It has been said that a Will is the last message you will leave your family. Having a Will can provide clear direction as to what your wishes are and who will get what. Die without a Will (known as dying intestate) and chaos will likely be the result. Having a Will allows you to provide for certainty instead of chaos.

Most of the reasons to have a Will have to do with what happens if you don’t have one and that often will depend on what province you reside in. Each provincial government has its own Wills and Estate legislation which also provides for the rules regarding intestacy. The following are some of the reasons to have a Will and what could result without one.

1. Informs your family how and when your property is to be distributed

Your Will affords you the opportunity to give clear instructions as to whom will receive your wealth. It also allows you to make bequests of certain items such as family heirlooms which you may wish to leave to a specific individual. For those who wish to leave funds to a charity, the Will allows you to do this. Without a Will, this opportunity may be lost. The bottom line is that you make the call. Dying without a Will means that the provincial government will make the determination on how your estate is to be distributed depending on the intestacy laws.

For example, if there is a spouse and children, the spouse will usually receive a specified amount. That amount can vary between $200,000 and $300,000 depending on the province. Any amounts over that are, for most provinces, split between the children and the spouse. The amounts due to the children, however, are not received by them until they reach the age of majority. Up until then, those funds are administered by the provincial government. If you reside in Alberta, the children receive nothing, and all goes to the spouse.

If you die without a spouse and without children, then the assets will be left to parents, siblings, nieces and nephews, in that order. The government will receive all if there are no relatives. And remember those family heirlooms that you could dictate to whom they went in your Will? Without a will those and other similar assets will most likely have to be sold so the estate can properly be distributed.

2. Allows the testator to name an Executor

The task of the Executor is to administer the estate and ensure that the testator’s wishes are carried out. Without a Will, there is no Executor, and an administrator must be appointed by the government. Usually, this will be the spouse, but if the spouse is not willing or capable then someone else will have to be found to carry out this function. Regardless, the result usually will be unnecessary delays and increased expenses.

In administering estate assets, the role of an Executor also helps to ensure that there is no loss of estate assets due to lack of oversight prior to the assets being distributed.

3. Protects a common law spouse

British Columbia, Saskatchewan, Manitoba, North West Territories and Nunavut recognize common law marriages where the parties have lived together for more than 2 years. In these jurisdictions common law spouses have the same rights as a married spouse. In all other provinces, however, they are not recognized and as a result are entitled to nothing. There may be exceptions where a dependency claim can be made to the courts, but that could prove to be expensive and result in significant delays. It also could result in other family members making objections to the court. With a properly drafted Will, the rights of a common law spouse are protected.

4. Naming a guardian for your children

Having the choice as to who will look after your children should you die is an extremely important reason to have a Will. This is especially true in the case of a common disaster involving both parents. Consider the unimaginable scenario in which the decision as to who should be the guardian of your children was left to the courts.

5. Leaving instructions for your funeral, burial or cremation

A Will affords you the opportunity to leave concise instructions regarding your funeral arrangements. Dying without a Will or with no clear directive could cause stress and family discord.

6. Proper estate planning can result in income tax savings

Estate planning, including a properly drafted Last Will and Testament, may result in tax savings. On the other hand, dying intestate will see this opportunity lost and administrative costs increased.

It is unfortunate that many Canadians do not have a Will. While there may be some circumstances where a Will is not necessary, for those Canadians who are married and have children, a Will is vital and should not be overlooked. Ideally, a Will should be drafted by a lawyer who is acquainted with all the technical requirements and contingencies that come into play.

If you are without a Will, talk to a professional who can assist you as soon as you can.

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The total net value of your estate represents what you will leave to your family when you die. It may include the following:

• Your residence;

• Cottage or other recreational property;

• Investment real estate;

• Stocks, bonds, mutual funds and commodities

• Life insurance;

• Any other assets you wish to leave to your heirs.

After paying off any liabilities, taxes arising at death, last expenses etc., what is left over is what your family will use to maintain the lifestyle that you created for them.

Two easy ways to make sure debt and investment losses do not impact the estate you leave for your family

• Insure your debt
  

• 
  Insure against market drops and other investment losses

Consider life insuring your debt and investment declines so that your heirs are not burdened by outstanding liabilities and market fluctuations.

In 2008, many investors experienced a decline of 40% to 50% in their equity portfolios resulting in a significant reduction in the amount of the estate to be left to their beneficiaries.

A greater problem was experienced by those that had used bank loans to leverage their investments. The value of those investments may have declined by up to 50% but the loan balance didn’t decrease at all.

Even if the investments are not leveraged, there is always a risk to the estate should the equity markets decline.

Be Prepared – The risk of waiting to insure for losses

Of course, you could always top up your life insurance when the market declines right? Not necessarily. If you have lost all or part of your insurability due to health that could be a problem.

Consider hedging against possible future decreases in your investments by purchasing life insurance specifically for this reason.

For hedging purposes, any form of life insurance can be used. Term insurance is an inexpensive way to insure for shorter terms such as 10 or 20 years.

Participating Whole Life Insurance should be considered for protecting your investments through diversification and building in stable returns. It is the only type of life insurance that is guaranteed to increase in value and death benefit regardless of equity market conditions.

Other benefits of Participating Whole life include

• Can be used as an investment in place of bond or GIC-type investments.

• The cash values of these policies grow on a tax-deferred or tax-free basis.

• If funds are required for unforeseen expenses or to make additional investments, the policy can be borrowed against either from a lending institution or directly from the insurance company.

Using Participating Whole Life insurance satisfies two objectives – providing a hedge against equity values declining prior to death and adding additional stability and less volatility to the overall portfolio.

Summary of how to manage the risk of estate shrinkage due to adverse equity market conditions:

Hedge the estate value of your investments

Select a percentage of your equity investments that you wish to protect if you die when market values have fallen. Purchase life insurance for this amount. For example, if you have $2,000,000 of equity investments and you wish to hedge 40% consider buying $800,000 of life insurance.

Life insure the loan in a leveraged investment strategy

It’s always a good idea to life insure debt. This is particularly the case when insuring leverage loans to protect against investment values falling prior to death while the loan is still outstanding.

Consider Participating Whole Life as a method to optimize your estate

Unlike equity investments, the values of a whole life policy cannot decrease. As long as the premium is paid the cash value and death benefit will continue to increase. This provides stability in your investment portfolio and reduces volatility. The increasing death benefit will optimize the value of your estate for the benefit of your family and heirs.

Combining your investment portfolio with an effective life insurance strategy to maximize the value of your estate is a prudent means to provide for your family. Great comfort comes with the knowledge that even if your investments decline your family will be adequately provided for in the manner you wished them to have.

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For many Canadians, the majority of their wealth is held in personally owned real estate. For most this will be limited to their principal residence, however, investment in recreational and real estate investment property also forms a substantial part of some estates. Due to the nature of real estate, it is important to utilize estate planning to realize optimum gain and minimize tax implications.

Key Considerations for Real Estate Investment

• Real estate is not a qualifying investment for the purposes of the Lifetime Capital Gains Exemption.

• Leaving taxable property to a spouse through a spousal rollover in the will defers the tax until the spouse sells the property or dies.

• Apart from the principal residence, real estate often creates a need for liquidity due to capital gains, estate equalization, mortgage repayment or other considerations.

• Professional advice is often required to select the most advantageous ownership structure (i.e. personal, trust, holding company).

The Impact of Capital Gains Taxes

• Upon the disposition (sale or transfer) of an asset, there is income tax payable based on 2/3 (66.67%) (as of June 25, 2024) of the capital gain of that asset.

• Capital gains taxes can be triggered at death unless the asset is left to a spouse in which case the tax is deferred until the spouse sells the asset or dies.

• In addition, there may be probate fees levied against the estate at death.

Why is Estate Planning Important?

It is recommended that family issues (including estate equalization) be addressed with certain types of real estate assets. Estate planning can organize your assets with the objective to ensure that at your death they are distributed according to your wishes:

• to the proper beneficiary(s),
  

• with a minimum of taxes and costs
  

• with the least amount of family discord.

Tax and Estate Planning Strategies for Real Estate Holdings

Principal Residence

• If your home qualifies as a principal residence, there is no tax on any capital gains upon sale or transfer of the property. An individual can only have one principal residence and the same holds true for a family unit (for example, both spouses have only one principal residence between them).

• If the property is held as joint tenants, upon the death of a spouse, the ownership automatically remains with the surviving spouse. Upon the death of the surviving spouse, his or her will dictates who will receive ownership of the home (usually one or more of the children).

• In preparing your estate planning for your principal residence, you may wish to ensure that you have sufficient liquidity to cover the cost of any property tax deferral program that you have exercised. This is especially important if the home is intended to be retained by the beneficiary(s) and you don’t want to burden them with the significant cost of repayment.

• Planning for the beneficiaries to retain the property often creates discord if the children are not all in agreement about the final disposition of the house. Should you just wish to leave the home to one child and not to the others consider estate equalization and use cash, other assets or life insurance as a replacement to the interest in the home.

To maintain family harmony, considerable thought should be given when making decisions to bequeath or liquidate the family cottage or recreational property.

Recreational Property

• If the sale, transfer or deemed disposition at death of the cottage or other recreational property results in a capital gain, that gain will be taxable. As in the principal residence, ownership could be in joint tenancy which will defer the tax. The tax will also be deferred if the property is left to your spouse in your will.

• There may be some concern that if the property is left outright to the spouse and the spouse remarries the property may ultimately end up with someone who was not intended as a beneficiary. To avoid this, a trust could be used to hold ownership of the property. A spousal trust created in the will also accomplishes this while at the same time maintaining the spousal rollover to avoid tax on the gain of the property. In addition, the spousal trust has an added advantage in that it allows the testator to specify who will inherit the property on the spouse’s death.

Real Estate Investment Property

• Sale, transfer or deemed disposition (at death), usually will result in a capital gain or capital loss. If the property in question is rental property, depreciation (known as capital cost allowance) may be claimed as a deduction against rental income. At death, if the fair market value of the rental property exceeds its undepreciated capital cost, there will be a tax payable on the recaptured depreciation. A value of less than undepreciated capital cost will create a capital loss which, in year of death, can be deducted against other income.

• If the property in question is performing favourably as an investment, it may be desirable to leave it to the surviving family members. In this case, it is recommended that any liquidity requirement for taxes, costs etc. be funded to alleviate the financial burden.

• From a planning point of view, it may be advisable to own commercial real estate through a holding company. Depending on the circumstances the same could be true with rental property.

Solving the Liquidity Need

One of the most cost-effective methods in providing the necessary liquidity in these situations is the use of second-to-die joint life insurance.

The Insurance Solution

• Tax-free cash at the second death. Naming a beneficiary bypasses the will and is not subject to probate.

• The proceeds are protected against creditor claims.

• Insurance provides for a guaranteed low-cost alternative to the issue of satisfying the liquidity need at death.

Please call me if you would like to discuss your personal estate planning needs. As always, feel free to use the sharing buttons to forward this article to a friend or family member you think may benefit from this information.

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