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Estate Planning

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Jon Williams with Manulife Securities and Williams Financial Group.

Today I’m going to talk about a very important part of people’s financial plans and that is the settling of their estate and creating an estate plan. So when we’re talking about an estate plan, obviously the most important part of this plan is a will. Before we get there, something that I want to touch on as well which is equally as important as having a will, is making sure people have in place power of attorneys. Now generally speaking there are two different types of power of attorneys. There is a financial power of attorney and a health power of attorney. Each of these powers of attorney allows someone else to make decisions on your behalf if you’re not capable at the time to make them. Now often the same person has the power of attorney for both financial and medical, but not always. For instance, if there are no family members that are close by, perhaps a non family member may have a financial power of attorney to make the decisions on this person’s behalf. But when it comes to medical decisions, the family member that may not live locally is probably better to make those decisions on behalf of the family.

Let’s talk about wills. There are several components of a will that I want to touch on. Number one let’s talk about beneficiaries of your estate. Number two choosing an executor, and number three we will talk briefly about inheritance tax and death costs. Let’s first off talk about beneficiaries of your estate, often they are spouses, children, charities ect. Now one of the important parts of making an estate plan is realizing that every asset is not equal in value. For instance, say a person has a $300,000 house, and they also have $300,000 in a RRSP or RRIF. This person also has two children and said to keep things simple I’m going to leave my house to one child and my investment portfolio which is mainly RRIFs to my other child. Now they each get $300,000. Well this actually isn’t an equal distribution and the reason why is that the primary residence has no capital gains on it. So if the value is $300,000 essentially that beneficiary will receive $300,000. On the other hand a RRIF has to be cashed out and all $300,000 is taken into income, and a tax return has to be done for that portion of the estate. Therefore let’s say 45% of that would actually have to go to taxes, leaving about half the amount to the second child that is getting the RRIF. It’s important to understand that each asset has a taxable event, and what exactly that is, so that things are evenly distributed.

Number two let’s talk about executors. Often clients will have multiple children and name those multiple children executors. There is this perception that being an executor is almost a good positive thing and that I’m honouring you to be my executor. This isn’t really the right approach, being an executor is actually a job, and the job of the executor is to make sure that the estate is settled according to the wishes of the will. The challenge with having multiple executors is that each financial institution that is trying to settle out investments, each account that is trying to get settled out, needs the signature of all of those executors. In fact having multiple executors can often add more complications and extend the timeline of settling that estate, just purely due to logistics. Whereas in fact it is the responsibility of any executor (if you just named one person to be that executor) it is their job to fulfill the wishes of the will. It doesn’t necessarily make a lot of sense to have multiple executors in most cases. Generally speaking one person can be the executor of the will actually settle it quicker, more efficiently than having multiple executors.

Finally, I want to talk a little bit about probate. Probate is a fee that is levied by the government; it’s approximately 1.5% of the value of the estate, not on all assets but on most assets. It is payable upon a person passing. A lot of people will attempt to structure their portfolio, their investments to avoid probate, which I think is prudent in a lot of situations, but I think people should also be cautioned because I’ve equally observed some people put multiple owners on a non-registered investment portfolio. Say they name two or three of their children as joint owners on this account, now there is nothing wrong with that as long as everything in life goes smoothly. The thing I like to caution people about with joint ownerships is this. Say there is a parent who names a child as a joint owner, as soon as that child is a joint owner; they technically and legally own half of that non-registered investment portfolio or GIC or whatever it may be. Now why is this important? Because it also means that that child’s spouse owns half of their half, meaning that unfortunately if the child that is now the joint owner on this account ended up getting divorced, their spouse now has legitimate claim to one quarter of that account. The important thing when coming up with an estate plan is figuring out how to efficiently transfer your wealth to your beneficiaries, and by all means minimizing probate, but certainly not at the cost of adding on additional cost or liability by adding joint owners on your investments.

And just before I finish off here, one thing that I’ll put in the attachments below my video here is a will planning questionnaire that Manulife Financial has produced. It asks simple questions like who would you like to be your executor, is there someone else you would like to assist in being your executor, and it is a simple 19 question questionnaire that will help start the process of figuring out exactly how you would like to have your estate distributed. It really is the first step in creating an estate plan, of which of course we would be happy to walk you through. Thanks very much have a great day!