There is much more to an estate plan than drawing up a will. An effective estate plan will ensure that your client’s will works together with other financial tools to make his or her wishes for passing on his or her assets a reality after death.

And as with all other aspects of financial planning, creating an estate plan for your client comes down to knowing that client.

With new clients and existing clients, you’ll need to learn about their family dynamics, says Carol Bezaire, vice president, tax and estate planning, with Mackenzie Financial Corp. in Toronto: “Are they married? Who are their dependents? And because people aren’t usually very forthcoming, you’ll have to keep asking questions to peel the layers of the onion back. Is this a second marriage? Do they want to provide for survivors? Do they want to minimize the tax hit on their estate?”

Clients usually require estate plans when they reach their 40s or 50s, says Brodie Mulholland, vice president and wills and estates consultant with RBC Dominion Securities Inc. in Vancouver. “Estate plans for younger clients would probably change over time, as they have families and accumulate more assets.”

Clients between the ages of 45 and 65 are in their “net accumulation” years, Bezaire notes: “This is also the age group with all the family issues. They’re still supporting children and they may be supporting elderly parents. They’ve been so busy they haven’t gotten around to estate planning.”

But, she adds, younger clients will need estate plans if they have:

> high incomes or considerable assets, perhaps from inheritances;

> their own businesses;

> young children, who will have to be properly designated as beneficiaries of their parents’ wills.

Clients with young children face some of the most challenging estate-planning issues. If a child under the age of 18 is the beneficiary of a client’s RRSP, the provincial government will step in; the public guardian will generally purchase an annuity for the child, says Bezaire, that will mature at the age of majority.

“This will mean that the client’s [widowed] spouse will have to work with the public guardian to access funds for the child’s benefit until [the child] reaches the age of majority,” she adds. “And at the age of majority, the child will receive a large sum of money.”

This could be a disaster, adds Jack Morris, president of Morris Financial Group in Winnipeg, who asks, rhetorically: “What do kids of 18 want to do with money?”

Morris’s firm gives clients a checklist to help them think through who they would want to see as their children’s guardians. The list covers such questions as how the client would want their children to be raised, and what values and beliefs the client wants the children to be exposed to.

“The checklist raises a lot of questions for clients,” Morris says. “They usually end up choosing family members — siblings or cousins — as their children’s guardians.”

> Executors

Your clients will need to name executors in their wills to administer the estates they leave. Executors’ duties include notifying insurers and the managers of government and corporate pension plans of the client’s death; cancelling credit cards; redirecting mail; determining the value of the estate; and completing the final tax return.

Periodically check with your clients about whether the executors they named are still appropriate, advises Carla Norris, financial planner with T.E. Financial Consultants Ltd. in Vancouver. “And are there backups?” she says. “As your clients age, suggest that they include a younger person as an executor. And make sure all executors know where the will is located.”

Morris suggests that clients include all their children — and not just one — as their executors. “That way, they’ll all know what’s going on with the parent’s estate,” he says, “and will not think one sibling was the favourite. And the will should state that a majority vote is required on the executors’ decisions.”

Sadly, many people don’t have anyone to name as executors, Bezaire says: “But they can always appoint a corporate executor, which will charge fees.” That is not necessarily a bad thing, she adds, because a large, complex estate may require professional assistance.

Non-professional executors also can claim executors’ fees, which vary from province to province; in Ontario, the maximum is 5% of the value of the estate. Executors’ fees are taxable, Bezaire notes. She suggests, as an alternative, advising clients to leave their executors small bequests through the will.

> Trusts

When creating an estate plan for your client, you must understand that person’s specific wishes, Mulholland says: “Are there concerns that a child isn’t good with money or has a substance-abuse problem? In these cases, we usually create a discretionary trust, with the trustee having the discretion to decide how much money the beneficiary receives over time.”

Or, he says, if the client’s child is going through a marriage breakdown, the client may have concerns that the inheritance will end up in the hands of an ex-spouse.

In Ontario, Mulholland notes, you can establish a testamentary trust — a trust set up within the will — to ensure that the inheritance will never become part of the adult child’s family assets. Or your client can leave assets outright to the child that will not become family assets, unless that beneficiary uses them to buy a family home.

“In British Columbia, however, we can’t do this,” Mulholland says. “But we can arrange to have an investment account pass into a trust registered in the name of the trust, with the child controlling the trust as a trustee. This will allow that child to keep the account separate from family assets.”

A spousal testamentary trust may be suitable for second marriages, Bezaire adds: “The trust will provide a life income for the surviving spouse. But, upon his or her death, the assets will go to the children from a prior marriage.”

Testamentary trusts, she notes, also provide dramatic income-splitting opportunities. “Instead of adding an inheritance to the beneficiary’s assets, which will probably put him or her into a higher tax bracket,” she says, “the trust pays taxes as a separate entity and files a separate tax return, thereby reducing the beneficiary’s tax hit.”

The choice of trustees is extremely important, Mulholland says. The trust may be intended to last only five or 10 years, until the child reaches a certain age. “But if the client wants the trust to last longer,” he adds, “will the trustee be around to deal with it?”@page_break@In some cases, he says, the client may have a responsible child or other young family member to act as trustee, but who will be that person’s backup? If something happens to the trustee and there is no one in line to take his or her place, the family will have to make a court application. The person the court appoints may not be someone the client would have wanted.

An option, Mulholland says, is to appoint a professional trust company as trustee. “This trustee will be up to date on tax law,” he says, “and will make decisions based on the client’s will and not on emotions.”

> Assets Outside The Will

Some assets, such as insurance policies, can be passed on outside the will through beneficiary designations. “Keeping as many assets as possible outside the will,” Bezaire says, “reduces the time it takes for beneficiaries to receive their bequests.”

If your client leaves life insurance to beneficiaries, they will receive their bequests immediately after the insurer is notified of the client’s death. But, if the client intends that the life insurance will pay the estate bills, the client will need to designate his or her estate as the policy’s beneficiary.

Bequests that don’t go through the will also avoid probate taxes, the fee the estate pays the courts in some provinces to certify the validity of the deceased’s will and the value of the assets.

Ontario has the highest probate taxes in Canada, at $250 on the first $50,000 of estate value, and $15 on every additional $1,000.

B.C. comes in second: no taxes on estates of $25,000 or less; $208 on estates valued between $25,001 and $50,000, plus $6 for every $1,000 over $25,000; and $358 on estates of $50,001 or more, plus $14 on every additional $1,000. There is no probate tax in Quebec; in Alberta, the ceiling is $400.

“But probate taxes can pale in comparison with some of the benefits of having assets pass through the will,” Mulholland says. “For example, the easiest and most cost-effective way of setting up a trust is to do so in the will. By comparison, setting up a trust while the client is alive — a living trust — is costlier and more complicated. Taxes are triggered and the client must file a tax return every year [on behalf of the trust].”

If your client expects the beneficiary to be in a high tax bracket, Mulholland says, there are significant income-splitting tax benefits to leaving an inheritance in a testamentary trust.

Your client needs a compelling reason for setting up a living trust, Mulholland adds, “But there are compelling reasons.”

One reason is preventing the will from being contested. Living trusts not only avoid triggering probate taxes, they also prevent individuals from contesting the bequests made in them. And, in B.C., they’re not subject to claims under the province’s Wills Variation Act, which allows a spouse, a common-law spouse, a natural child and an adopted child to contest a will if those people feel they have not been adequately provided for.

“The courts [in B.C.] are packed with claims under this act,” Mulholland says. “If your client wants to prevent the will from being contested under this act, he or she should set up a living trust today.”

Most other provinces have so-called “dependents’ relief” legislation, which allows the courts to give a portion of the estate to dependent spouses and children if the deceased did not provide for them in the will.

Clients in provinces other than B.C. who want to leave an individual out of their will — such as an estranged child or a child to whom the client has already given money — can acknowledge in the will their reasons for doing so, and then bequeath that person $1, according to Bezaire: “Have the client go over the wording of the will with his or her lawyer. Estate litigation costs time and money, and can reduce the size of the estate for everyone.”

In all provinces except Quebec, putting financial assets — such as bank and investment accounts and real estate — into joint ownership with rights of survivorship with a beneficiary will ensure that the assets pass directly to the surviving owner without being subject to probate. But, Norris notes, your client may want to take steps to ensure that other children will get an equal share of assets.

She also cautions that assets that are jointly owned can be attacked by the co-owner’s creditors or his or her ex-spouse. “And if two or more children become joint owners,” she says, “the problem is multiplied by opening the assets to attack from more than one ex-spouse and more than one child’s creditors.”

Clients who want a specific amount of money to go to a charity should include that as a bequest in the will, Bezaire says. “The estate can use the charitable donation tax credit, up to 100% of the client’s income in the final year of his or her life, to reduce income in the final tax bill,” she says. “If the client doesn’t put this in the will and a beneficiary goes ahead and makes the donation for him or her after his or her death, the tax credit can’t be used in the final return, although the beneficiary can use the donation as a tax credit on his or her own income tax return.”



> Family Discussion

Encourage your clients to talk to their families about what they want to happen after their deaths, Norris says, so there will be no surprises. This will be easier for your baby-boomer clients than for clients who are in their mid-70s or older, as members of this age group often are reluctant to talk about death and personal finances.

“Have [clients] list in the will who gets which personal items,” she adds. “Or, if the list is very long, keep it with the will rather than in it. Family feuds are usually triggered by personal items.”

Encourage your clients to discuss funeral arrangements with their families, she says, and then make sure the client’s wishes are in writing. The client should not state his or her funeral wishes only in the will, she adds. Wills often remain locked in safety deposit boxes until after the funeral. IE