The Ins and Outs of Estate Planning

Estate planning is the process of arranging one’s affairs while minimizing administrative burdens, costs, and income tax upon death. It also involves planning for incapacity and establishing healthcare directives.   

In Canada, this typically involves a will (death), power of attorney (incapacity), and a representative agreement (healthcare directives).

Probate Fees In British Columbia, probate fees depend on the value of the estate. The probate fee is approximately 1.4% of your estate. For the first $25,000, there is no fee; between $25,000 and $50,000, it is $6 for every $1,000; and for anything over $50,000, the fee is $14 for every $1,000. There is also an additional fee of $200 that is waived for estates below $25,000.

For example, if your estate is $250,000, then your probate fee would be: $200 (fee) + $150 (fee between $25,000 to $50,000) + $2,800 (probate fee between $50,000 and $250,000) = $3,150.

This, of course, does not include any legal fees. As you can see, probate can be very costly.

You can reduce your probate fee by structuring your affairs to avoid your will, but caution and understanding should be taken when skipping the instructions in your will.

Joint Ownership with Rights of Survivorship Joint ownership with rights of survivorship allows two or more people to own an asset together and, upon death, the asset passes directly to the surviving owners and avoids probate. This is the structure we typically recommend between spouses. All joint owners have an equal interest in the property, which can have unintended consequences if used improperly.

Beneficiary Designations Beneficiary designations can be used quite effectively in estate planning. All registered investments (RRSPs, TFSAs, RRIFs, etc.) can name a beneficiary. Upon your death, the funds go directly to the named beneficiary and skip probate. This strategy can be used with spouses and other non-spousal individuals. Beneficiaries do not have control or ownership of the asset while you’re alive, unlike in joint ownership. This makes it a very effective estate planning tool.

Beneficiary designations are not allowed on all assets. For example, you cannot name a beneficiary on your principal residence or your stock portfolio. However, you can name a beneficiary on any product purchased through a life insurance company. Inside an insurance contract, you can buy GICs (GIAs) and investment funds (segregated and pooled funds). We find this to be a very effective strategy to avoid the pitfalls of joint ownership and to reduce estate planning costs when dealing with non-registered assets. This type of strategy can really simplify your estate plan.

Gifting One of the simplest strategies for avoiding probate and reducing administrative burdens and costs upon your death is to gift some of your assets while you’re still alive.  This strategy has many benefits; it allows you to avoid probate fees (we do not have a gift tax in Canada) while also reducing your future taxes, as you will no longer be paying income tax on the earnings of the funds. It also allows you to see your beneficiaries enjoy the use of the funds while you’re still alive. Lastly, there is typically a bit of moral suasion on the use of the funds. Your beneficiaries tend to spend it more prudently and effectively when you’re alive.

The trick, of course, is to make sure you’re not giving away too much money. You want to make sure that you keep enough to maintain your expected lifestyle throughout your retirement years. Do not give away money that you may need. We would recommend that you do some analysis to determine whether or not you can give any of your funds away and how much you can give away.

Trusts A trust is a legal entity that holds assets outside of a will. Trusts require initial legal costs and ongoing accounting costs for additional income tax filings.

Trusts that are set up during your lifetime are known as inter vivos (living) trusts. A living trust may help you avoid probate fees.

Trusts set up in your will are considered testamentary trusts. They can be particularly useful if you do not think your beneficiaries can handle a lump sum payment from your estate upon your death.

Do We Have a Hidden Estate Tax in BC? In Canada, we do not have an inheritance tax or a gift tax. A very simplistic way of estimating the income tax payable upon your death is to assume you sell everything the day before you die. Your entire registered account (RRSPs and RRIFs) balance become payable in the year of your death. So, if you have $300,000 in a registered account, the full $300,000 will be payable in the year of your death. Any capital gains on your nonregistered assets (i.g., cottage) or investment accounts will become payable. There is no income tax on your principal residence. As you can see, your income tax bill can be extremely high in the year of your death. Most income tax can be deferred if you leave your assets to a spouse. There are also some provisions for disabled children.

Recently, the BC government introduced a new tax bracket at $220,000. In BC, the combined federal and provincial tax rate for any income above $220,000 will be 53.5%. The justification for this increase was to have higher income earners pay a higher tax rate. There are not many people in BC that have a yearly taxable income more than $220,000. Many or most of the individuals that will be paying tax at this higher marginal rate will be in their final tax year, as many individuals will have a substantially higher taxable income in the year of their death. I believe this is more of a hidden estate tax than it is a tax on higher income earners.

Family Meetings In designing any estate plan, we recommend that you consult with your family. Any disagreements or misunderstandings can be worked through while you are alive. You do not want to create problems or disagreements between your children because of your estate plan

We strongly recommend holding a family meeting so that you can discuss your intentions and why you are considering what you’re considering. This can be done in person or virtually (everyone is getting much better at virtual meetings nowadays). Keep this meeting focused on the distribution of your assets and any special healthcare directives that you may have. You want to make sure you’re not causing any disagreements or discord in your family because of your estate plan. ■

Estate Planning Misconceptions

In this 5-minute webinar, we explore an important but often misunderstood area of financial planning.

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