieces, and nephews, other members of your extended family, or to friends. You should also consider writing a clause in your will to cover situations in which beneficiaries die before receiving their full inheritance. Marriage and remarriage Any time you make a change in your marital status, you should review your estate plan and make the changes needed to protect the assets you bring into the marriage, your estate, and those you want to benefit from it. There is nothing preventing anyone who feels unfairly treated by a will from challenging that will in court. Marriage contract Couples have been making marriage contracts since before Roman times and are still doing it. When you marry someone, you and your partner agree to accept the terms of a contract written for you in law

50 What s in a name? marriage contract pre-nuptial agreement post-nuptial agreement. These different terms all mean the same thing a written agreement between spouses or intended spouses arranging for the distribution of property different from that which is normally provided under marital laws. Similarly, you and your intended partner can create a legal agreement that sets out decisions you have made together regarding your marriage, often about financial arrangements. Drawing up a marriage contract is important if you and your partner would like to divide your property after your death or in case the marriage fails in a way that is different from the terms set out in marital laws. In the marriage contract, you and your intended partner can state how the property should be divided. A marriage contract is also important if you are supporting a previous spouse or children, want to protect an inheritance for children from another marriage, or want to protect assets you are bringing to the marriage in case of a divorce. It may not seem romantic to be negotiating a marriage contract just before you say, I do, but think of it as a tool to bring mutual understanding to two family units, each with unique patterns and habits, that are now merging into one. Having things in writing may not entirely prevent tension and stress, but it could go a long way toward minimizing them for all concerned. Pre-nuptial agreements Frank had been widowed eight months when he met Martha, who had also been widowed. Within the year, they married. Frank had three adult children from his previous marriage and Martha had two. Frank and Martha had each done reasonably well financially. Before getting married, the couple agreed that they would maintain their financial affairs separately and would benefit their own children through their wills. During their lifetime, they would live in the house Frank owned, and he would cover the housing expenses. They contacted a lawyer who prepared a pre-nuptial agreement. Eight years later, Frank and Martha were involved in an accident that resulted in the death of Frank and injuries to Martha. She recuperated in hospital for three months. While Frank s and Martha s children had got along well enough, the loss and the settling of the estate put some strain on their relationships. The question of whether Martha would continue to live in the home she and Frank had shared was especially difficult. Thankfully, the couple s pre-nuptial agreement clarified their intent. When Martha moved into an apartment three years later, the house was sold and Frank s estate was finally settled. 48 Money matters Money ranks high as a leading cause of conflict for couples at the best of times, and perhaps more so for couples who are remarrying. They frequently bring more financial responsibilities and assets into the relationship than they did into their first marriages. They may be responsible for child or spousal support payments, business interests, children from previous marriages, credit card payments, insurance policies, investments, cottages, and homes. Some couples have different values regarding finances, which can lead to difficulties. w w w. m e n n o f o u n d a t i o n. c a

51 Here are some steps to take before you marry to minimize conflict afterwards: Discuss how to blend household finances. Finding ways to handle your finances is important, especially if you each have different saving and spending habits. Talking about whether you will have joint or separate bank accounts, and who will be responsible for financial records can reduce or prevent future tensions. Identify which possessions each of you owns. Often, items of sentimental value create more disagreements in settling estates than items of monetary value. Keep in mind the significance of family heirlooms; antiques; collections of art, stamps, and coins; and other items that have value either sentimental or monetary. Involve your children in deciding who will receive what, because they are the ones who will ultimately benefit from your decisions. Work together to set goals: the more in agreement you are, the stronger your marriage will be. Some things can be stated in a marriage contract; others can be worked out only as your marriage unfolds. Wedding bells If you marry, take the time to make a new will, because your old one may no longer be valid. Redrafting your will and updating beneficiary designations If you marry, take the time to make a new will, because your old one may have been revoked by the marriage. (For information on the consequences of dying without a will, known as intestacy, see Chapter 3.) It is important to do the following when redrafting your will: Review and update your beneficiary designations on insurance policies, pension plans, RRSPs, RRIFs, TFSAs, annuities, or any other financial instrument. Review and update your life and disability insurance. If you have a two-income household, consider whether you will be able to manage if either of you loses your job or becomes disabled. Review, too, whether there would be enough insurance and income to provide for the needs of the surviving spouse and any children or dependants, if one of you should die. Special family situations Single-parent families, stepfamilies, and blended families have their own estate planning issues that need careful consideration. All families need wills. For single parents, stepparents, and blended families, not having a will can mean that family members they want to benefit from their estate could instead be left out. MFC s Stewardship Consultants can help you navigate estate planning in these situations. Single-parent families As a single parent, you need a will to protect and provide for your child(ren) in the event of your death. Estate planning issues for single parents include: Choosing a guardian for any minor children. It is possible the minor will be cared for by the surviving parent (if there is one), but at least one alternate should be named. If there are reasons a surviving parent should not care for the child, 49 review them with your lawyer while preparing your will

52 Naming a trustee to manage inheritance(s). Unless specified differently in your will, children receive their inheritance upon becoming an adult. In your will, you can arrange to have children receive their inheritance over time by specifying the age(s) at which they can inherit and the percentage of the estate at each age. Such an arrangement allows children, who have likely not handled large amounts of money, to receive their inheritance when they might be more mature and in a better position to manage the money. Making arrangements in case of a common disaster. All single parents need to consider how they would distribute their estate if their child predeceases them or dies at the same time. Stepfamilies Stepfamilies are those in which the partners have no blood or adopted children together but one or both have a child or children. Estate planning issues for stepfamilies include: Assets brought into the relationship. If one partner brings significantly more assets than the other into the relationship, that contribution may be reflected in the eventual estate distribution. Stepparent s relationship to the stepchild. You may not realize that as a stepparent, if you have a clause in your will that leaves your estate to your child(ren), your stepchild would be excluded from receiving a part of the estate. If you wish to include a stepchild, you need to specifically name the stepchild in your will. Pre- or post-nuptial agreements. Your will should be consistent with any legal agreements between you and your partner. Spousal trusts. One or both of you can establish a spousal trust so that the other can receive an income as long as he or she lives and, upon the spouse s death, the trust flows to your child(ren). Trusts can ensure that the child of the first partner to die is not left out of his or her parent s estate. Obligations for spousal or child support. Your will can be overturned by the courts if you are legally obligated to provide financial support to a child or former spouse and fail to do so in your will. Have your lawyer review your separation or divorce agreement when preparing your will. 50 Blended families Blended families are those in which the partners have at least one blood or adopted child together and a child of one or both partners. Estate planning issues for blended families include: Assets brought into the relationship. If one partner brought significantly more assets into the relationship than the other, that may be reflected in the eventual estate distribution. Stepparent s relationship to the stepchild. You may not realize that as a stepparent, using a clause that simply states that you are leaving your estate to your child(ren) would exclude your stepchild from receiving part of the estate. If you wish to include a stepchild, you must specifically name the stepchild in your will. w w w. m e n n o f o u n d a t i o n. c a

53 Blended-family considerations For Doug and Susan, being part of a blended family meant that nearly everything required extra planning. Even their wills required careful consideration, since they couldn t just leave assets to each other. Doug and Susan each had children from their first marriages to consider, and they were expecting their first child together. Their pastor recommended they contact Mennonite Foundation of Canada for assistance. The MFC Stewardship Consultant was familiar with the laws of their province and was able to suggest ways for Doug and Susan to provide for their own children and for each other if one of them were to die. For the couple, this meant purchasing life insurance policies that would benefit their children, while leaving joint assets such as their home and retirement savings to the surviving spouse. As the children grow and family needs change, Doug and Susan will need to review their wills and estate plans. For now, they can check it off their to-do list. Pre- or post-nuptial agreement. Your will should be consistent with legal agreements between you and your partner. Spousal trusts. One or both of you can establish a spousal trust (or trusts) so that the other can receive money so long as she or he lives and, upon the spouse s death, the trust flows to your child(ren). Trusts can ensure that the child of the first partner to die is not left without an inheritance. Obligations for spousal or child support. Your will can be overturned by the courts if you are legally obligated to provide financial support to a child or former spouse but do not do so in your will. Have your lawyer review your separation or divorce agreement when you are preparing your will. Fair distribution of assets among the children. An equal distribution of assets between blood and adopted children and stepchildren may or may not be fair depending on the circumstances. Contact an MFC Stewardship Consultant for more information on how to plan your estate to meet the needs of your family situation

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55 Chapter 13 Succession planning For family farms and businesses Transferring your family farm or business to the next generation can be complex and challenging, especially if you have some children who are interested in taking over and some who are not. One or two of your children may already be involved with or interested in operating the farm or business, while others may be pursuing different careers. If that is the case, you may be caught between trying to treat all your children fairly in your division of assets and ensuring that the family farm or business is passed on as a financially viable unit for the next generation to manage and enjoy. The timing of the transfer of assets may be another issue you have to sort out. Those who take over or inherit the farm or business may receive their inheritance much earlier in life than the non-farm/business heirs. Good planning can minimize the family conflicts and financial struggles that often accompany transfers of family farms and businesses. Succession planning goals include: treating family members fairly minimizing taxes maintaining the viability of the business or farm after the transfer. Capital gains exemption At time of writing, the federal government provides a $750,000 lifetime capital gains exemption for qualifying farms and small businesses. This allows you, as a current owner, to pass on qualifying assets to your children without paying tax on the exempt portion of the capital gain. It also allows the next generation your children or grandchildren to begin operating the farm or business without worrying about future taxes on deferred capital gains. To benefit from this provision, you must apply for the capital gains exemption when you sell the property or gift it to your heirs. You can also apply for the exemption when capital gains are crystallized through an estate freeze, which locks in the value of an asset on the date of your choice. Any future growth is then taxed in the hands of the next generation. You have three options to consider for utilizing the capital gains exemption: 1. selling or gifting the property 2. reorganizing the share structure of the corporation so that non-growth, preferred shares are assigned to the seller and growth shares to the buyer(s) 3. rolling over qualifying farm assets to your child or grandchild at your adjusted cost 53 base (ACB), or at a value you choose between your ACB and fair market value (FMV)

56 Consult your accountant and lawyer to determine if you qualify for these provisions and to design the right succession strategy for your situation. Business agreements If you are a partner or shareholder in a business, it is important to have a written agreement outlining what is to happen to the business or shares if a partner/co-owner dies or leaves the business. The agreement is essential to the success of the business. If you are a partner in a non-incorporated business, you need a written partnership agreement, whether the partnership is with family members or with someone unrelated. An agreement puts in writing the details of the division of assets and liabilities and the financial responsibilities of each partner, and outlines what is to happen if a marriage breaks up or a partner dies or chooses to leave the partnership. Having prescribed steps for dissolving or getting out of a partnership is critical to your financial well-being. If you are involved in an incorporated business, you need to consider what will happen to the shares, such as to whom they would go. You may need a shareholder agreement dealing with what happens when one or more shareholders die or wish to leave the corporation. You should seek legal advice as to the appropriate structure for your shareholders agreement. Insurance Life insurance has many potential uses in a farm or business succession plan. It may assist with paying taxes, providing funding for interim management, providing an inheritance for non-farm/business heirs, or providing funds to buy out a deceased partner s interest. Premium payments can be made by either you or the company. Planning well in advance will keep the costs of insurance in your estate plan manageable. Legal and accounting advice Always seek competent legal and accounting advice as you develop and carry out your succession plan. Your heirs will be glad you did. 54 w w w. m e n n o f o u n d a t i o n. c a

57 Chapter 14 Probate Proving your will s validity Probate is the process of getting a provincial court to approve a will as valid. (In Ontario, an application for probate is called a certificate of appointment of estate trustee with a will.) Not all estates have to go through this process, depending on the amount of money involved. A small estate that is divided equally between your children may not require probate, for instance. Sometimes assets can be structured so that the costs associated with the probate process are reduced or avoided entirely. Reason for probate The primary reason for probate is to authorize and require institutions such as mutual fund companies to release assets belonging to the estate to the executor. If an executor proceeds to act on a will that is not probated and a more recent will is found, the executor may be held legally responsible. If a court approves a will as valid, then the executor will be protected, even if another will is discovered later and is deemed to be valid. Privacy issues and probate Depending on how complex your estate is, it may take from six months to several years for your executor to settle your estate. If your will goes to probate, it is automatically considered to be a public document. Anyone who makes application to the appropriate court (usually for a fee) will be able to read your will. You can keep your will private by creating a living trust, whose details are not open to public scrutiny. (For more information, see Chapter 10.) Probate process Submitting documents to court To achieve probate, an executor will normally be required to deliver the following documents to the court before the court will approve that person s appointment and the validity of a will: your original signed and witnessed will a certificate verifying the date of your death an inventory of your estate, including a list that describes and values all assets 55 you owned or that were owed to you on the date of your death

58 an application for probate, giving your address and marital status at the time of your death, the date of your will, and proof of the executor s identity in many provinces, a sworn statement by your executor to verify that the estate inventory as submitted is complete, and that the executor is committed to fulfilling the duties of the job a sworn statement confirming the document s authenticity that is signed by at least one or both of your witnesses at the time your will was signed. Receiving probate certificate Once proper documentation has been filed and approved and fees have been paid to the court, the court will issue a probate certificate, normally within a few weeks. The certificate is required in order to transfer property into your estate or to your beneficiaries. This certificate is not needed for property held in joint tenancy, which passes automatically to the surviving joint tenant(s) without becoming part of your estate. Probate fees and how to reduce them Probate fees, which vary from province to province, are generally based on the size of the estate (see Appendix 2, page 71). The following actions can reduce the portion of your estate that is subject to probate: naming beneficiaries on your life insurance policies and pension plans holding property in joint ownership with right of survivorship. If you do this, make sure it does not conflict with any trusts set up in your will transferring property to your beneficiaries prior to death. Keep in mind that transferring property to anyone other than a spouse may result in you having to pay taxes making charitable gifts prior to death. Although the above actions reduce the costs of administering your estate, cutting costs should not be the only consideration. You need to be careful to ensure that your own retirement needs will be met. Placing property into joint title may reduce probate costs, but may lead to other problems as well, and should only be done after seeking professional advice. Transferring or gifting property will reduce your assets, so you must consider your own financial needs before doing this. 56 w w w. m e n n o f o u n d a t i o n. c a

59 Chapter 15 Final tax returns Tax issues After you die, your executor will have to file one or more tax returns, depending on when you die, how complex your estate is, and your personal financial situation. The possibilities are as follows: final or terminal personal return tax return for the estate tax return for rights and things tax return for business income tax return for trust income. If you are dealing with someone else s estate, it is advisable to use a professional to file the final tax returns. Types of tax returns for a deceased person Final personal income return Your executor will prepare a final tax return, also known as a terminal return, after you die. While neither federal nor provincial governments levy an estate tax, they do collect final income and capital gains taxes through your final tax return. In Canada, your final tax return must be filed by your executor for the period from January 1 to the date of your death. If you die between January 1 and October 31, a terminal return is due April 30 of the following year. If your death occurs between November 1 and year-end, a terminal return is due six months after your death. Your executor is also responsible for filing a return for any previous year in which you did not file a return. Upon your death, special rules apply relating to the following: the assumed sale (deemed disposition) of capital property spousal rollovers of property. If when you die, an asset passes to a spouse or spousal trust within 36 months, any tax payable may be deferred until the asset is sold or transferred collapsing RRSPs or RRIFs, or transferring them to a spouse or to a financially dependent child or grandchild income accrued to your date of death, including salary, interest earned on any un-matured Guaranteed Investment Certificates (GICs) or other investments, and any pension benefits. In some instances, income earned after death can be passed on to a beneficiary, avoiding the use of a separate trust (T3) tax return medical expenses. For any 24-month period that includes the date of your death, medical expenses may be claimed in the year you died. This permits your executor to include expenses paid after your death. If you owned property outside of Canada, or if you were a citizen or resident of a 57 foreign country, your estate may have to pay foreign or estate taxes

60 Tax return for the estate A separate tax return must be filed for your estate that covers the period from the date of your death until the date all assets are distributed to your beneficiaries. As is the case with individuals, estates are taxed with progressive rates of marginal taxation, meaning that a higher level of tax is charged as income increases. Estates cannot claim personal tax credits other than the charitable donation tax credit. In certain circumstances, it may be a good idea for an executor to file separate optional returns related to particular assets. Tax return for rights and things Tax must be paid on amounts of money owed to you that you did not receive before you died. These rights or things might include the following: income from matured but un-cashed bond or debenture interest coupons vacation pay, commissions declared but unpaid dividends crops and livestock of farmers on a cash basis and inventory or equipment that would have been sold in the course of business. Filing a return for rights and things is most useful for a someone who had reported business or investment income on a cash basis. Land held in inventory is not considered a right or thing. Filing a separate tax return for rights and things could result in the estate having additional tax credits in the year of death and paying a lower rate of tax. However, if a beneficiary is in a low tax bracket, it is sometimes better for him or her to include the rights and things in his or her income for the year, rather than the executor including it in the deceased s estate. Tax return for business income The executor may be able to file a separate return to report business income from a sole proprietorship or partnership to the date of death, if the year-end of the business is other than December 31. The advantages would be timing and possibly certain tax credits. Tax return for trust income If the testamentary trust of which the deceased was a beneficiary had a year-end other than December 31, it may be possible for the executor to file a separate return to report income from the trust. This return would cover the period from the end of the trust s last year to the date of the person s death. The benefit of filing this return is that it allows double use of personal tax credits, such as the single status, married, equivalent to married, dependent, and age credits. 58 Tax returns for ongoing trusts A trustee must file annual tax returns for a trust set up under the terms of a will. Because special tax rules apply to trusts, there may be ways to reduce taxes under certain circumstances. w w w. m e n n o f o u n d a t i o n. c a

61 After all tax-filing requirements have been met and assessment notices have been received, your executor should ask Canada Revenue Agency (CRA) for a clearance certificate. Once this document has been received, the executor should be able to distribute the rest of your estate to your beneficiaries. Donations to charity For the final tax return and for the year prior to death, the deduction limit for charitable donations is increased from the normal 75 per cent to 100 per cent of your net income. Your executor can claim this tax deduction as long as the charity provided a tax receipt for your donation. Your executor should review your previous tax returns to determine if there are any unclaimed credits from the past five years that could be applied to your final tax return. Planning ahead Meeting CRA s requirements and taking advantage of all tax provisions that apply to your estate may be a challenge for your executor. Depending on how complicated your estate is, it may be wise for you to do some advanced planning, along with your executor and your accountant, so your estate can be wound up more quickly and efficiently

62 60 w w w. m e n n o f o u n d a t i o n. c a

63 Chapter 16 Implementing your estate plan Your estate planning checklist Congratulations on taking the time to become familiar with the estate planning process. As you act on each of the steps that apply to you and your family, you will be taking thoughtful, caring steps to provide for your family and the organizations you care about. As stated in Chapter 1, putting your plans in place is an intentional act of stewardship that expresses your faith and values and shows what was important to you. It lets you leave a meaningful legacy. Once you put your estate plan in place, you will feel a well-deserved sense of satisfaction. But remember, estate planning is not a one-time exercise. It is an ongoing process because circumstances and needs will change in your life, your family s, and those of the charities you want to support. As circumstances change, so should your estate plan. Good planning will reduce the complications and expense of dealing with your estate. Planning may also increase the assets you leave to the people who are near and dear to you, and your favourite charities. An MFC Stewardship Consultant can help guide you through the estate planning process as your circumstances change

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