BY: JAY BRIJPAUL
Estate planning is essential and the first place to start is with a will. While the time of death is uncertain, death itself is. As such, the earlier we prepare a will, the better. Most lawyers can prepare a will for under one thousand dollars. In the will, you must decide on someone reliable to be the administrator and carry out your wishes. Choose a neutral person who is not a beneficiary. You can use a lawyer or your bank as the administrator too. Their fees are between two to four percent of the estate which can be hefty. If you plan on using your children as the administrator, avoid choosing everyone. If they disagree, it can create family disharmony. Upon death, the will must pass probate court to ensure that it is valid. The cost is about 1.5% of the estate value.
It is best to dispose of most assets before death. An investment property, for example, once sold or transferred to a family member, will trigger capital gains. With capital gains, fifty percent of the profit is considered as income and will be taxed accordingly. Dispose ofthe assets gradually, especially when your income is low. If an investment property is gifted to a child, capital gains arecalculated based on the true value of the property at the time it was gifted. The principal residence is exempted but if left in a will, it is subject to probate fees. Another idea is to add a family member as a joint tenant.
Joint tenant means that in the event of death, the entire property goes to the other person. Joint assets are not part of the estate and are not subject to probate fees. However, you must pay capital gains when you transfer half ownership. The savings are considerable because you will only pay capital gains on half the profit. Another option is to create a family trust.
A family trust is created when you give property to another person, the trustee, to keep for the benefit of another person. When you create a family trust, you give up ownership to the trustee and that will trigger capital gains on your investment assets. One of the major benefits is that your assets are protected against creditors of your beneficiaries. For example, a business person may want to put his assets in a family trust and in the event,the business goes sour, the assets are protected. Assets transferred to your children can become available to their partners, but in a family trust it is not considered as part of their personal property and is not subject to claims of the children’s partner. The disadvantage, however, is that you lose control of your assets under the trust agreement. Estate planning can be simple or intricate; it depends.
If estate planning involves the family home and a few other assets, a will is good enough. If it involves multiple investments such as real estate, stocks, and other assets, then it can be complex. Upon death, it is deemed that all your assets are disposed of and if everything is in a will, then, the family must have money put away to cover probate fees and capital gains. Life insurance and RRSP are not part of your estate and there are no probate fees. RRSP can be transferred to a spouse, tax-free. Other than that, it is taxable. A permanent life insurance is a good idea to have because the proceeds can be used to pay probate fees, taxes and other obligations.
Life is a speeding torrent down a steep hill and no one wants to think about death. Death is inevitable and so is taxation. You work hard for your money and want most of it to be in the hands of your loved ones. Careful estate planning can accomplish that.