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By Joanna Pachner
National Post
FP Weekend
Saturday, December 02, 2006
If you were a law student trying to pick a focus for your future practice, estate litigation would be a savvy choice. The next couple of decades will be a bonanza for those involved in resolving inheritance disputes, not only because of the much-ballyhooed transfer of wealth that 9.4 million Canadian Baby Boomers are expecting from their parents, but because people continue to hold many outdated notions about estate planning.
Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "People think probate fees are much higher than they are. They go to great lengths to avoid that fee, spending much more time and effort and money than it's worth."
It is estimated that only about half the population has made a will, and that means we'll be hearing lots of nasty squabbles over cottages, stock portfolios and prized comic-book collections.
Estate planners and financial advisors encounter many misconceptions held by both future givers and hopeful recipients. The following are some of the most common myths about your family's future financial well-being:
MYTH #1: ESTATE PLANNING IS ONLY FOR THE RICH
"The words 'estate' and 'trust' conjure up images of grandiose mansions, stables and fancy cars," says Sandy Cardy, senior vice-president of tax and estate planning at Mackenzie Financial Corp. In reality, even people with small nest eggs will have to share them with the government -- the issue is how much and when, and that's where planning comes in.
"If you die without a will, your assets are distributed according to provincial legislation," says Adrian Mastracci, president of KCM Wealth Management in Vancouver. That means not just losing control of where your money goes, but "it may necessitate additional time and fees to settle your estate."
Money isn't the only concern. Powers of attorney that determine who manages your affairs, living wills stating your wishes in case you're incapacitated, the choice of who gets the family heirloom -- these issues have little to do with how wealthy you are. Ms. Cardy recommends getting a will as soon as you have someone you care about, so everyone's interests are protected.
MYTH #2: JOINT OWNERSHIP WILL SAFEGUARD MY ASSETS BY KEEPING THE TAXMAN AT BAY
When a person dies, an asset they held jointly with another person automatically passes to that individual without being subject to estate taxes. Not surprisingly, putting property and other assets in joint ownership with a partner or the kids has become a popular tactic -- one that ignores a slew of potential risks.
For example, by making your child a joint owner of your home, you're no longer free to sell it or rent it as you wish. If young Johnny or Joan has creditors, they could come after your house, as could an aggrieved spouse seeking assets in a divorce settlement. Carefully laid plans to minimize taxes, such as testamentary trusts for children, may also get thrown out the window as a jointly owned asset may not be eligible for such treatment.
And while your kids may save on probate fees (see more below), they can get hit with hefty capital gains taxes if they want to sell the property. In fact, just the act of making someone a co-owner of an asset such as a stock portfolio could trigger capital gains, says Debbie Ammeter, vice-president of advanced financial planning at Investors Group Inc. She explains you may be deemed to have disposed of half the account.
Most importantly, joint ownership is not conducive to family peace. If one offspring is named a joint owner of an asset, others may feel slighted. Ms. Cardy recommends that anyone establishing a joint ownership write a letter explaining the rationale and whether the asset is intended to be split with others as part of the estate -- and then have all the heirs sign it. Many advisors, however, say it's simpler, safer and often cheaper to keep the assets in the original owner's name.
MYTH #3: MY PARENTS' THRIFTINESS WILL MAKE ME RICH
Whether it's $1-trillion or $5-trillion (estimates vary), the general consensus is that Boomers are in for a 13-figure windfall. The problem with that is twofold: First, the predictions may be overly optimistic; and second, not everyone will profit. It seems some of those estimates, made in the 1990s, failed to take into account a run of historically low interest rates that have kept portfolios from accumulating quickly. As well, people are living -- and spending -- longer, something the statistical models didn't fully calculate. "As parents live longer, they need more of their assets to cover their expenses," says Ms. Ammeter. "As a result, the size of the estate may not be what people have expected, or the date that they get it may be later than in previous generations."
That means if you've been banking on an inheritance to bail you out of financial difficulty or to make up for the failure to build your own retirement nest egg, you may be in for a shock. Your parents may end up spending a good chunk of their savings, and one or both of them may still be around when you retire.
MYTH #4: ABOVE ALL, I'VE GOT TO MINIMIZE PROBATE FEES
Probate is the fee your estate pays to the government for certifying your will and determining the value of your property. Probate fees can be reduced by placing assets outside the estate, such as making your child or spouse the beneficiary on your RRSP rather than your estate, or gifting portions of your estate before you die (see Myth #5).
However, advisors stress the need to focus on the big picture. "People think probate fees are much higher than they are," says Mr. Mastracci.
"They go to great lengths to avoid that fee, spending much more time and effort and money than it's worth".
Probate fees vary province to province, and while they're nothing to sneeze at -- in Ontario, the 1.5% probate would eat up roughly $15,000 of a million-dollar estate -- capital gains taxes can, in fact, be a bigger burden.
MYTH #5: IT'S ALL ABOUT WHAT HAPPENS AFTER I'M DEAD
An estate plan can involve giving money away during your lifetime. Perhaps one of your children has fallen on hard times, or you discover that transferring the cottage to your kids now offers financial benefits over doing it later.
Or, maybe you want to make a mark in philanthropy while you're still around to enjoy its fruits -- and get the tax credit. "Gifting" your assets while you're alive reduces estate tax since no probate applies and it simplifies your estate.
MYTH #6: MY KIDS CAN SORT IT OUT AFTER I'M GONE
Unless you want to punish your children, don't lay that burden on them. Estate planners see the fallout all the time.
As long as the parent is around, the conflicts between family factions remain under wraps. And afterward? War.
"Silence does not prevent disputes, silence breeds legal battles," says Ms. Cardy.
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