Each year in Canada, billions of dollars in assets are transferred at death. Those planning to transfer all or some of their assets to heirs may want to make sure their money goes to the people and causes most important to them.
Outlined below are some common mistakes people make while trying to transfer their wealth:
-no will: A basic and all too common mistake is failing to have a valid will. A will communicates intentions and allows the deceased – and not the government – to determine how their assets will be distributed.
It also allows people to choose the executor of their estate and the guardian of their children. Review your will every few years to ensure it reflects your current wishes and marital status. Wills are often invalid after re-marriage;
– treating equals unequally: Often, when splitting assets, the intentions are to divide them equally among beneficiaries. However, failing to take into account tax consequences means the wealth transfer may not be equal. This is particularly tricky when leaving RRSPs or RRIFs to anyone except your spouse;
– naming beneficiaries: Insurance contracts, including insurance investments, allow investors to name beneficiaries which make them an efficient way to move wealth to the people most important to you.
It is also more private than your will and avoids potential claims from creditors. It also avoids the probate costs and proceeds are usually paid to beneficiaries within a few weeks of the insurance company receiving the necessary proof of death documentation;
– but leave some cash in your estate: Even if you could move all your investments directly to your chosen beneficiaries, it’s still important to have some cash left in the estate for your executor to pay final income taxes or maintain a property until it is sold;
– minor Beneficiaries: Consider the ages of the beneficiaries named as, generally, death benefits cannot be paid directly to minors. The funds will be paid into the courts and a public trustee assigned. Once the beneficiaries reach the age of majority, they will be entitled to the funds without restriction.
To better protect children, a will can establish a trust and name a trustee to act on their behalf according to the deceased’s specific instructions. The 2014 budget made changes to how testamentary trusts can be managed and legal advice should be obtained to properly document the trust in the will; and
– unused charitable donations: If you’re planning to make significant charitable donations at death, steps should be taken to ensure one’s estate will be able to use the entire donation. With RRSP/RRIF balances becoming taxable income at death, donating to your favourite charity in your will can be an impactful way of reducing your estate’s tax obligation.
The 2014 budget has improved how and when final charitable donations can be used starting in 2015. Final details have not been fleshed out and consult legal and tax advice for more information.
In conclusion, there are many reasons to plan for an efficient wealth transfer at death. Anyone who doesn’t have a will should arrange to meet a lawyer to prepare one and review it regularly to maintain its effectiveness.
In addition, they should meet with a financial advisor to discuss their wishes in order to structure their investments and beneficiaries accordingly.
Submitted by Dan Allen, Financial Advisor and accredited Elder Planning Counselor specializing in retirement income planning.
