Estate Planning For Non-Lawyers (How to work with estates lawyers for the benefit of your clients)

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Estate Planning For Non-Lawyers(How to work
with estates lawyers for the benefit of your
clients)

• Cynthia J. Kett, CA, CGA, CFP
• Stewart Kett Financial Advisors Inc.
• ckett_at_stewartkett.com

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Outline

• Why is estate planning important?
• What can you do to help your client through the
  process?
• Should you be an executor/trustee?

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Why Is It Important?

• Orderly succession
• Assets to desired beneficiaries
• Minimization of family disputes
• Expeditious transition
• Tax minimization
• Estate liquidity
• Payment of taxes
• Payment of debts
• Provision for spouses/CLPs and dependents
  ongoing living expenses

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What Can You Do to Help?

• Estate Net Worth
• Cash management
• Tax planning
• Retirement planning
• Investing and risk management
• Wills
• Intestacy
• Family law issues
• Outright distribution
• Trust will
• Probate and probate fees
• Powers of attorney for property and personal care

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Estate Net Worth

• Complete list of assets and liabilities
• Current fair market values and costs
• Assets held jointly with other individuals
  joint beneficial ownership or assets held in
  trust?
• Net asset values as of the date of marriage
• Check title and beneficiary designations
• Differentiate between registered and
  non-registered accounts
• Identify liquid versus non-liquid assets
• Include life insurance proceeds
• Include personal assets
• Quantify tax liabilities prior years, current
  and contingent
• Other legal liabilities
• Support obligations to dependants
• Contingent business liabilities (personal
  guarantees)
• Estimate probate fees

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Cash Management

• Identify surviving dependants needs
• Spouses/CLPs
• Minor children
• Disabled dependants
• Quantify immediate need for cash on death to
  cover testamentary expenses
• Quantify current cash flow available for purchase
  of insurance (if required/desired and client is
  insurable)
• Consider charitable giving objectives

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Tax Planning

• Objective is to execute testators/ testatrixs
  desired distribution at minimum tax cost
• The death of a taxpayer triggers a deemed
  disposition of all his/her assets at fair market
  value
• Net unrealized capital gains are subject to
  income tax unless a rollover applies

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Tax Planning Strategies

• Income splitting
• Rollover to spouses/CLPs or spousal/CLP trusts
• Family trusts
• Registered proceeds trusts
• Life insurance trusts
• Assets left to disabled beneficiaries may
  disqualify them from receiving government
  disability benefits
• Henson trusts not valid in Alberta
• Registered Disability Savings Plans (RDSP)

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Tax Planning Strategies

• Estate freezes
• Consider future financial needs of the freezor,
  including potential emergencies
• Multiple tax returns upon death of the taxpayer
• Choice of non-calendar year-end for testamentary
  trusts
• Unapplied capital losses in excess of capital
  gains can be deducted from any source of income
  in the deceased taxpayers terminal return or in
  his/her return for the immediately preceding year
• Net capital losses and terminal losses realized
  in the first taxation year after death can be
  carried back to the final return
• Alternative Minimum Tax (AMT) carried forward
  from previous years can be claimed in the
  terminal return
• AMT does not apply in the year of death

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Retirement Planning

• Quantify resources needed to support
  testators/testatrixs desired retirement
  lifestyle
• Excess or shortfall?
• Provides estimate of potential size of the estate
• Sets parameters for estate planning strategies

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Investing and Risk Management

• Assets in excess of clients projected future
  financial needs may be invested for multiple
  generations
• For clients
• For beneficiaries
• Impact on asset mix
• Consider the appropriate use of insurance
  products and the impact on the estate plan
• Life insurance, LTC insurance, critical illness

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Wills and Will Components

• Will
• Legal appointment of an estate executor/trustee
• Legal declaration of a persons wishes regarding
  the disposition of his or her assets after death
• Will components
• Identification of Testator/Testatrix
• Appointment of executors/executrices and trustees
• Registered proceeds and/or insurance clause
• Payment of debts and funeral expenses
• Specific bequests
• Distribution of residue
• Primary, secondary, giftover
• Family law provisions
• Custody of minor children
• The appointment of custodian is only valid for a
  limited period following the date of death as set
  out in the relevant statute
• The permanent appointment will be determined by
  the court, but the clients recommendation will
  play a significant role in that determination
  (specify reasons for the choice)

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More Will Components

• Residue trust provisions
• Hotchpotch clause
• Acknowledge disproportionate gifts made during
  lifetime
• Spousal trust
• Other income-splitting trusts
• Henson trust
• Powers of trustees
• To accumulate and distribute income
• To encroach on capital
• To make payments to minors
• To employ agents
• To deal with real property (sell, lease,
  mortgage)
• To distribute in specie
• To make income tax elections
• To borrow or to lend
• To act as the testator/testatrix could act with
  respect to business interests and shareholdings
• To deal with claims against the estate
• To settle trusts on other trustees
• Clauses protecting the trustees (limiting
  liability)

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Intestacy

• Intestacy
• If an individual dies intestate (without a valid
  will), provincial legislation dictates how his or
  her property will be distributed
• Preferential share
• The surviving spouse of the deceased receives a
  preferential share (varies by jurisdiction)
• Distributive shares
• If the value of the estate is larger than the
  preferential share, the remainder of the estate
  is divided between the spouse and the surviving
  children or grandchildren in the form of
  distributive shares

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Other Intestacy Issues

• The distribution of intestate estate by
  legislation may not reflect your clients wishes
  and may not result in what is best for his/her
  estate or beneficiaries
• If there are no trustees appointed by way of a
  will, the court will appoint one or more for the
  estate
• Generally look to intestate beneficiaries in the
  order of their interest in the estate
• The appointed trustee(s) will not have the broad
  powers that the client might otherwise wish them
  to have
• The trustee may have to post a bond unless the
  requirement is waived by the court
• May be difficult to obtain
• A bond must also be posted by non-resident
  trustees

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Family Law Act, R.S.O. 1990

• Applies in the case of death or marriage
  breakdown
• Applies to common law spouses only with regard to
  support provisions
• Major provisions of the Family Law Act (FLA)
• Spouses have equal entitlement to possession of
  the Matrimonial Home(s)
• Neither spouse may sell, mortgage, lease or
  encumber the Matrimonial Home without the other
  spouses consent
• Each spouses Net Family Property (NFP) is
  calculated as at the Valuation Date
• The spouse with the lower NFP is entitled to an
  equalizing payment equal to one-half the
  difference between his/her NFP and that of the
  other spouse
• NFP equals the net value of property owned on the
  date of separation, divorce or the day before the
  date of death, less the net value of property
  owned on the date of marriage, other than
  property excluded by the FLA

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Outright Distribution versus Trust Will

• Two basic alternatives for disposition
• Outright distribution
• All assets are left outright to beneficiaries
• Beneficiaries have complete responsibility for
  administration and investment of funds once they
  receive them
• Subsequent income is taxed in the hands of the
  beneficiaries
• Trust will
• Assets are left to one or more trustees who are
  charged with the responsibility of administering
  and investing funds
• Upon the death of the primary beneficiary, estate
  capital is passed onto the residual beneficiaries
• Income retained in a testamentary trust is
  subject to marginal personal tax rates
• Maximum accumulation of income is 21 years from
  the date of the Testators death (The
  Accumulations Act - Ontario)
• Limitation on the length of the trust life in
  being at the time of death 21 years
  distribution (The Perpetuities Act - Ontario)
• Deemed disposition every 21 years unless
  transferred to beneficiaries at tax cost (The
  Income Tax Act)

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Outright Distribution

• Advantages
• Simplicity
• Freedom from ongoing administration costs
• If the spouse is the beneficiary, deemed capital
  gains can be deferred until the death of the
  surviving spouse
• If the spouse and others are beneficiaries,
  trustees may have some flexibility with respect
  to the deemed disposition of estate assets
• Capital gains can be triggered to utilize the
  deceaseds unrealized capital losses or his/her
  remaining capital gains deduction (small business
  shares or farm property)
• Disadvantages
• No control over estate assets after they have
  been distributed to beneficiaries
• Beneficiaries may lack the ability to manage the
  inherited capital
• Less flexibility than trusts with respect to
  income splitting

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Testamentary Trusts

• Trusts categorized by intended beneficiaries
• Spousal trusts
• Family trusts
• Spendthrift trusts
• Henson trusts
• Reasons to use trusts
• Control of assets
• Provision of ongoing asset administration for
  beneficiaries (minors, disabled beneficiaries,
  financially uninformed beneficiaries, multiple
  beneficiaries with potentially conflicting
  objectives)
• Minimization of taxation
• Tax deferral
• Income splitting
• Protection from creditors of the beneficiaries

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Deemed Disposition Upon Transfer to Trusts

• Deemed disposition upon transfer
• No deemed disposition if its a rollover trust
• Spousal/CLP trusts
• Alter ego trusts
• Joint partner trusts

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Spousal/CLP trusts

• The spouse must be the only income beneficiary
• Until his/her death, no one other than the spouse
  may be entitled to capital distributions out of
  the trust
• Rollover
• No deemed disposition upon transfer
• Capital gain taxes are deferred until the death
  of the spouse

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Probate Probate Fees

• What is probate?
• Probate is the process whereby a provincial court
  
• Confirms the authority of the personal
  representative or administrator, in the case of
  intestacy, to administer the estate of the
  deceased
• Certifies the validity of a will (if one exists)
• Why is probate needed?
• Probate is generally required before third
  parties (banks, mutual fund companies, and
  investment dealers, for example) will allow the
  executor to access and administer the assets of
  the estate
• What are probate fees?
• Estate fees charged by the courts to probate a
  will or to appoint an administrator

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Probate Probate Fees

• In some Canadian jurisdictions, the probate fees
  are reasonable (Alberta, for example, has a
  maximum of 400)
• Probate fees in Ontario are significantly higher
• The fees are charged on the total value of the
  assets of the estate at the time of death, less
  any mortgages on real estate
• The rate in Ontario is rounded up to the nearest
  1,000
• 0.5 on the first 50,000
• 1.5 on the remainder
• How to avoid and minimize probate fees
• The basic rule
• Non-estate assets are not subject to probate fees

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Avoid and Minimize Probate Fees

• Gift Assets Before Death
• These assets will not pass through the estate,
  thus avoiding probate fees
• However, income tax and other consequences should
  be considered
• Deemed disposition upon gifting
• Gift tax-friendly assets like cash or GICs, since
  these won't trigger a capital gain
• Gift investments that have not appreciated
  significantly in value since purchased
• Gift assets that have appreciated in value over a
  number of years to avoid a tax hit all in one
  year
• Income attribution
• Gift assets to children age 18 or older to avoid
  income attribution
• The gift is irrevocable and control of the asset
  will be lost
• The asset will become available to creditors of
  the beneficiary
• US gift tax may be applicable (US citizen or US
  assets)

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Avoid and Minimize Probate Fees

• Hold assets in joint tenancy
• Assets held in joint tenancy will automatically
  pass to the surviving co-tenant and will not form
  part of the estate, thus avoiding probate fees
• Tax and other considerations
• Deemed disposition upon transfer from sole
  ownership to joint tenancy
• Income attribution
• Control of the asset is shared
• The asset becomes available to creditors of the
  other owners on title
• If there is a question of the transferors
  intent, the asset may be assumed to be
  transferred in trust or treated as held as
  tenants in common
• Confirm intent using a Declaration of Trust or by
  confirming a gift by legal document
• May be challenged by other estate beneficiaries
  if the transfer results in an unequal
  distribution of estate assets
• Two Supreme Court of Canada decisions May 3,
  2007
• Pecore v. Pecore
• Found in favour of the daughter dismissed appeal
  by daughters ex-husband
• Madsen Estate v. Saylor
• Found in favour of siblings dismissed appeal by
  daughter who was joint account holder

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Avoid and Minimize Probate Fees

• Name beneficiaries directly for registered plans
  and life insurance
• Establish multiple wills
• Primary everything that requires probate
• Secondary Only these items such as personal
  effects shares of private corporations/bare
  trustee corporations an interest in an inter
  vivos trust controlled by the family assets held
  in trust in joint name with the deceased
• Use of inter vivos trusts
• Alter ego trusts
• Joint partner trusts
• Use of Alberta trusts

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Alter Ego Trusts Joint Partner Trusts

• Created after 1999
• The transferor is at least age 65 (partner can be
  lt65 years old)
• Under the terms of the trust
• The transferor, or the transferor and his/her
  partner, are entitled to receive all of the
  income derived from the trust property during
  his/her lifetime, or during the period ending on
  the death of the survivor of the two of them
• During the transferors lifetime, or the trust
  period, no person other than the transferor, or
  the transferor and his/her partner, is entitled
  to receive or otherwise obtain the use of any
  income or capital of the trust
• Advantages
• Privacy
• Less likely to be challenged than a will
• Disadvantages
• Income retained in the trust will be taxed at the
  highest marginal tax rates
• No testamentary trusts for income splitting

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Powers of Attorney

• For property
• The client designates someone to act on his/her
  behalf in his/her absence, inability or
  incapacity
• The attorney will be able to do anything your
  client can lawfully do with respect to his/her
  financial affairs except make a will and make
  testamentary disposition decisions (such as
  beneficiary designations)
• As such, the document is very powerful and should
  be safeguarded
• Consider specifying that the attorney can
  designate a beneficiary for a RRIF if the
  beneficiary is consistent with the one for its
  predecessor RRSP
• For personal care
• The client designates someone to make personal
  care decisions for him/her if he/she becomes
  incapable of doing so
• Types of decisions might include
• Health care (including authority to refuse or
  consent to medical treatment)
• Shelter
• Nutrition
• Clothing
• Safety
• Hygiene

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Powers of Attorney

• Considerations regarding your clients choice of
  attorney include
• His/her degree of trust in the person
• The attorneys ability to understand all aspects
  of the clients financial affairs and to manage
  the clients assets (for property) or to
  understand the clients philosophy of life (for
  personal care)
• The proximity of the attorneys residence to the
  clients
• His/her willingness to act as the clients
  attorney
• If joint attorneys are appointed, ensure that
  they are compatible
• The naming of an alternate attorney is strongly
  recommended
• A power of attorney may be revoked at any time
  while the client has capacity
• Someone can apply to the court to be appointed
  guardian in place of the named attorney
• A power of attorney becomes null and void upon
  the clients death

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Should You Be an Executor/Trustee?

• Considerations
• Conflict of interest
• Potential liability
• To creditors
• To CRA if all assets distributed without
  Clearance Certificate
• To beneficiaries
• To spouse under family law if assets are
  distributed too soon
• Duties
• Compensation

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Duties of Executor/Trustee

• Duties include
• Carrying out directions specified in the will
• Acting personally except where authorized
• Can delegate administrative functions
• Can delegate decision-making in certain
  circumstances
• Written agreement with the party to whom
  delegated
• Retain responsibility for the results
• Acting honestly and with the level of skill and
  prudence expected of a reasonable person of
  business administering his or her own affairs
• Acting in the best interests of the beneficiaries
• Maintaining an even hand with regard to
  beneficiaries
• Exercising discretion without extraneous bias
• Maintaining accounts regarding the estate/trust
  administration and reporting to beneficiaries
• Consult an estates lawyer, who will be paid for
  by the estate, to ensure that you are aware of
  all the requirements of your role as
  executor/trustee

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Compensation

• No pre-determined formula
• As agreed with the testator/testatrix or the
  beneficiaries
• Otherwise, guided by the provisions of the
  applicable Trustee Act
• S. 61(1) of Ontarios Trustee Act reads
• A trustee, guardian or personal representative
  shall be entitled to such fair and reasonable
  allowance for the care, pains and trouble, and
  the time expended in and about the estate, as may
  be allowed by a judge of the Superior Court of
  Justice

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Ontario Compensation Guideline

• The sum of
• 2 ½ of capital receipts and disbursements
• 2 ½ of revenue receipts and disbursements
• 2/5/year of the value of assets under
  administration where trusts are involved
• On a 1 million dollar estate with assets held in
  trust and yielding a 5 rate of return, the
  approximate compensation under this formula would
  be
• 50,000 (once all assets have been distributed)
• 2,500, annually
• 4,000 annually
• Compensation is divided equally amongst the
  executors/trustees unless you agree to a
  different allocation
• The cost of preparing and passing accounts is
  borne by the executors/trustees (courts have been
  awarding reasonable costs out of the estate)

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Alternate Compensation Arrangements

• Consider whether to negotiate payment based on
  hours spent x your professional billing rate
  (ideally at the drafting stage of the will, when
  you can discuss the matter with your client)
• You may ask that the will specify that you are
  only to perform the duties within your capacity
  as a professional
• If you choose not to act (whether based on
  compensation or for other reasons), do so at the
  start
• Moral obligation to act if you had previously
  agreed to do so
• Once you begin to act, you may be restricted in
  your ability to resign your duties especially
  if youre the sole executor/trustee
• Instead of acting as executor/trustee, you could
  choose to be an advisor to the estate

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Summary

• You have the background and expertise to guide
  your clients through the estate planning process
• Depending on your business focus, you may be able
  to provide expert advice in certain areas
• You know their financial and family circumstances
• You have gained their trust during your
  professional relationship with them
• Therefore, you can help to make them more
  comfortable with
• Their mortality
• The legal process
• Their fears regarding the well-being of dependent
  survivors
• You may gain significant personal satisfaction by
  helping your clients with their estate plans
• Assets to desired beneficiaries in an expeditious
  and cost-effective manner
• Estate planning may provide profitable business
  opportunities for you