Consider the sad case of someone who has just learned they have a terminal illness and have been given less than a year to live. What can be done to lessen the financial headache and ensure a smooth transition to their heirs?
Catherine Hurlburt, a senior financial planner at Assante Financial Management Ltd. in Vancouver, sees the situation as an opportunity to run what she calls a "fire drill." To start, she wants to ensure that the client's will, powers of attorney and beneficiary designations are up to date.
"I'm going to check these documents to see how old they are, what they say and make sure all the people named in them are still alive and capable and that these documents represent the client's current wishes," she says. "Sometimes they are not."
Hurlburt recalls one client who had named her sister and brother-in-law as guardians for her children in her will. But the sister had subsequently divorced. "She may not want her ex brother in law raising her kids since he can't get along with her sister," she says.
Sometimes clients with terminal illnesses want to make changes in their will to make things easier for their loved ones. For example, Hurlburt has a client who gifted her half of the money to her spouse right away to make probate easier.
"She is more the financial manager in the family and so we're trying to make sure there will be little for her husband to do in the land of probate and documents," Hurlburt says.
Another issue is making sure the executor can find all the client's assets. Is there a list of every asset the person owns? These days, many people forgo mailed monthly statements for electronic statements. But what happens when the person dies and the executor can't access the statements because he doesn't know the passwords? (This article deals with that topic in depth.)
"I often ask clients how their partner will know that you have an account with Tangerine?" Hurlburt says. "If they don't have a list of stuff that's up to date, how will the executors know if they found all the money?"
Hurlburt will also look at tax advantages, such as ensuring TFSAs are topped up and a successor owner or beneficiary is named, since those assets pass tax free outside of the will. "We also check whether or not RRSP beneficiaries have been named, whether those are still representative of the client's wishes and confirm that the tax consequences of whatever designations they have made are understood by the client," she says.
Beneficiary designations play a key role in minimizing tax on an estate plan, notes Frank DiPietro, director of tax and estate planning for Mackenzie Investments. Many people have set up beneficiary designations but don't necessarily know why naming certain people may be better for tax reasons.
Designating a spouse, common-law partner or minor children as the beneficiary of registered accounts, for example, means the assets in those plans will be rolled over on a tax-deferred basis to those heirs. Otherwise, in most other scenarios, the values of the plans are included in the income of the deceased and can potentially create a huge tax liability on death, says DiPietro.
A person could also choose a financially dependent child or grandchild who suffers from a medical infirmity or disability as beneficiary. If the child is eligible for a registered disability savings plan, the assets from the RRSP or RRIF could roll over to the RDSP, DiPietro notes.
If individuals want to leave money to people beside a spouse, it's better to give cash and assets that haven't appreciated, DiPietro says. That way, the person gets to see the assets used in their lifetime, and avoid hefty tax implications to the estate.
Joint tenancy of bank accounts and real estate is another consideration. This would allow the joint owner to automatically inherit assets upon the death of the other joint owner. It works really well with spouses or common-law partners, according to DiPietro. "There's no tax implication, the asset rolls over to them outside of the estate, there's no probate taxes and it gives that surviving spouse automatic access to that asset," he says.
Your loved ones may need some money right away. After death, many expenses often crop up. Simply leaving the assets to heirs in the will can delay things a bit. "The will has a process," DiPietro says. "It has to be probated and the executor has to be given discretion to give out the assets."
Not everyone is a fan of joint tenancy, especially between a parent and an adult child. While the intention might be to save on probate or ease the estate transfer, the end result might turn out differently, says Robert McEachern, a financial planner at McEachern Financial in Barrie, Ont.
He uses the example of a mother and daughter who are listed on the mother's accounts as joint owners. "Let's suppose the daughter is married and breaks up with her husband," he says. "The spouse may claim a portion of that joint account since he's entitled to half of the daughter's assets."
DiPietro recommends clients ensure there is a provision in the will that gives the executor the authority to take advantage of certain tax elections, which can create tax-saving opportunities. For example, an executor could make a final spousal RRSP contribution in the year of death. "It allows the deceased to claim an RRSP deduction in the year of death that will reduce any final taxes that may be owing by the deceased," he explains.
Finally, charitable giving should be part of any estate-planning discussion, DiPietro says. Terminally ill individuals will sometimes want to make a donation to their palliative-care unit or come up with a larger strategy for giving back, he adds.
