Estate planning is the process of explicitly documenting where and to whom you’d like your assets and dependents (kids and pets) to go after your death. You can approach estate planning two ways:
- Avoid it altogether. This can lead to neglect and cause major problems for your family when you die.
- Be proactive and prepare clear instructions about your assets. This will make your passing easier for your family. You could say that planning your estate is your final act of service to the people you care about.
The estate planning checklist for what really matters.
We’ll discuss the finances in more detail below. But some things are more important than money.
Keep the government out of your estate.
Create a will. Without a will, your assets would be subject to Ontario’s Succession Reform Act. This directs the first $350,000 of your estate, plus one-third, to your spouse and divides the remainder equally among your children. The Act does not allow any of your estate to go anywhere else, like to friends or other family members or a charity. Most importantly, the Act does not recognize a common law spouse.
Protect your children.
Name a guardian. Without clear instructions, the court will find a suitable placement for them if neither parent is available. The vetting process take a while, so your kids will be in foster care while they wait.
Trust that your wishes will be honoured.
Name an executor. This person should be someone who you believe can follow your instructions, despite any pressure they may receive from others. They’ll be responsible for ensuring that your assets are divided correctly and that your final tax return is filed. More on that below.
Protect your dignity.
Assign Power of Attorney. A necessary element of your estate planning checklist, this person will make decisions on your behalf if you're unable to do so yourself. Choose someone who has the emotional strength to make difficult decisions when the time comes.
Leave on your terms.
Leave final arrangement instructions. This may be last on your estate planning checklist, but it’s important. Do you want to be buried? Cremated? Sent out to sea or up to space? Make your wishes clear so your family doesn’t have to guess.
Speed up the inheritance process.
Be absolutely clear. If nothing is ambiguous, no one will have reason to draw anything out longer than it needs to be.
Estate planning is financial planning.
Before getting into the intersection of financial planning of estate planning, it’s important to understand what happens financially when you die.
Deemed disposition — On the day you die, you will be deemed by CRA to have sold everything you own at fair market value. Currently, 50% of capital gains are taxable; proposed changes would increase the inclusion rate to two-thirds on annual gains above $250,000, but this is subject to legislative confirmation. For example, if you bought a boat for $50,000 that was worth $150,000 at the time of your death, $50,000 of that gain will be subject to tax. The same goes for everything else you own, including real estate, investments, and business interests. If your estate's value exceeds $250,000, the taxable total increases from 50% to two-thirds for everything above that amount.
Registered account taxation — Your RRSPs and RRIFs will be fully taxable upon your death, unless they are transferred to a spouse or dependent child through your will. The total value of the account will be added to your final taxable income for the year of your death. Depending on how much you’ve earned or haven’t spent, respectively, this could significantly increase your final tax bill and reduce the
amount left to your heirs.
Probate fees — Probate is the legal process of validating a will and conferring legal authority on to the executor you named to administer your estate. In Ontario, the probate fee is 1.5% of the estate value above $50,000. For example, an estate valued at $2 million would pay a probate fee of roughly $30,000. It’s your executor’s job to ensure it gets paid.
Final tax bill — Another one of your executor’s responsibilities is filing your final tax return. This return applies to half of the total created by a) gains on anything deemed disposed, (b) taxes owed on any registered accounts and (c) any income you earned that year. Actual tax payable will depend on provincial residence and marginal tax rates. So, a taxable income of $1M in the year of death could generate a tax bill in the high six figures, depending on the circumstances.
Yes, dying is expensive.
The Optimize advisory team can help ease the financial burden on your loved ones.
How to plan your estate so you pay less after death.
One great reason to make time for estate planning with the Optimize advisory team is to minimize your posthumous tax obligations. Depending on your family and financial situation, you’ll have a few options for leaving more to your heirs.
Leave assets to your spouse — Anything you bequeath to your spouse or put into a spousal trust is tax-deferred until your spouse dies or sells the asset. Your Optimize advisor can help you set this up.
Give assets away before you die — You can’t be taxed on assets that aren’t yours. The key is timing the gift correctly, which your Optimize advisor can discuss with you.
Look for exemptions — Your Optimize advisor can confirm if you qualify for any of these tax breaks, and how to leverage them in your estate planning:
✔️ Principal residence exemption — If you own your home, the gains made on its value can be exempted from taxes. If you own more than one property, you can choose the most valuable one, as long as it’s not a rental property.
✔️ Lifetime capital gains exemption —You can offset up to $1,250,000 of gains earned on shares of select Canadian companies or gains made on the value of agricultural land.
✔️ A higher adjusted cost base of your assets — Your estate is taxed on the difference between what you paid to acquire and maintain an asset (known as the adjusted cost base, or ACB), and what the asset is worth on the day of your death (known as the fair market value, or FMV). Your Optimize advisor can help you shrink the difference.
✔️ Charitable donations — Directing a portion of your estate to a registered charity will trigger a tax credit for the FMV of the gift you bequeathed. Your Optimize advisor can help you arrange these donations.
✔️ Multiple tax returns — Filing more than one could save your estate some tax. Your Optimize advisor can explain the nature of each of your four options and help you decide which ones to consider.
Smart estate planning builds a safety net instead of a crutch.
One tough question people wrestle with when starting the estate planning process is how to divide and structure the release of their assets. This can be especially difficult when leaving assets to children.
Any parent would want to ensure that their children are well-resourced. However, providing too many resources too soon can lead to complacency, bad habits, and a future different from the one you envisioned. Your Optimize advisor can guide you through estate planning options for protecting your children’s security and ambition.
Smart estate planning includes financial planning. That’s what protecting your wealth with intention looks like. Talk to an Optimize advisor about it.