When the topic of wills and estates comes up you often hear the term “intestate”. What does it mean and why is it important? In Canada, if you die without a will, the law says that you have died intestate. It means that you did not leave any instructions about how to distribute your assets or property.
There are many consequences to dying intestate or without a will. The following are just a few:
You have no say in who controls your estate since you have not named an executor (also called the estate trustee). The court will appoint someone to deal with your estate and this process can take months. Generally, your closest relative has the right to be appointed. If more than one person applies, the process will take even longer. The appointee must live in the same province as where you died so this can lead to further delays.
Your spouse does not automatically inherit your entire estate. Each province has its own laws which determine how assets are transferred if you die intestate or without a will. They also have family legislation which override the rules of intestacy but this causes delays and extra costs to the estate.
The provincial government, and not you, will decide how your assets will be divided. Each province has its own intestacy rules. Usually, your legal spouse and children will end up with your assets but the law determines how much each will get. If you have at least one child, you won’t be able to leave everything to your spouse if you want to. If you don’t have a spouse and children or they have predeceased you, it’s possible that relatives you haven’t spoken to in years or don’t even like can inherit your estate. You won’t be able to decide at what age your children or grandchildren will receive their inheritances. In most cases, minors under the age of 18 will have their inheritance put in trust. They will receive the full amount at age 18, even if they are not ready to handle money at that age.
All assets in your estate will be liquidated. Your principal residence may be exempt from this, however, all other assets will be liquidated, despite the market conditions.
Your last wishes will not be taken into account. You will not be able to designate who receives any of your personal items such as jewellery, a guitar or an automobile. Any items you want to go to specific persons can’t be legally enforced without a will. All your assets must be sold and converted into cash.
You may not be able to leave part of your estate to your common-law spouse or same-sex partner. Many provinces do not recognize common-law status. In most provinces the spouse can go to court to get support as a dependant, although this costs the estate in delays and lawyers’ fees.
You can’t choose who will be named as guardian for your children under the age of 18. The court will appoint a guardian and there could be a fight for custody.
Income tax opportunities will be lost and tax issues will most likely arise. Tax planning strategies that reduce taxes for the estate, such as charitable donations and RRSP beneficiaries, will be lost without a will giving direction. It takes time to have someone appointed as administrator if your estate so most likely your taxes will not be filed on time. This can lead to penalties and interest charges and causes delays in distribution of all assets.
Your assets are frozen and no one has access to your bank accounts. This means loved ones with immediate financial needs will be stuck as well as additional administration expenses and delays.
ESTABLISH OBJECTIVES
How do you want your estate to be distributed? Do you want or need to set up trusts? Do you want certain people to get specific items such as jewellery, art, etc.? Are you considering making charitable donations through your will?
REVIEW YOUR PRESENT SITUATION
If you were to die today, what assets would be in your estate? Who are the named beneficiaries of insurance policies, rrsp’s and pensions? Estate planning involves looking at everything you own such as: your car, house, life insurance, savings account, investments and personal possessions. You are making a plan in advance and controlling who will get your assets when you die.
CONSIDER THE TAX CONSEQUENCES
Taxes on death are unavoidable but there are various approaches you can consider to minimize the impact. For example, make sure your spouse is named as the beneficiary of any rrsp’s instead of your estate. This will ensure the rrsp’s can be transferred directly to your spouse and bypass the estate and taxes. Where possible, hold assets jointly with your spouse. These assets will bypass the estate and go directly to your spouse. This also minimizes the administration of your estate and ensures your spouse has direct access to assets after your death. In some cases, setting up trusts for family members can also be an estate tax planning tool. For more detailed information please see our section on estate planning for taxes.
DEVELOP AND IMPLEMENT A STRATEGY
This may involve a new Will or trust arrangements. You may also need to change your property ownership or beneficiary designations. Here are a few ideas to help get you started:
Will planning basics
Executors and Trustees
An Executor is named by you in your will. The first job of the executor is to prove the will is legal – this is called getting probate from the court. Next, the executor usually makes funeral arrangements. In general, the executor then gathers the estate assets, pays all debts (including taxes) and divides what remains among the beneficiaries according to the instructions in your Will. You will want to choose an Executor with good judgement and someone who is able and willing to fulfill their responsibilities.
The executor doesn’t necessarily need any expertise because they can hire the services of professionals. Or, you may also name a professional executor such as a trust company, lawyer, or accountant. A professional executor has expertise in handling estates and they help you avoid any problems that can sometimes arise by placing family members in charge.
A Trustee is different than your executor and you only need a trustee if your Will creates a trust. You will need a trust, for example, if you want to set money aside for your children until they reach a certain age or to set up a fund for your spouse where they receive regular amounts. An executor’s job is done when all assets have been distributed but the trustee is involved for the life of the trust which can be long-term. Some of the many duties of the trustee include managing the investments and distributing the funds and/or capital of the trust according to the instructions in your Will.
Beneficiaries
One of the main purposes of having a Will is to name the beneficiaries. The beneficiaries are the people or charitable organizations that you want to inherit your estate. You can name anyone you want. In most cases, the spouse is the primary beneficiary or the first in line to receive the residue of the estate (what is left after all debts, taxes, etc. have been paid).
If there is no surviving spouse, the residue generally will go to the children in the proportions you choose. You can also use a trust and distribute your estate in a staggered manner. For example, after your spouse dies the remainder can be distributed to the children in the following manner: one third of the estate at age 21; one half of the balance at age 25 and the balance age 30.
You can also name any other relatives, friends or charities as beneficiaries. Keep in mind that there have been situations in the past where bequests have been contested by family members who felt they should get a bigger share of the will. This adds to the costs of settling the estate and also delays settling the estate so the proper heirs have to wait to get their share. Therefore, it’s important to consider a number of “what if” scenarios to ensure your Will is as specific as possible about who gets what. This means considering scenarios where your specified beneficiaries do not survive you.
Guardianship
A guardian should be named in the Will if you have children who are under the age of 18. The guardian ultimately will be someone that you feel would be the best capable and willing person to care for your children in the event you and your spouse are both not around. A guardian has the option of turning down the job so you should discuss it with the proposed guardian prior to making your Will. Also, due to the potential conflict of interest, if you establish trust funds for your children, it is advisable to choose a guardian who is not an Executor or Trustee of the estate.
Personal effects memorandum
This is usually a hand-written memo that is mentioned in a clause of the will and in which you bequest specific personal items to specific people. It can easily be changed without having to amend the entire Will.
Burial instructions
Any special wishes should be included in your Will to help guide your Executor.
RRSP/pension clause
Your pension and RRSP accounts should have designated beneficiaries in their documentation but you should include a clause in your Will naming the beneficiary of your RRSP, pension, RRIF and other such assets just in case. Keep in mind that there can be tax implications when leaving your RRSP’s to anyone other than your spouse or a disabled child or grandchild. In these cases, the RRSP is simply transferred to them. If they go to anyone else, including your children over 18, the RRSPs are collapsed and taxed, and the net amount is distributed by your estate.
Provincial Family Legislation
In many cases, family legislation guarantees that 50% of family assets go to your surviving spouse. Your spouse or children can apply to vary or change a Will which they feel does not adequately provide for them. Most Wills leave the entire residue of the estate to the spouse and there are no problems.
WHILE YOU ARE ALIVE
The Will and trust documents determine what will happen when you die and do not apply while you are alive. It is important to prepare for the event that you are unable to make decisions on your own due to injury or illness while you’re still living.
Power of Attorney
This is a separate document from your Will. A power of attorney is someone you appoint to take care of your financial affairs in the event that you are determined to be legally incapacitated. This means you are unable to make decisions on your own due to injury or illness. If proof of incapacity is established, the person that you have named can act legally on your behalf. In most cases, spouses name each other as their Powers of Attorney. It’s a good idea to name an alternate Power of Attorney. If you do not have a Power of Attorney and something should happen to you, the government Public Guardian would manage your affairs.
Living Will
A Living Will is different than your Power of Attorney. Your Living Will includes your directions and wishes for conditions or situations where others will have to make decisions on your behalf. This might include things like your health care and artificial life support. You can name the same person to be your Power of Attorney and to take care of your Living Will.
MONITOR YOUR PLAN
Your will should reflect where you are in your life. As your personal situation changes, you need to update your will along the way. For example, if you have young children then you will want to name a guardian. You may also want to consider tax laws around death and estates, especially if you are thinking of setting up a trust. Be prepared to adapt to these changes as the need arises.
