Chapter 18 – Estate Planning
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Agenda
Review of learning goals Key chapter terms and definitions Principles of estate planning Wills, powers of attorney and living wills Death, taxes and trusts Gifts and taxes Summary Internet links and on-line resources
Agenda
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Chapter 13 – Preserving Your Estate
Chapter 13 - Learning Goals
LG 1 - Describe the role of estate planning in personal financial planning and identify the seven steps involved in the process.
LG 2 - Recognize the importance of preparing a will and other documents to protect you and your estate.
LG 3 - Explain how your assets are taxed at death.
LG 4 - Explain how trusts are used in estate planning. LG 5 - Explain how gifts and life insurance are used in estate planning.
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Chapter 13 – Preserving Your Estate
Learning Goals
Key Chapter Terms and Definitions
Terms
Estate Planning Probate fees Probate estate Will Intestacy Testator Codicil Letter of last instructions Probate process Executor Administrator Power of attorney Living will Power of attorney for health care Joint tenancy Right of survivorship Tenancy in common
Community property Trust Grantor Trustee Beneficiaries Inter vivos trust Revocable living trust Irrevocable living trust Alter ego trust Joint partner trust Testamentary trust Spousal trust Family trust
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What is Estate Planning?
Developing plans and taking actions during your lifetime to accumulate, preserve, and distribute your wealth upon your death according to your wishes, while minimizing taxes and transfer costs.
LG 1
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Estate Planning Includes . . .
Accumulating enough capital to
•
• •
LG 1
Meet education and special family needs. Provide for family members in event of death of head of household. Provide for yourself and your family in the event of long-term disability. If you become disabled. If you are unable to make medical decisions for yourself.
Having plans in place to manage your affairs
• •
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Chapter 13 – Preserving Your Estate
Principles of Estate Planning
Who Needs Estate Planning?
LG 1
Have dependents. Have a spouse who cannot or does not want to handle finances. Have loved ones of any age with special needs. Have property you would like to keep in the family. Have debts or own your own business. Have assets worth more than exclusion amount.
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Principles of Estate Planning
How Can An Estate Plan Break Down?
LG 1
Excessive transfer costs Lack of liquidity Improper disposition of assets Inadequate income at retirement Inadequate income, if disabled Inadequate income for family at estate owner’s death Insufficient capital Special problems
• •
•
A family member with a serious illness or physical or emotion problems Children of a prior marriage Beneficiaries with extraordinary needs or who can’t be trusted to hand estate matters.
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Chapter 13 – Preserving Your Estate
Principles of Estate Planning
People planning and asset planning
There are two main areas of estate planning: People planning
•
LG 1
•
Anticipating the psychological and financial needs of those people you love Providing enough capital or income to ensure continuation of their way of life.
Asset planning
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Inventorying assets both financial and tangible and anticipating the costs of winding up the estate and whether the structure of the estate is efficient from a tax perspective as well as from a liquidity perspective.
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Principles of Estate Planning
What is Your Estate? Probate Estate?
Probate estate –
LG 1
Your Estate
Your property
(whatever you own when you die)
consists of the real and personal property you own in your own name that can be transferred at death according to the terms of a will, or according to intestate laws if you have no valid will.
Non-probate estate – consists of
the real and personal property you own in joint tenancy that is automatically transferred upon your death and does not form a part of the probate estate. 13 - 10
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Property Not Passing to the Estate
Joint Tenancy
Some property owned during a person's lifetime does not pass to a person's estate. One example is property held as joint tenants. Co-owners may hold property either as joint tenants or as tenants in common. In a joint tenancy, the interest goes to the survivor or survivors. Only in a tenancy in common does an interest pass to the deceased person's estate. Some property owned during a person's lifetime does not pass to a person's estate. One example is property held as joint tenants. Co-owners may hold property either as joint tenants or as tenants in common. In a joint tenancy, the interest goes to the survivor or survivors. Only in a tenancy in common does an interest pass to the deceased person's estate.
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Property Not Passing to the Estate
Benefits under and Insurance Policy
Some property owned during a person's lifetime does not pass to a person's estate. Also not included in a person's estate are benefits under an insurance policy or pension plan which has a designated beneficiary other than the estate.
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The Estate Planning Process
LG 1
1. 2. 3. 4. 5. 6. 7.
Assess family situation and set estate planning goals. Gather comprehensive and accurate data. List assets and determine value of estate. Designate beneficiaries of estate’s assets. Estimate estate transfer costs. Formulate and implement your plan. Review periodically and revise as necessary.
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Wills
A will is a written, legal declaration of a person's wishes concerning the disposition of his/her property upon death.
LG 2
Jane Doe, being of sound mind . . .
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Absence of a Valid Will
Intestacy
Your province’s laws of intestate succession will determine how your property passes. The statutes set out preferred classes of survivors in the following general order:
1.
LG 2
2.
3.
Spouse Children Other offspring (grandchildren or greatgrandchildren)
If the foregoing exist, more distant relatives receive nothing. If no spouse, children or other offspring survive, the deceased parents, brothers and sisters receive a share.
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Absence of a Valid Will
Intestacy - consequences
The person who dies intestate forfeits:
•
•
LG 2
Right to name a personal representative to guide disposition of the estate The right to name a guardian for persons and property.
Absence of a will may increase estate shrinkage through income taxes and probate fees.
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Preparing the Will
LG 2
Provides a plan for distributing assets in accordance with testator’s wishes, needs of the beneficiaries, and federal and provincial dispositive and tax laws. Considers changes in family circumstances that might occur after its execution. Is unambiguous and complete in describing testator’s desires.
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Components of a Will
LG 2
Introductory clause Revocation statement Appointment clause Direction of payments Disposition of property Common disaster or simultaneous death clause Power clause Trust clause Execution and Attestation Clause
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Components of a Will
Introductory Clause
LG 2
A preamble stating testator’s name and residence.
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Components of a Will
Revocation Clause
LG 2
A clause that nullified old and forgotten wills and codicils.
I HEREBY REVOKE all former wills and other testamentary dispositions formerly made by me heretofore and I DECLARE this to be and to contain my Last Will and Testament.
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Components of a Will
Appointment Clause
LG 2
This clause names the executor and an alternative in the event that the initial representative cannot serve.
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Components of a Will
Direction of Payments
LG 2
This clause directs the estate to make certain payments of expenses.
I GIVE, DEVISE AND BEQUEATH all of my property, both real, personal and mixed to my Executrix hereinbefore named upon the following trusts:
a. To pay all of my just debts, funeral and testamentary expenses as soon as conveniently may be after my decease.
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Chapter 13 – Preserving Your Estate
Components of a Will
Disposition of Property
LG 2
Direct the executor to transfer property to the named beneficiaries
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Components of a Will
Common Disaster Clause
LG 2
This clause describes what happens in the event of simultaneous death of a spouse. Other types of clauses are similarly designed to avoid double probate of the same assets – duplication of administrative and probate costs.
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Components of a Will
Power Clause
LG 2
This clause provides the Executor with the power to manage the estate without the requirement of approval from the courts or heirs.
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Chapter 13 – Preserving Your Estate
Components of a Will
Trust Clause
LG 2
Directs the Executor to establish a trust on behalf of any minor who inherits under the will.
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Chapter 13 – Preserving Your Estate
Components of a Will
Execution and Attestation Clause
LG 2
Every will should be in writing and signed by the testator at its end as a precaution against fraud. Many lawyers suggest that the testator also initial each page after the last line or sign in a corner of each page.
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Chapter 13 – Preserving Your Estate
Requirements for a Valid Will
Mental capacity Freedom of Choice Proper Execution
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Chapter 13 – Preserving Your Estate
Requirements for a Valid Will
To be valid, a will must have been the product of a person with a sound mind. It must not have been created under undue influence (influence that would remove the testator’s freedom of choice) It must have been properly executed It’s execution must have been free from fraud.
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Requirements for a Valid Will
Mental Capacity
This means:
1. 2.
3. 4.
You know what a will is and are aware that you are making and signing one. Understand your relationship with persons for whom you would normally provide, such as a spouse or children. Understand what you own. Are able to decide how to distribute your property and have knowledge of the persons who would generally be expected to receive the estate (even though the testator is not required to leave anything to them)
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Chapter 13 – Preserving Your Estate
Setting Aside a Will
Or nullifying a will Requires the person contesting the will to provide clear and convincing proof of the deceased’s mental incapacity at the time of writing the will.
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Chapter 13 – Preserving Your Estate
Requirements for a Valid Will
Freedom of Choice
You must not be under the undue influence of another person. Types of undue influence include:
•
• • •
Threats Misrepresentations Inordinate flattery Physical or mental coercion employed to destroy your freedom of choice
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Requirements for a Valid Will
Proper Execution
It must be demonstrable that it is your will. Properly witnessed Beneficiaries cannot be witnesses.
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Chapter 13 – Preserving Your Estate
Changing the Will
Minor changes can be made to an existing will through a codicil. A codicil is often a one-page document reaffirming the all existing provisions in the will except for the one to be changed.
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Chapter 13 – Preserving Your Estate
Revoking the Will
By the Testator
Wills may be revoked either by the testator or automatically by law. Testator may:
• •
•
Making a later valid will that expressly revokes prior wills; Making a codicil or declaration in writing that expressly revokes all earlier wills; Physically mutilating, burning, tearing or defacing the will with the intention of revoking it.
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Chapter 13 – Preserving Your Estate
Revoking the Will
By Law
Wills may be revoked either by the testator or automatically by law. Depending on the province the law may automatically modify the will under circumstances for example:
• • •
Divorce Marriage Birth or adoption
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Safeguarding the Will
Should be a located in a safe place this known and accessible to the named executor with copies in a safe, accessible location.
• •
Safety deposit box Lawyer
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Executor’s Checklist
Name (Testator): 1. 2. 3. 4. 5. 6.
Checklist of Items to Keep in a Safe-deposit box
Executor's Checklist
Birth certificates Marriage certificates Your will and trust agreements Listing of life insurance policies and or certificates Social insurance number Military discharge papers
7. Bonds, stocks and securities 8. Real estate deeds 9. Business (buy-sell) agreements 10. Automobile titles and insurance policies 11. Property insurance policies 12. Letter of last instructions 13. Additional documents
List all checking and savings account numbers, including bank addresses and location of safe-deposit boxes:
List name, address, and phone number of property and life insurance agents:
List, name, address and phone number of attorney and accountant:
List, name, address, and phone number of (current or past) employer. State date when retired if applicable. Include benefits handbooks:
List all debt owed to and owed by you:
List the names, addresses, telephone numbers, and birth dates of your children and other beneficiaries. Include charitable beneficiaries.
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Chapter 13 – Preserving Your Estate
Letter of Last Instruction
LG 2
Informal memorandum; not a legal document. Details items that cannot properly be included in a will. For example: – Location of the will and other documents – Funeral and burial instructions – Suggestions or recommendations as to the continuation, sale, or liquidation of a business – Personal matters that the testator might prefer not to be made public in the will, such as statements that might sound unkind or inconsiderate but would prove of great value to the executor – Legal and accounting services – An explanation of the actions taken in the will. – Suggestions on how to divide the personal property.
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Chapter 13 – Preserving Your Estate
Administration of an Estate
Court oversees probate process— the liquidation of deceased’s estate. The executor you named in your will (or courtappointed administrator if you died intestate) acts as your personal representative. Executor inventories your assets, pays your debts and taxes (both income and estate), and distributes remaining assets according to your will.
LG 2
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Chapter 13 – Preserving Your Estate
Other Estate Planning Documents
Power of Attorney
If you are incapacitated by serious illness or injury, POA allows you to name as your agent the person you consider best suited to take over your financial affairs.
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Other Estate Planning Documents
Living Will or Power of Attorney for Healthcare
States precisely the treatments that you want and to what degree you wish them continued.
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Chapter 13 – Preserving Your Estate
Trusts
A trust is a legal relationship that facilitates the transfer of property and the income from that property to another party.
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Chapter 13 – Preserving Your Estate
The GRANTOR transfers property to
$
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Chapter 13 – Preserving Your Estate
The GRANTOR transfers property to
the TRUSTEE who holds and administers the property for the benefit of
$
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Chapter 13 – Preserving Your Estate
The GRANTOR transfers property to
the TRUSTEE who holds and administers the property for the benefit of
$
the BENEFICIARIES (which may include the grantor).
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Purposes of Trusts:
Possible income tax savings for those in higher tax brackets.
Possible estate tax savings; if trust is irrevocable, value of trust property is removed from grantor’s estate. Manage and conserve property on behalf of beneficiaries over a long period of time.
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Types of Trusts:
Living (inter vivos) Trust—created during grantor's lifetime; can last for a limited period or continue after grantor's death.
–
Revocable Living Trust: grantor may revoke trust and regain property; grantor pays income taxes.
–
Irrevocable Living Trust: grantor forfeits all rights to trust property; trust pays income taxes.
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Testamentary Trust—created after death according to will provisions; no tax savings, as grantor owns property until death.
Irrevocable Life Insurance Trust— created while living and funded with life insurance policy; removes proceeds of policy from grantor's estate; usually used to pay estate taxes or care for family.
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Gifts and Taxes
LG 5
A gift is made when property is transferred without full consideration in money or money’s worth to another, and the donor relinquishes control over the property.
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Chapter 13 – Preserving Your Estate
Gifts and Taxes
LG 5
There is no gift tax in Canada However, if the gift is a transfer of assets other than cash, there will be a disposition which may need to be included in taxable income. In addition, if the recipient is your spouse or a minor, any income earned on the gift will be attributed back to you for tax purposes.
You can gift assets to adults without the income on those assets being attributed back to you; however, you may be exposed to income tax on the appreciated value of those assets.
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Chapter 13 – Preserving Your Estate
In summary you …
Learned to describe the role of estate planning in personal financial planning and identify the seven steps involved in the process. Learned to recognize the importance of preparing a will and other documents to protect you and your estate. Know how your assets are taxed at death. Know how trusts may be used to achieve estate planning objectives. Know how gifts and life insurance are used in estate planning.
Summary
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Chapter 13 – Preserving Your Estate
Internet Links and On-Line Resources
•
• •
•
•
• • • •
Web Links
•
A Death in the Family – Public Legal Education Association of Saskatchewan Headspring Consulting checklist when reviewing financial plans including estate plans. Useful tools in constructing a will – William J. Genereux Barrister & Solicitor. The Learning Centre on Fiscal Agents Financial Services Group Web site containing useful information on wills, estates and general estate-planning advice. Estate Planning User’s Guide on the Fiscal Agents Knowledge Bank web site. Choosing a Guardian for Your Children from Nolo’s Legal Encyclopedia Choosing a Guardian, Andrew E. Tanenbaum Caring Connections provides some useful guidance on how to ensure your end of life wishes are met. Tax advantages of donating publicly traded securities. TD Bank Financial Group. Scotia McLeod Tips on Probate 13 - 53
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THE END!
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Appendices
1.
Key Terms and Definitions
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Key Chapter Terms and Definitions
Terms
Estate Planning Probate fees Probate estate Will Intestacy Testator Codicil Letter of last instructions Probate process Executor Administrator Power of attorney Living will Power of attorney for health care Joint tenancy Right of survivorship Tenancy in common
Community property Trust Grantor Trustee Beneficiaries Inter vivos trust Revocable living trust Irrevocable living trust Alter ego trust Joint partner trust Testamentary trust Spousal trust Family trust
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Definitions
Estate Planning
The process of developing a plan to administer and distribute your assets on death in a manner consistent with your wishes and the needs of your survivors, while minimizing taxes.
Terms
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Definitions
Probate Fees
The fees levied by a province or territory on the assets of a deceased individual that are transferred by will.
Terms
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Definitions
Probate estate
The real and personal property owned by a person that can be transferred at death according to the terms of a will, or according to intestate laws in the absence of a valid will.
Terms
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Definitions
Will
A written and legally enforceable document that expresses how a person’s property should be distributed on his or her death. It is also used to name a personal representative to guide the disposition of the estate and to name a guardian for persons and property.
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Terms
Definitions
Intestacy
The situation that exists when a person dies without a valid will.
Terms
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Definitions
Testator
A person whose will directs the disposition of property at his or her death.
Terms
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Definitions
Codicil
A document that legally modifies a will without revoking it.
Terms
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Definitions
Letter of last instructions
An informal memorandum separate from the will and containing suggestions or recommendations for carrying out the decedent’s wishes.
Terms
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Chapter 13 – Preserving Your Estate
Definitions
Probate process
The court-supervised process of estate liquidation that occurs when a person dies; it consists of collecting money owed the decedent, paying his or her debts, and distributing the remaining assets to the appropriate individuals and organizations.
Terms
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Definitions
Executor
•
The personal representative of an estate designated in the decedent’s will.
Terms
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Definitions
Administrator
•
The personal representative of the estate appointed by the court if the decedent died intestate (without a valid will)
Terms
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Definitions
Power of Attorney
•
Legal document that authorizes another person to take over one’s financial affairs and act on his or her behalf.
Terms
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Definitions
Living will
•
A document that states, in very precise terms, the treatments that a person wants and to what degree he or she wishes them continued if he or she becomes terminally ill.
Terms
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Definitions
Power of attorney for healthcare
•
A written power of attorney authorizing an individual (an agent) to make healthcare decisions on behalf of the principal during such times, either temporarily or permanently, when the principal is unable to make such decisions.
Terms
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Definitions
Joint tenancy
•
•
A type of ownership by two or more parties, with the survivor(s) continuing to hold all such property on the death of one or more of the tenants. Each joint tenant can unilaterally sever the tenancy.
Terms
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Definitions
Right of survivorship
•
The right of surviving joint owners of property to receive title to the deceased joint owner’s interest in the property.
Terms
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Definitions
Tenancy in common
•
A form of joint ownership under which there is no right of survivorship, and each co-owner can leave his or her share to whomever he or she desires.
Terms
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Definitions
Community property
•
A form of marital property co-ownership wherein all income earned and property acquired by either spouse while living together are automatically owned equally by both spouses.
Terms
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Definitions
Trust
•
A legal relationship created when one party, the grantor, transfers property to a second party, the trustee, for the benefit of third parties, the beneficiaries, who may or may not include the grantor.
Terms
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Definitions
Grantor
•
A person who creates a trust and whose property is transferred into it; also called settlor, trustor, or creator.
Terms
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Definitions
Trustee
•
An organization or individual selected by the grantor to manage and conserve property placed in trust for the benefit of the
beneficiaries.
Terms
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Definitions
Beneficiaries
•
Those who receive benefits – property or income – from a trust or from the estate of a decedent; may or may not include the grantor.
Terms
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Definitions
Inter vivos trust
•
A trust created and funded during the grantor’s lifetime.
Terms
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Definitions
Revocable living trust
•
A trust in which the grantor reserves the right to revoke the trust and regain trust property.
Terms
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Definitions
Irrevocable living trust
•
A trust in which the grantor relinquishes the title to the property placed in it and gives up the right to revoke or terminate the trust.
Terms
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Definitions
Alter ego trust
• •
An inter vivos trust created by an individual over 65 to hold property. Assets may be rolled over tax-free to the trust.
Terms
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Definitions
Joint partner trust
•
•
•
•
An inter vivos trust created by two individuals over 65 to hold property. Only the grantor and the partner have access to the assets and income from the trust while they are both alive and only the survivor has access to the income and capital on the passing of either the grantor or the partner. Assets may be rolled over tax-free to the trust. This arrangement allows assets to pass tax-free between the grantor and the partner and avoids exposing assets to probate fees.
Terms
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Definitions
Testamentary trust
•
A trust created by a decedent’s will and funded through the deceased’s estate.
Terms
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Definitions
Spousal trust
•
A trust created by an individual for the benefit of their spouse; assets may be rolled over taxfree to the trust.
Terms
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Definitions
Family trust
•
A trust created by an individual for the benefit of the member of a family.
Terms
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Chapter 13 – Preserving Your Estate
THE END!
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