Estate Planning and Wills
Kurt Oelschlagel
The Milk Producer
Jan 2010
What is “estate planning” anyway? It is a very broad and encompassing term that can include the following objectives:
- Preservation of your estate during life, at death and post-mortem – this includes tax minimization and creditor proofing.
- Preservation of control over your assets during your life and flexibility.
- Liquidity on death to provide for family members.
- Equity and fairness among the beneficiaries of your estate to minimize discord (those active in the farm versus those not active).
- Provision for retirement
- Transfer of the family farm without dissolving it.
- Logical and managed succession of the family farm.
Advisors have a number of tools available to them to help you fulfill your personal objectives, some of these are as follows:
- Wills and Powers of Attorney
- Trusts – both while alive (intervivos) or upon death (testamentary)
- Insurance – life, disability, critical illness
- Estate freezes
- Shareholder agreements / Partnership agreements
- Buy/Sell agreements (these can be part of the shareholder/partnership agreements)
- Post-mortem planning.
The answer to this question may seem obvious, but why have a Will?
A will allows you to direct the disposition of your estate on death to specifically named beneficiaries and allows you to control the flow of your assets to the beneficiaries. Your will legally authorizes your trustees to carry out your wishes. In absence of a will, an administrator of your estate is appointed by the court and assets distributed based on the provincial intestacy laws, which is not desirable by anyone. Not having a will can cause an administrative nightmare and wreak havoc on your family members, not to mention that it can be very costly. A situation I was involved with some years ago was a wealthy businessman who passed away without a will, needless to say it was very stressful on the family and the professional fees were enormous.
A will can be invalid for the following reasons:
- if it was revoked;
- if it was incorrectly witnessed;
- if it was incorrectly changed;
- if the testator lacked capacity to draw the will;
- if there is uncertainty in all or part of the will; or
- if the testator was unduly influenced by one of the beneficiaries.
The general rule is that if there are no children of a prior marriage, the surviving spouse or common-law spouse is entitled to the entire estate. If there are children of a prior marriage, the spouse of the deceased is usually entitled to a preferential share of the estate, while the residue of the estate is distributed to all surviving children equally. Where there is no spouse or children, the estate typically gets divided along prescribed family lines. In Ontario the Succession Law Reform Act) dictates that where there is a spouse but no children, the spouse receives the entire estate. Where there is one or more children, but the net value of the estate does not exceed $200,000, the spouse receives the entire estate. Where there is a spouse and one child, and the net value of the estate is more than $200,000, the spouse receives $200,000 plus one-half of the balance and the child receives the other half of the balance. Where there is more than one child, the spouse receives $200,000 plus one-third of the balance and the remaining balance is split amongst the children.
It is also important to remember to a will can be revoked by:
- Making a new will.
- Deliberately destroying the old will.
- Revoking the old will.
- Getting married (unless the will was written in direct contemplation of a specific marriage).
A will drawn before marriage and not in contemplation of that marriage is automatically revoked upon marriage. A divorce does not revoke a will. However, where a couple has been divorced, the will is read as if the otherwise benefiting spouse has predeceased.
It is important to remember that not all assets that a person owns will be included in that person's estate. The following assets, for example, would not be included:
- Jointly owned property, such as real estate or bank accounts, in which the testator's interest automatically passes to the surviving owner;
- Gifts made before death;
- Life insurance proceeds (unless the estate is named as beneficiary), RRSP's or non-registered investments (e.g., segregated funds) held in life insurance companies that provide for payment directly to a designated beneficiary
These assets would pass outside the will and, in Ontario, not be subject to the estate administration tax, better known as probate fees.
You must give careful consideration to assets that pass outside the will. For example, if you were to name a child as a direct beneficiary of your RRSP/RRIF, then the funds will pass directly to that child outside the will. However, for income tax purposes, the full fair market value of the RRSP must be reported on the deceased’s final tax return and the resulting tax liability must be paid by the estate and not the RRSP beneficiary.
Another useful tool where there are private corporations involved, such as a family farm corporation, is the use of dual wills to reduce probate fees. This involves having a primary will covering all your assets except any debt or shares of private corporations and a secondary will covering the debts and shares of private corporations. Currently in Ontario your investment in private corporations can be transferred to your beneficiaries without requiring probate, so the secondary will is not submitted for probate which can result in a substantial probate fee savings.
A proper will allows you also to distribute your assets on a tax-efficient basis. There are many provisions of the Income Tax Act that relate to the transfer of property in a tax-efficient manner to spouses and the transfer of farm property to children. Many of these provisions require that the assets “vest indefeasibly” in the beneficiary, which basically means they must have an unassailable right to ownership that is not subject to any conditions. A properly worded will can ensure the desired properties are transferred to specific beneficiaries and the special provisions of the Income Tax Act can be utilized.
Kurt Oelschlagel, C.A, TEP is a partner with BDO Canada LLP based in their Hanover, Ontario office.
