When faced with making decisions, doing nothing is an option and for some decisions that could be the most viable option. However, In the world of estate planning, doing nothing rarely turns out to be a good idea.
We can all point to an example of executing a deceased’s estate gone wrong. Most times a disastrous estate situation could have been avoided or mitigated if the deceased would have done a little planning during their lifetime. Surprisingly, many estates go off the rails due to overlooking the most basic of estate planning and not having an updated properly executed will and current direct designations. This lack of basic planning is not isolated to the unsophisticated. In fact, many professionals who deal with estate planning for their clients often overlook their own planning until it’s too late. Another situation that can cause hardship to families, who are already grieving the death of their loved one, is the direct designation of certain financial assets or life insurance polices outside of the will. It is too easy to forget about the life insurance policy or RRSP account you set-up 10 years ago that designated a previous partner as the beneficiary and only upon the death of the policy holder was this discovered.
I got to see this exact scenario play out in front of me. An individual was living common-law with his partner and their young child when he suddenly passed away. He forgot that a partner from a previous relationship was the direct designation on his life insurance policy thus his young child and current partner were not provided for upon his death and faced financial hardship. Just recently, CBC published an article about a Halifax woman dealing with a similar situation. In her situation, her late husband’s RRSP was directly designated to his mother and thus the wife did not receive the proceeds. In this situation his estate had to pay the tax without receiving the funds from the RRSP placing a further financial hardship on the estate and the wife.
These types of situations can easily be avoided if individuals would have an updated properly executed will and updated direct designations on their financial assets and life insurance policies.
Now estates come in all shapes, sizes and complexities with some estates requiring more sophisticated tax planning. I found the best planning tool to assist clients with larger more complicated estates was to visually map out the will so the client could see how their estate would be divided among their beneficiaries. Through this exercise we would review each beneficiary’s bequeathed asset and the potential tax consequences along with future management issues that might come with that particular asset. Here are a few of potential issues that should be addressed throughout the estate planning process:
- Succession of private company assets, both at the management and shareholder level;
- Qualification of the company for the capital gains exemption;
- Consideration of potential issues over assets bequeathed to multiple beneficiaries (i.e. cottage);
- Direct designation of assets such as RRSP, TFSA, life insurance, etc.
- Tax efficiency of bequeathed assets (i.e. spousal rollover, other tax-free roll overs, principal residence exemption, etc);
- Control of assets (would a trust be beneficial to use); and
- Post-mortem tax planning.
This blog is only scratching the surface regarding estate planning and we could write an entire book dealing with the potential issues listed as well as the many other issues not mentioned.
I assume that most professionals reading this blog already subscribe to the notion of encouraging their clients that planning is the best defence against loved ones dealing with a disastrous estate situation. My hope is that this blog will work its way into the hands of those individuals that always consider estate planning as something they will do when they get around to it. Death is sometimes sudden, robbing families of their opportunity to develop a plan to avoid financial hardship. With estate planning, no plan is usually a bad plan.
 Normally a qualifying corporation would have to be a small business corporation at the time of disposition, even a deemed disposition. There is an exception upon the death of a shareholder providing a 12 month window ending immediately prior to death where the company may qualify as a small business corporation.)