Estate planning is a difficult subject to discuss as it forces us to come to terms with our own mortality. Yet it deserves open and frank discussion with your loved ones today because you simply can’t do so after you’re gone or after they’re gone.
Whether your goal is to provide adequately for family members, ensure your estate is distributed in the most timely manner possible after your death or to minimize income taxes, the place to start is with estate planning.
To help you focus on this important process, use the following as a checklist of the areas you need to eventually address:
- You will need advisors, including a financial advisor, lawyer, tax professional and possibly an insurance advisor. The complexity of your situation will determine the extent to which these advisors are utilized.
- Determine your overall net worth by drawing up a household balance sheet. This exercise will help you:
- See how vulnerable you might be should death or disability occur;
- Reflect on your lifestyle and priorities;
- Determine income that will be available to support your family.
- Understand your life insurance needs. How much will be needed to pay estate taxes? Do you need to replace some or all of lost earnings? Do you want to leave more for your loved ones? Life insurance might be the answer to all of these questions.
- You must have an updated will. The will is a crucial document for the purpose of:
- Naming the person you want responsible for the administration of your estate;
- Naming a guardian for any minor children;
- Expressing limits on the distribution of assets, etc.
- Establish a Power of Attorney. If you become unable to manage your financial affairs you need to authorize someone to do so on your behalf.
- Establish Power of Attorney for personal care. You should discuss, with your doctor and family, your preferences with respect to your health care, nutrition, shelter, clothing, hygiene and your final wishes from a medical perspective. The person or persons you appoint needs to know your preferences in the event you cannot communicate them yourself.
- Minimize income taxes and probate fees. Where assets are not transferred to a surviving spouse, income tax resulting from the deemed disposition of assets can be substantial. It may be prudent to “freeze” the value of your estate at today’s value allowing future growth to accrue to your family. This future growth is not subject to income taxes on your death.
- Probate fees can be reduced or eliminated altogether by arranging for the distribution of your assets to your heirs outside of your estate. The key is to reduce the value of your estate assets that require probate. The simplest way is to designate beneficiaries for RRSPs, RRIFs, life insurance policies, etc. That way these assets do not form part of your estate. You may also consider joint ownership of property as jointly held assets do not form part of the first owner’s estate. Probate can also be avoided with the use of Alter Ego or Joint Partner trusts
- Prearranged funeral plans may also save costs by eliminating costly last minute preparations by grieving family members. This also relieves family members from having to make decisions at a difficult time.
- Keep track. One of the first roles for an executor is to gather the information required to settle the estate. You should document important information concerning legal documents, bank accounts, insurance policies. Put a copy in a safe place and let someone know where it is.
- Review and Update. Once a year, update your statement of net worth and compare it to the previous year. This gives you an opportunity to revise your plan as circumstances change. This would include a review of insurance coverage needs and beneficiary designations for life insurance, RRSPs, RRIFs, etc.
- Share your plan. Make sure that all those affected by your plan know where things are and what they need to do. All the planning in the world won’t help you if no one knows about it.