Estate Planning - How to do it right.
If we were to define “Estate Planning” in the simplest possible terms, we might say that it is the disposition of worldly goods you leave behind at your death. These are compromised of your tangible assets and whatever cash you have been able to accumulate over the years. This accumulated wealth, for the most part, will be passed on to your heirs. It is the “how” of what happens at this time that may either result in a smooth transition or, if we do not do a reasonable amount of planning, in a legal and financial disaster.
When we are dealing with an estate, one that compromises only personal wealth, without the complications of a business succession, we can often take care of the issues involved at a quite reasonable cost and by taking a few simple precautions.
What we are faced with at this time:
Final expenses – funeral and final tax return;
All final documentation – death certificate, final tax assessment, life insurance claim forms, named executor’s documentation, pension transfer forms, all statements regarding outstanding debt (credit cards, mortgage), notarized will, testamentary trusts, just to name a few;
Provincial Probate forms and fees;
Arm’s length claims against the estate for professional services, sub-contractors and previously undeclared family members (children from a first marriage, in-laws and others);
Appraisal and disposition of all taxable assets (cottage property, registered investments and unregistered investments (RRSPs and Mutual Funds);
Cataloguing and disposal of the household minutiae that are claimed by the heirs;
Contacting all interested parties.
The list, of course, does not include any time for grieving or reflection on the overwhelming loss of a loved one. This is only possible if the individual whose estate is being dealt with has had the foresight to put a few tools in place to simplify the process.
The very first issue to be dealt with, when you are the executor of an estate, is cash on hand. You will not have access to the departed’s bank accounts, as they will be part of the probate process. Mutual funds and pensions will be paid into the estate and will be immediately taxable. All insurance that has not been designated to a beneficiary will also be paid into the estate, and not available until the estate is probated. Credit cards and other debt will become immediately payable. The cost of acting as executor – advertising the death to creditors, the newspaper obituary, finals expenses – will all be born by the executor unless provisions have been made.
How is it possible to minimize the stresses related to dealing with an estate? A complex solution, part of a simple plan, may well be the answer.
All life insurance with named beneficiary/beneficiaries (as many as you see fit) will be paid to the beneficiary(ies) tax-free, and will bypass probate, and unless there is a question relating to the cause of the decedent’s death, will be paid out within five to fifteen business days, after all related documentation has reached the insurer;
A joint bank account with the executor or a member of the family that can be accessed for those immediate cash needs;
A transfer of all RRSP’s and Unregistered Mutual Funds to an Insurance Company Segregated Fund will flow through to the named beneficiary(ies) tax-free to them, with the tax bill flowing back to the estate;
Sufficient insurance to cover all the debt obligations, including any taxes owed. The insurer has tables to help you calculate this amount;
Insurance in place to cover possible claims from extended family members, such as siblings from a previous marriage, family creditors and estranged siblings or parents;
A notarized will and last testament, detailed enough to simplify the executor’s task;
Seeing to it that certain assets are owned jointly while the estate owner is still living. The items in this list should be consulted on with a tax specialist before proceeding.
There may be more precautionary measures available to you in the future. One more thing that we highly recommend is a Testamentary Trust, which is a letter drawn up by your lawyer and submitted to the insurance company that details how you want the funds dispersed. In effect, you can manage parts of your estate after you are gone.
You may want an elder child to receive the full amount of his/her share of the insurance proceeds immediately after your demise. For others, the less fiscally responsible, you may want to have the funds doled out to them in monthly or annual payments.
Business succession in the estate plan:
This has many of the same characteristics as the personal estate plan and will make up a significant part of the personal estate plan, for those who have active business interests. Where they differ for the most part is the type of planning required and the provisions that need to be made for a smooth transition. As well, whereas in the first instance we are dealing with family members, in this latter environment, we may have to contend with the interests of those same family members, along with one or more business partners.
Issues to contend with in a business succession plan:
How to assure the businesses survival if you are gone;
Who will inherit your shares of the business;
What is the tax impact of the ownership transfer;
What is the value of your shares;
Can this be handled by the executor you have named for your personal estate;
How will your heirs handle the cost of the disposal or transfer of ownership?
There are any number of elements that will make up a successful transition of ownership for an active business, from one generation to another or from one partner to another. In the case of a business where there is more than one owner/partner, it is likely that the surviving partners have the competence to run the company successfully and are not partial to the idea of having your spouse or your nineteen-year old inherit your shares.
Some of the elements of a successful transition:
A detailed partnership agreement between all parties with an ownership stake in the business;
Cross Partnership life insurance: money to replace the skills of the departed partner and a portion of same to buy out the interests of the heirs;
Disability and Critical Illness insurance on the owner/partner to ensure that the company is not under cash-flow pressure if the partner suffers a debilitating period of illness before his/her demise;
A corporate structure that allows for the transition to have a minimum tax impact on the partners and heirs: shares held by the partners and/or family in a trust, a holding company between the trust and the operating company, the operating company’s share structure amenable to a transfer of ownership to the trust before the partner’s passing and a dedicated life insurance policy with the corporation as beneficiary, to defray all related costs.
There are a myriad of other details relating to the transition of business ownership, but as they are impacted by changes to the tax act – future and unknown - to the growth of the business over many years, to the changing dynamics of partnerships and family relations and many others, these can only be addressed on a case-by-case basis.
In closing, let us say that if most of the above steps are dealt with at the outset of the business’s life cycle or shortly into its active growth cycle, most of the concerns regarding this issue will be greatly mitigated. Our recommendation is that you keep your broker in-the-loop about any significant changes in your business and that you consult him when making any significant changes to structure, ownership or succession. Your broker staying abreast of these issues will be a valuable asset to you throughout the business’s and your lifespan.