Did you know that if you die without a Will in Ontario, are married, have children and your assets are worth more than $200,000...
- your surviving spouse will not be entitled to your whole estate?
- it will be up to the Court to appoint someone to administer your estate?
- if your minor children are entitled to any funds from your estate, the office of the Children's Lawyer of Ontario ("OCL") and the Accountant of the Superior Court of Justice of Ontario ("Accountant of the Court") will decide how those funds should be invested and what amounts should be paid for your children's maintenance?
- if both you and your spouse are deceased, it will be up to the court to decide who should act as guardians of your children?
The lawyers who practise estate planning at McMillan LLP work to ensure that our clients receive the best possible advice and attention. Whether you need a straightforward Will or a carefully structured estate plan, our Trusts, Estates and Succession Planning Group has the ability to meet your needs. Our areas of speciality include:
- inter vivos and post-mortem tax planning
- the succession of family businesses
- the use of trusts
- estate and trust litigation
- planning for mental incapacity
- charitable giving
- the implications of Ontario's Family Law Act on estate planning.
estate planning by default
Whether you like it or not, you have an estate plan. If you die without organizing your affairs, the law will decide who the beneficiaries of your estate will be and what they will receive. In other words, your estate will be planned for you by default. The results may not be what you intended.
If, for instance, you die leaving a spouse and three minor children, your spouse will receive the first $200,000 and one-third of the remainder of your estate. The balance will be divided equally among your children.
The share for any child who is under the age of 18 will be paid into court to be invested and managed by the OCL and the Accountant of the Court. In that event, if, for example, orthodontic braces or school fees are required, an application must be made to the OCL for the funds. When a child reaches 18, that child will be entitled to withdraw all of his or her share of your estate held by the court. Eighteen may not be the age you would have chosen if you had an opportunity to plan your affairs differently.
estate planning by choice
We can help you plan your affairs to ensure that the beneficiaries of your estate are provided for in accordance with your wishes and in a tax effective manner.
Since the most important tool in any estate plan is a Will, the following are a few of the many issues you should consider in preparing your Will.
The first thing is to choose your executor. Your executor, often called a "trustee" or "estate trustee", will assume control of your assets on your death and administer your estate. Whom you choose is key to how your estate will be administered.
If you are leaving your whole estate to one beneficiary, such as your spouse, and you think that beneficiary will be able to properly administer the estate alone, then it is perfectly acceptable to name him or her as your sole executor. Having said this, you should always name an alternate executor in case that individual is unable to act for any reason.
If you are not leaving your whole estate to one beneficiary, then the choice of an executor becomes more difficult. Since complex issues often come up in the administration of an estate, your executor should be someone whose judgement you trust, who has good business sense and who will act impartially where the interests of beneficiaries conflict. You should also consider the age of your executor, particularly if your Will provides for ongoing trusts for your children or others.
Remember that you do not have to appoint just one executor. If you wish, you can appoint two or more people to act together to administer your estate. For example, you might name one individual who has business expertise and another person who understands the needs and personalities of your family members.
If there is no family member or friend who would be an appropriate choice as your executor, then you should consider the possibility of appointing a professional trustee, such as a trust company experienced in estate administration. If your Will provides for ongoing trusts for your spouse and children, a trust company may be the right choice since it will help to ensure continuity in the administration of your estate over the years.
Bitter feuds can result over the division of personal effects. For example, a child may grow up expecting to inherit a particular painting or piece of jewellery and be shocked to find out that a sibling thought the same thing.
If there is any chance that there will be arguments among family members over personal effects, or if you feel strongly that specific articles should go to specific individuals, then the scheme of distribution of those articles should be carefully detailed in your Will. Failing that, if beneficiaries cannot agree among themselves as to how such articles should be divided, the task of distributing personal effects should be left to the discretion of your executors. In the alternative, your Will might direct that personal effects be sold and the proceeds of sale divided. The sale approach will enable a child who really wants an article to buy it. Your Will could also provide for the distribution of personal effects through a lottery arrangement or by means of a family auction.
These are only a few of the options available to you. The key is to choose the one that you think will suit your family best.
A family cottage often has a very important status. It is where family members have gathered over the years and it may have considerable sentimental as well as financial value. Although the idea may have some appeal, you should think carefully before directing that the family cottage be transferred to all of your children as joint owners. This approach often creates much discord among the siblings once the parents are gone. There is a big difference between parents deciding whether the cottage roof should be replaced and four children at different stages of life trying to reach an agreement on it. One child might think the roof should be replaced, while another may want a new motor boat or prefer that the cottage be insulated for the winter.
There are many other ways to deal with a family cottage. The easiest way is to provide that it be sold and an option to purchase given to the children. That way, any child or children who want to buy it can do so, and the others will recover their share of the proceeds of sale when the residue of the estate is divided. If some of them decide to buy the cottage together, then they can do so knowingly without having the relationship and responsibilities of co-ownership thrust upon them.
Another possibility is to direct that the cottage be held in a trust for the enjoyment of the family for a specified length of time; for example, until the last of your children dies. At the start of each season, the executors would decide who will use the cottage and when, who will pay the expenses and how the cottage will be maintained. When such a trust is established, the Will also often establishes a separate money fund to be used to pay for expenses and repairs to the cottage while it is held.
Are there members of your family, friends or particular charities you would like to remember through a legacy of a specified amount? If so, you should consider how each legacy should be dealt with if the beneficiary predeceases you or, in the case of a charity, is no longer in existence at the date of your death. In that event, should the gift take effect at all? Should it be paid to the beneficiary's estate? To his or her spouse or children? To a charity with similar purposes?
We can help you decide how to structure such gifts and, particularly in the case of charitable gifts, give you the advice you need to ensure that they are made in a tax-effective manner.
The "residue" is whatever is left in your estate after your executor has satisfied all of your debts and liabilities and dealt with any specific gifts of personal effects, real estate and other property gifted in your Will. You may wish to leave the entire residue outright to your spouse. Whether you should do so depends upon many factors including, for example, the value of your estate, your spouse's age and health, whether you have any dependants and, if so, the financial obligations which you owe to them, etc.
If you want to ensure that your spouse is well provided for, but that your children ultimately inherit the capital of your estate, then a spousal trust is an option you may wish to consider. More particularly, your Will might provide that your estate be held in trust and that your spouse receive all the income from it during his or her life, together with as much of the capital as the executors consider appropriate. On your spouse's death, the balance of the capital remaining in the spousal trust would pass to your children. The terms of such a trust may vary significantly depending upon your circumstances and objectives.
beneficiaries with special problems
There are a number of particular issues to consider if a beneficiary has special problems, for example, if he or she is suffering from a disability or an illness, has a substance abuse problem or is unable to handle money. Where such special circumstances exist, we can help you decide how best to protect and provide for the beneficiary, while keeping in mind your overall estate goals.
gifts to children
Children's inheritances should be deferred until they are at least 18. Otherwise, their shares of your estate will have to be paid into Court. Indeed, you should consider directing that your executor hold the share of a child in trust for a longer period. The temptation for an 18-year-old to use an inheritance to buy an expensive car and enjoy an indulgent lifestyle may override any desire to pursue an education or achieve some other worthwhile goal.
If the inheritance is a sizeable sum, a staggered distribution of the capital of the trust to the child may be a good idea. For example, you could direct that your child receive one-half of his or her share of your estate at the age of 25 and the balance at the age of 30. This technique allows you to protect the inheritance while teaching your child to handle and invest money over time. If for some reason the child squanders the first distribution, there will still be money in reserve.
Most people with young children are concerned about the appointment of someone who will have physical custody of their children. The appointment of a guardian for infant children under a Will is binding in Ontario for 90 days from the death of the surviving parent. After that period, it is up to the Court to make a decision as to who the appropriate guardians should be. In doing so, the Court will take into account a parent's wishes as expressed in a Will. Guardians have a very different role from executors and are confined to dealing with "parenting" matters, such as deciding whether Johnny should go to summer camp. The executors then decide whether the estate can afford to send Johnny to summer camp. Depending on the circumstances, it may or may not be appropriate for the guardians to also act as your executors.
the Family Law Act
The Family Law Act of Ontario provides that, subject to certain exceptions, if you do not leave your spouse an outright gift on your death at least equivalent to the equalization payment your spouse would be entitled to on separation, your spouse will be entitled to make a claim against your estate and receive that specific amount as a first charge prior to any other gifts under your Will. In simplified language, the effect of the Act is to put your desired estate plan in jeopardy if it does not comply with the Act.
The only way to completely avoid the application of the property division rights under the Act is by way of a marriage contract, whereby the husband and wife agree not to be bound by the Act and to respect one another's Wills. Marriage contracts, especially where there is disproportionate wealth between spouses or in the case of a second marriage, are becoming quite common.
The federal government eliminated estate taxes over 30 years ago. Similarly, Ontario abolished succession duties over 10 years ago. The taxes now exigible in Ontario on death include income and capital gains taxes computed, in the case of capital gains taxes, as if you had disposed of your capital properties a moment before your death at their fair market value.
There is also a provincial level of tax called "estate administration tax", sometimes called by its former name "probate fees", which will have to be paid in the event your Will has to be probated in the Ontario Court.
Probate fees are calculated at approximately 1.5% on the gross value of assets which fall into your estate on your death, with no reduction for debt, except mortgages on real property situate in Ontario.
Whether a will has to be probated depends on the particular types of assets owned by the deceased, or the need in some cases to resolve disputes with respect to the validity or interpretation of a Will.
Depending upon your particular circumstances, one or more of the following techniques may be available to you to minimize probate fees. But note the cautions! Seek advice before implementing any of these techniques:
- holding property such as bank accounts and real estate in joint tenancy so that the property passes automatically to another person by right of survivorship, rather than passing through your estate and thereby attracting probate fees; caution: this technique is generally advisable only between spouses; also, if the other joint owner is not the intended beneficiary of the asset, this technique may lead to disputes among beneficiaries.
- ensuring that proceeds from insurance policies, RRSPs and RRIFs are payable to a named beneficiary rather than to your estate; caution: your estate may be liable for taxes creating a serious inequity.
- achieving an effective netting of liabilities against asset values by holding property through a corporation that has significant debt. The value of the shares of the corporation, rather than its assets, would then be relevant for probate tax calculation purposes and the value of those shares will reflect the liabilities of the corporation; caution: consider the tax consequences of holding investments through a corporation.
- making gifts of property prior to your death to intended beneficiaries in order to reduce the ultimate value of your estate; caution: can you afford to make the gifts?
- use of alter ego or joint partner trusts (must be 65 years or older) - transferring assets to a trust established during your lifetime so that those assets will not form part of your estate; caution: this technique precludes the use of testamentary trusts to minimize income taxes of beneficiaries and is only suitable for outright bequests.
- executing more than one Will - assets that your executors will be able to deal with in the absence of an Ontario Court Certificate of Appointment would be governed by one Will and all other assets would be governed by a second Will dealing with your general estate. Only the Will dealing with the general estate would be submitted to the Court and thus subject to probate tax.
We can help you plan to minimize and, in some cases, eliminate such taxes in the course of advising you on your estate plan.
Estate planning enables you to pull together all of your life's acquisitions and dispose of them to the people or institutions you want to benefit in an organized and reasonable way. Once you have made a Will, it should be reviewed on an annual basis to ensure that its provisions are still appropriate. Your personal and financial circumstances may change significantly over time making changes to your Will necessary. For example, if you marry, your marriage will automatically revoke any prior Will unless the Will provides that it was made in contemplation of the marriage. Many other changes may take place in your life. An executor may move away, the amount of a legacy may become inappropriate in light of your increasing or decreasing fortune, beneficiaries may predecease you or fall out of favour, minor children may or may not grow up to be responsible adults and laws affecting the taxation of your estate may change.
When you do not plan and your estate is distributed by default, or your estate plan is not updated to keep pace with your changing personal and financial circumstances, your family will be left wondering why you didn't care enough to take the time to ensure that your affairs were in order.