To say estate planning can be problematic is a gross understatement. Administering an estate can be compared to undertaking a renovation—it’s almost guaranteed something will go wrong. It can be relatively minor, or land the estate in court and cause irreparable harm to family relationships.
Most problems can be avoided or minimized and managed via good planning. This involves more than just making a will.
There are other key elements including: powers of attorney, beneficiary designations, trusts, determining most appropriate type of property ownership (sole ownership vs. joint tenancy or tenancy in common), selecting the right executor, probate planning and income tax minimization.
The best way to learn is through mistakes. So here are three common estate planning offences.
1. Failing to prepare a will
The majority of adult Canadians haven’t prepared a will. Surveys also show most adult Canadians appreciate the importance of a will and plan on preparing one sometime in the future. Despite these good intentions, a significant percentage of this group will die intestate; that is, without ever having gotten around to it.
So what happens if you die without having a valid will in place? Your assets are distributable according to the arbitrary formula set out in the applicable provincial legislation.
The Ontario Succession Law Reform Act (SDA), for example, sets out the following schemes of distribution. If the client has…
Spouse only: Entire estate goes to the spouse.
Spouse + one child: First $200,000 goes to spouse. Remainder is split equally between spouse and child.
Spouse + children: First $200,000 goes to spouse. Remainder is split: one-third to spouse; two-thirds to children equally.
Children, but no spouse: Children share equally.
No spouse or children: Entire estate goes to the deceased’s parents or surviving parent. If parents have predeceased, siblings share equally. Children of a deceased sibling share their parents’ share. If only nieces and nephews survive, they share equally.
No lawful heirs: The estate becomes property of the province.
And that’s not all. Consider some of the other factors applicable on intestacy.
- A spouse doesn’t have the right to determine how property should be divided among the children, or at what age(s) they should receive their share. A share payable to a child on intestacy must be paid into court and held until the child attains the age of majority. Upon attaining the age of majority, the share will be paid to the child. This is seldom the parent’s intention or in the best interests of the child.
- A spouse, or any other heir, doesn’t have the right to determine who should handle the administration of the estate.
- Without a will, parents cannot appoint guardians for minor children.
- The distribution of the estate may be more costly and can be delayed until one year from the date of death.
- There is no ability to establish testamentary trusts for special needs beneficiaries.
- Income tax and probate planning opportunities are forfeited.
- “Spouse” is narrowly defined to mean legally married. Common-law spouses aren’t entitled to a share on intestacy. This comes as a surprise to many clients.
Bottom line: preparing a will enables a client to transfer their assets to the loved ones and/or charities they wish to benefit, in the most time-, cost- and tax-efficient manner possible.