This article looks at estate planning in Canada and why it is important to you.
For anyone who is concerned about the disposition of their estate after they die, the good news is that Canada has no estate tax.
The bad news is that they do have what is referred to as a “deemed disposition tax” which is imposed upon your estate prior to the distribution of its assets.
With federal tax rates as high as 29% or more, the financial impact on your estate can be severe.
Estate planning in Canada, therefore, involves planning your estate so that it passes to your heirs as you would want with minimal encumbrance of taxes and other fees.
The disposition tax is applied when assets are transferred from the estate as if they were sold at the time of death.
If assets are to be passed to a spouse, as they would be automatically if they were owned jointly, the tax is postponed until the spouse dies or sells the assets.
(Joint ownership laws may vary in different provinces).
Assets that are owned by a spousal trust can also avoid immediate taxation.
The children or subsequent beneficiaries of the estate owner will then be responsible for the tax which is applied at their personal tax rates.
There are other costs associated with the disposition of an estate.
Namely the cost of probate which is a legal proceeding to determine the authenticity of the will and to ensure that the disposition occurs as instructed by the will.
Probate proceedings can also cause delays in the distribution of the assets as sufficient time must pass to allow potential creditors time to come forward and make a claim for any debts that might owed to them.
The costs and delays of probate can sometimes be devastating for families who need access to the assets for their financial security.
The goal of your estate plan should be to arrange your affairs in such a way so as to minimize potential taxes, costs and delays.
The time and, relatively small expense it takes right now to properly plan your estate can save your family a lot of time, money and hardship at a crucial time.
Even the simplest estates can benefit from a minimal amount of planning.
The larger the estate, the more layers of estate planning tools may be necessary to stave off costs and complications.
At the very least you need a will, without which the province becomes the executor of your estate and will decide how your assets are to be distributed.
They use a very strict formula for distribution and it is not likely to conform to what you had intended.
As people live longer, and become more susceptible to health issues later in life, a power of attorney (Mandate of Incapacity) is becoming more of an essential tool as it will ensure that your financial affairs are managed based on your instructions if you become mentally or physically incapable of doing it on your own.
If you want to ensure that your family maintains control of your assets, you may want to consider using a trust which is a legal entity to which you transfer ownership of your assets.
Your named trustee (Mandator), who can be your spouse, can manage the assets while you are living and then oversee the distribution of the trust assets, according to the trust’s instructions after your death.
Trusts can be effective at simplifying the transfer of assets and can ensure that there is continuity of income for your family.