While almost 75% of Canadians over 55 years old have a will, only 34% of those between 35 and 54 years old have one, according to an RBC survey. A well-structured estate plan can help to preserve your wealth, ensure your wishes are known and followed, and secure your legacy. It’s often mistakenly thought of as something to do later in life—but if you organize and manage your assets now and make your intentions clear, it could relieve the burden on family and ensure your estate is handled as carefully as possible.
Creating a will is just one part of a broader strategy. When preparing your estate plan, it’s important to also consider family dynamics, the impact on business (if you have one), and the tax implications. Whether you’re a business owner or someone who wants to make sure your family is taken care of, the best time to start estate planning is now. With the right team of advisors, including an estate lawyer, tax advisor, and insurance and wealth professionals, your estate plan becomes a proactive tool for your peace of mind, to preserve your wealth, and prevent costly surprises after death.
Dealing with loss can be tough on families and having a clear estate plan can help relieve additional stress and financial burden. Even with a prudent will and estate plan, working through what needs to be done after death takes time. Often, it can take up to two to three years, depending on the complexity of the estate and its assets. A well-structured estate plan allows for a smooth transition of your wealth to your heirs; without it, tax implications can be more severe, including estate taxes, probate fees, and other costs. These taxes and fees can significantly erode the inheritance left for successors and beneficiaries—which, in some cases, could result in your family losing the assets that you hoped they could enjoy. An advisor can help find tax-efficient strategies to help minimize these costs and ensure your family is taken care of.
Mrs. Smith—a successful entrepreneur and a divorced mother of two—was the sole shareholder of an active business and an investment holding company. Unfortunately, she never got around to creating an estate plan. Without a proper plan in place, her assets were deemed to be disposed of at their fair market value on the day she passed away. This triggered significant capital gains and income taxes, which had to be paid from the estate before anything could be passed on to her children.
With an estate plan in place, the outcome could have been very different. A tax advisor can discuss various strategies and tools to mitigate some of the taxes and fees. For example, those tools may include discussing use of trusts and multiple wills as well as considering strategies to minimize the latent double tax issues when holding private company shares.
Generally, having a well-structured estate plan can help to:
If you’ve already prepared a will, regularly reviewing it is just as important. A best practice is to review your will and estate plan every three to five years or anytime you experience a life event, such as if you have a child, move to a new home or area, or marriage or divorce. If you have a business, it’s important to review as the business grows as well to ensure that your goals and objectives for your business align with your estate plan. As part of your business succession plan, you will also need to align any shareholders’ agreement with your estate plan.
When planning your estate, our advisors can talk you through what must happen before you pass away, what would happen when you pass away, and after. As part of the drafting of a will, the planning generally starts with preparing a detailed list of assets and liabilities statement as well as outlining where those net assets will be distributed upon death. Often, it’s not top of mind to also consider what you’d want to happen when faced with illness, an accident, or sudden incapacity. This is equally important to consider in every estate plan.
Once you have a will in place, a tax advisor can help review and discuss your current situation and help determine whether changes are necessary to result in the best outcome for your family and loved ones. Many think that even without a proper plan in place, an estate would automatically go to a spouse or be divided between children. However, the only certain way to ensure that your estate goes to your loved ones is by making a will. If you die without preparing a will, intestacy rules apply—which outline a specific order of inheritance based on family relationships. These rules can lead to unintended outcomes, especially in blended families. If your assets are larger or if a business is involved, it can add another layer of complexity.
Asking the following questions is a great way to start planning and figure out where you can get support from your team of advisors.
Over time, managing wealth can become increasingly more challenging and complex. It’s not always easy to decipher exactly how your assets are structured and held. Many business owners see their business as an extension of themselves, but that isn’t the case—so it’s important to consider where the wealth lies—whether it’s personal or within a business structure (e.g., in trusts, corporations, partnerships). A tax advisor can help navigate planning decisions and strategies, including to identify your assets and explain how they would be treated once you pass away.
If you own a business, a business succession plan is also critical, as it helps preserve the value of your estate and can offer tax advantages when integrated with your broader estate plan. Without a clear succession plan, the future of the business could be at risk. A succession plan—which outlines who will take over, how ownership should be transferred, and how the business should be valued—can help minimize disruption and potential conflicts.
Depending on your goals, there are many factors to consider when estate planning. It’s not only important to understand your wishes, but also to understand family dynamics, how you’d like assets to be distributed, and any potential concerns. A tax advisor can help determine strategies to help ensure sufficient cash flow to cover any tax liabilities upon death and the best outcome for family. In addition, you may have philanthropic intentions that you’d like to fulfill (which, at the same time, could help minimize taxes on the estate).
A power of attorney, who can help make decisions on your behalf, as well as an executor, who would help administer your estate according to your will, are two roles that need to be considered. In some cases, even though close family or a beneficiary may seem like the obvious choice, it may not be the best choice. Rather, executors could be a pragmatic friend or family member or a professional advisor. Especially after major life changes like marriage, divorce, or the birth of a child, return to your estate plan and ensure beneficiary designations up to date on insurance policies, registered plans, and with other financial instruments.
Sharing wishes with family members, business stakeholders, and anyone managing your estate can help make the estate process more seamless and may prevent conflict. If the family isn’t made aware of plans or objectives, it can lead to additional stress when the family is also grieving. Especially if assets are being split in a specific way—for example, if a child actively participating in a family business is to receive more shares in the company compared to another that isn’t actively involved—communication is important.
In addition to will planning, understanding the tax implications upon death and how tax may impact your estate is key. A tax advisor can help to review your assets, assess objectives and create a strategy to minimize taxes and other estate costs—and ultimately preserve wealth for the family and your heirs.
In Canada, we don't have an estate or inheritance tax like in the United States and other jurisdictions; however, there are potential taxes and other rules to consider that would be due upon death.
When a person dies, the will-named executor must file a final tax return that includes all income earned up to the date of death (i.e., a terminal tax return). To determine taxes owed on a person’s estate, the fair market value of each of the assets is determined and each asset is considered sold immediately before death, under the deemed disposition rules. Any capital gains recognized under these rules are also included in income at death and are therefore subject to tax.
In addition to income taxes, each province also has legislation related to the probate process. Compared to other provinces, Ontario and British Columbia have more significant probate fees upon death, which could result in unexpected costs to an estate.
Since many registered allow for taxes to be deferred, the full value of a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) must be included on the deceased’s final (terminal) tax return (unless they are transferred to a spouse or a financially dependent child). Similarly, shares of privately held businesses, non-registered investments, and investment properties may also be subject to capital gains tax.
Once you have considered your assets and your objectives, an advisor can discuss potential outcomes and strategies to help reduce tax liabilities and maximize the value of your estate when implemented correctly. Some of the most effective estate planning strategies that we have utilized recently include the following:
Estate planning is one of the most important financial decisions you’ll make. With us on your team, you can reduce costs, avoid surprises, and ensure your loved ones are taken care of. Don’t wait—call your Doane Grant Thornton advisor to start planning.
