Legacy Planning

Nobody lives forever, yet half of all Canadians don’t have a plan in place to handle their legacy if they pass away unexpectedly. Yes, death is something that people don’t like thinking about, and you’re statistically less likely to pass away when you’re younger, but nobody knows when their time will be up. 

If the unthinkable happens, you want to make sure that the assets you’ve worked so hard to build throughout your life are taken care of. Legacy planning (also known as “estate planning” or “succession planning”) is about taking the steps to make sure that, if you pass away, everything you’ve worked for is handled according to your wishes.

Myth: legacy planning is only for the elderly

A lot of younger people use their age to brush off legacy planning. Sometimes they figure they have decades of time to deal with it, sometimes the thought just never occurs to them, or sometimes they simply would rather not think of the possibility that they might pass away before they’re elderly.

While death is never pleasant to think about, and if you’re younger then you’re statistically much less likely to pass away early, it’s still important to take some steps to secure your legacy. Yes, the average natural life expectancy in Canada is about 82 years, among the highest in the world, but nobody can say with certainty when an accident or unknown health problem might take someone before their time.

For the above reasons, it’s commonly suggested that you have a legacy plan in place as soon as you enter the workforce.

Myth: legacy planning is only for the rich

It’s easy for many to delay legacy planning by assuming that wills are only for the wealthy. This also ties a bit into the myth about legacy planning being for the elderly, as young people often assume they don’t have enough assets to bother.

If you assume you haven’t built up enough net worth when you’re young, you could be selling yourself short: even if you’re early in your career, you likely have some savings, possibly an emergency fund, and maybe a car. Sure, it might not be “mansion-and-yacht” wealth, but it likely still adds up to a significant benefit for your loved ones if you pass. Plus, depending on your job, you may also have a life insurance policy through your work benefits. This can work out to a life-changing sum if you pass away early, which you definitely don’t want caught up in a long and expensive probate process or legal battle.

Even if you don’t have life insurance benefits through your work, you still don’t need a massive estate to benefit from legacy planning. Smaller estates are subject to the same regulations, blockers, and potential problems as large estates, and legacy planning can help provide a clean and painless transition for everyone involved.

Myth: I can do my legacy planning in an email or on a cocktail napkin

Nobody is able to show up in person to their own will reading to answer questions or make clarifications. This is why estates lawyers exist: a formal will is designed to be ironclad, meaning nobody can dispute what your will means, or the date when it was written, or your state of mind when you made your wishes known. All it takes is one unanswered question to throw your entire estate into question, which could lead to a long, messy, expensive legal battle for your loved ones.

It’s worth mentioning that holographic wills (meaning wholly hand-written wills without formal witness signatures) may technically be an acceptable alternative to formal wills, depending on your province. Provinces that accept holographic wills generally have requirements. For example, the Ontario government requires that the will be a fully legible “full and final expression of intention”, which means any room for interpretation (either in your handwriting or your intention) may call the will into question and result in a legal battle.

If you’re thinking of writing a holographic will, you should do your research to make sure that your hand-written will meets the requirements of your province, and that you minimize the chances of it being disputed or invalidated.

Myth: legacy planning is just about money

While disbursing physical assets (like property or heirlooms) and financial assets (like your investment accounts) are a major part of legacy planning, there’s a lot more to it. Your legacy planning can also include things like:

• Final wishes, such as funeral and burial arrangements
• Your living will (also known as power of attorney for personal care or a healthcare directive) which dictates your medical treatment if you become incapacitated
• Arrangements for your children if you and your spouse are both unable to care for them
• Succession and continuity plans if you own and run a business, which can also provide guidance about how your business is handled if you’re alive but temporarily incapacitated

Myth: the only important part of legacy planning is saying who gets what

While dictating what happens to your belongings is a key part of legacy planning, it’s important not to forget about naming an executor.

An executor is responsible for a number of things: identifying all your assets and liabilities, validating your will, making arrangements with your beneficiaries, and even making funeral arrangements.

Needless to say, your executor is important. You’re going to want to make sure that you have an executor named, and that your executor is someone you trust, who is capable of carrying out your will, and who will be willing (and able) to take on the pressure of managing your estate right after you pass away. It’s also recommended that your beneficiaries live close to you, as they will be handling your assets and dealing with your provincial government.

It’s not unusual for executors to be compensated for the time and effort it takes to manage an estate. This gives you the option to name someone outside of your immediate family, leaving it to a professional executor or lawyer. This can be particularly helpful if your beneficiaries live out of province or out of the country, or if you simply don’t want to place the burden of executing your will on your grieving loved ones.

It’s also possible to name multiple executors to split the burden, or a back-up executor in case your first pick is either unwilling or unable to carry out the task.

There are procedures in place if you pass away without a will. There’s even a legal term for dying without a will: intestate. And dealing with an intestate estate can be a bit tricky for your loved ones.

How an estate is handled in the absence of a will can differ from province to province. And while the systems are designed to be fair in a broad sense of the word, they are very loose, often contested, and take no measures to mitigate the cost of passing down your legacy.

There is also the issue of keeping track of your assets. A legacy plan can also act as a central record of your assets, listing all of your non-physical assets like bank accounts and investment accounts which might otherwise be very difficult to track down.

What is probate, and how does it work?

Probate is the legal process of disbursing the estate of someone who has passed away. If you pass away with a binding will, then this process can be relatively quick and painless. But if there is no clear direction then it can be a lengthy and expensive process. 

Assets such as investment accounts, real estate, and life insurance disbursements can be withheld until the probate process is settled, which can take years if you died intestate.

Regardless of whether or not you have a legacy plan in place, most expenses incurred by probate are usually paid out from the estate itself, leaving less for your loved ones once the dust settles.

What happens if someone contests an estate?

It depends on how prepared you were when you passed. If you’ve done your legacy planning and have an ironclad will, then there is generally very little your beneficiaries can do to contest the outcome.

However, if your will is contestable, your loved ones may be in for a ride. Legal contestations can be long and costly, and some of the legal costs (up to 100%, depending on which province you’re in) could be withdrawn from the estate itself, whittling it down while your loved ones (or non-loved ones who believe they have a claim) fight over it.

What happens if an estate has no executor?

Much like handling an estate with no will, an estate with no executor is handled by the provincial courts, and so might vary depending on where you live. Some provinces will allow the beneficiaries to propose a trustee. The courts may then either approve the decision or appoint a different neutral party.

As with probate, any court fees and third-party executor fees will typically be paid out from the balance of your estate, reducing the amount left over for your loved ones.

Legacy planning can come in many forms when it comes to your Questrade account:

Beneficiary designations

You can set beneficiary designations for any account to make sure that they go directly where you want them to go in the case of your death. Beneficiary designations function separately from a will, and are therefore less likely to get wrapped up in litigation before they are disbursed to your loved ones.

Beneficiary designations can be set by filling out either the beneficiary designation form for registered accounts, or by reaching out to our support team for non-registered accounts.

Please be aware that Quebec residents are not allowed to add a beneficiary directly to their account, and will need to declare their account beneficiaries in their will.

Trusts

A trust account (also known as a trust fund) assigns a trustee to oversee your assets on behalf of your beneficiaries.

Trust accounts and their beneficiaries can be set up and designated “inter vivos” (meaning while you’re still alive), in which case an existing trust generally doesn’t have to go through probate. They can also be “testamentary” (meaning they’re set to take effect after you die), in which case you would need them set up as part of your will.

Trust funds have a reputation for being a tool for the wealthy, but they can also be useful for anyone who wants to take care of dependent children or elderly family members who would be unable to manage the funds themselves.

Very wealthy people can also set up trusts to provide for multiple generations of beneficiaries, often setting restrictions on how the money is disbursed to make sure the money lasts as long as possible.

Learn more about setting up inter vivos trust accounts, or contact your estate lawyer or financial advisor to learn more about setting up testamentary trusts.

Charitable donations

What counts as a qualified donee?

There are several types of organizations you can donate to with a zero capital gains inclusion rate, including:

• Registered charities
• Canadian schools and universities
• Registered Canadian amateur athletic organizations
• Registered national arts service organizations
• Registered housing corporations providing low-cost housing for the aged
• Registered municipalities in Canada

Finally, if you have a significant amount of money you plan on donating to charity once you’ve passed, you may want to set up a private foundation or charitable trust, allowing you to leverage your donated wealth to provide ongoing support to your preferred causes and charities.

Talk to your tax advisor or estate law expert to learn more about charitable contributions.

Tax planning

Inheritance is often subject to tax. However, with careful planning, it’s often possible to relieve some of that tax burden.

For example, some tax-advantaged registered accounts such as RRSPs and FHSAs can be transferred directly to a qualifying survivor (usually the spouse) without taking up their contribution rooms or losing the funds’ tax-deferred status.

Contact your tax advisor or financial advisor to learn more about how to minimize taxes paid on your estate.

It’s great to have a legacy plan in place, but it’s also important that your plan is up-to-date. It’s commonly recommended that you update your plan every few years, but there are some major life events that require their own updates to your plan, such as:

• Marriage
• Divorce
• The start (or end) of a common-law relationship
• The birth of a child or grandchild
• The death of one of your beneficiaries
• A major purchase or acquisition, including ownership of a new business or the creation of new intellectual property
• Inheriting significant wealth, property, or possessions yourself

In other words, it’s likely worth revisiting your legacy plan if anything changes about what you want to leave, or who you want to leave it to.

Having an up-to-date plan in place may not be top-of-mind, especially to the working-age investor. However, taking the extra step to keep your affairs in order can make sure that your legacy will be secured, even if the unthinkable happens.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.