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By Timothy Renshaw
National Post
Investing Guide
Thursday, January 29, 2004
They say that where there’s a will there’s a way. But, where there is no will, it will be the government’s way when it comes to dividing up the assets of an estate.
Adrian Mastracci, investment counsel and president of Vancouver based ‘fee-only’ KCM Wealth Management, says, "Excuses for not having a will are as numerous as the days in the year. These range from procrastination, a reluctance to contemplate death, to not caring about a document that has no benefit for the person signing it.”
That could, of course, create unnecessary bureaucratic entanglements and expenses for beneficiaries. But there is more to consider in estate management than whether to have a will or not.
As the well-worn bromide states, death, along with taxes, is one of two certainties. And, says Sally Dennis, a partner in the wills and estates group at McCarthy Tetrault in Vancouver, “they both come at the same time.”
People can’t do much about death. But they can do something about taxes. Reducing and simplifying the taxes triggered by death requires careful estate planning. The fundamental way of planning beyond the most rudimentary dispersal of assets is with a will.
Adrian Mastracci, investment counsel for Vancouver’s KCM Wealth Management Inc., says excuses for not having one are as numerous as the days in the year.
These range from procrastination, a reluctance to contemplate death, to not caring about a document that has no benefit for the person signing it.
When a person’s wishes are consistent with the provincial legislation that fills the void created when someone dies intestate, not having a will may be fine. A spouse would be the initial prime beneficiary under government wills legislation.
Betting on fate, however, is a crapshoot. Theoretical plans may be made, but, as Ms. Dennis asks, “What happens if your wife dies before you?”
Government succession legislation stipulates asset dispersal based on a logical family and next-of-kin hierarchy. But families and family dynamics are rarely simple.
Neither are the taxes and probate fees upon a death straightforward. Having the details spelled out in a will helps beneficiaries avoid dealing with bureaucratic intrusion during their period of mourning.
However, estate-planning experts say people unwittingly make key errors when drafting wills, errors that can penalize the estate.
For one, says Peter Lockie, they miss opportunities to take advantage of available tax deferrals and income splitting. The co-managing partner of Ogilvy Renault’s Toronto office says people pay far less attention than they should to their spousal and other obligations under such provincial legislations under such provincial legislations under such provincial legislation as Ontario’s Family Law Act.
That oversight can spark lengthy and expensive court wrangles when wills are contested, a further drain on fiscal and emotional resources already under stress.
“You can do a very complicated will that you think is great, but your wife can come along and say she doesn’t accept it. It blows it all out of the water,” Mr. Lockie says.
Legal dogfights also result when people intentionally try to cut legitimate beneficiaries out of the wills.
Some people make a mistake by allowing tax concerns to dictate estate planning, at the expense of what the will was originally intended to achieve, Ms. Dennis says.
They also often fail to get adequate legal advice. “I’m not saying this to drum up business, but there is no such thing as a simple will,” she says, “particularly if you have tax issues.”
A comprehensive will includes options for executors, trustees, beneficiaries and all its key players.
When a person dies, he is deemed to have sold all his possessions. Large stock portfolios, real estate and other asset gains can generate a significant tax bill for the estate, but this tax burden can be eased.
For example, by assigning assets to a trust while they are alive, people can create income tax savings for their beneficiaries and cut their estate’s probate fees (these fees apply to the total value of the estate at the time of death, without any deduction for debts except those on real property).
Instead of leaving money to an offspring, Mr. Lockie says it can be assigned to a trust for that child and his or her spouse. Income generated by the entitlement can then be split, and the tax bill reduced.
Because allocating assets to a trust removes them from an estate, they are no longer subject to provincial probate fees.
Those fees have increasingly become an issue for estate planners. In 1992, for example, Ontario probate fees tripled. They are now 1.5% on any assets totalling more than $50,000. That adds up to $15,000 on a $1-million estate. In British Columbia the fee is 1.4% on the assets of an estate worth more than $50,000.
But trusts don’t suit all assets. Real estate, for example, would generate property transfer taxes if moved into a trust. As well, trusts are complex and expensive to set up.
“The tax rules for trusts are really, really complicated,” Ms. Dennis says. “It’s a minefield. You can end up at best being tax neutral to everyone but at worst costing more if not done right.”
Probate fees can also be minimized through joint tenancy agreements. Assets covered by joint tenancy automatically go to surviving partners. No probate fees apply.
But joint tenancy agreements require proof that both parties are legitimate owners of the asset involved.
They can not be set up just to avoid probate fees, Ms. Dennis says.
Bank accounts, for example, have to show that both parties have been actively involved in contributing to and benefiting from them.
People hoping to avoid probate fees and other taxes might consider giving away their assets while they are alive. However, that requires accurately estimating life expectancy and the amount of money that would require. Miscalculation in either area could have serious financial consequences.
A professionally drafted will can cost anywhere from several hundred dollars to more than $10,000 depending on its complexity. Lawyers and estate planners advise that wills should be updated every five years or when any major change, such as marriage or divorce, occurs in a person’s life.
None of the options outlined above provides the entire answer. All are merely pieces of an overall estate-planning puzzle that needs careful consideration to achieve desired goals for an estate and its beneficiaries.
Some taxes can be deferred and some probate fees avoided, but the government is going to be a player in each estate one way or another.
“It’s one of those inevitable things,” Ms. Dennis says. “The taxman is going to come calling.”
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