Estate Planning in Canada: A Checklist

While most of us do not like to consider death, the costs of not planning for it can be high. Whether you have specific instructions for family heirlooms, want to prevent unnecessary stress for loved ones, or save money on probate and taxes, estate planning is for you. Actually, everyone can benefit from it, and the process of estate planning in Canada is not as difficult as you may think. 

This guide will cover some of your estate questions and provide a checklist for creating an estate plan and preserving your wealth. Getting ahead of your estate planning needs will ensure a smooth transition for your heirs, while putting it off may lead to unintended consequences in an untimely or unexpected passing. 

What is estate planning?

For many, the first thing that comes to mind about estate planning is creating a will. While this is an important part, it is only one part. In reality, proper estate planning in Canada is so much more. 

Estate planning means creating a plan to protect your assets upon your passing and distributing them according to your wishes. The many components include a will, tax planning, life insurance, funeral preparation, charitable giving, beneficiary designation, and arrangements for minors. It can also involve arranging for end-of-life care and the possibility of incapacitation through the use of a power of attorney document. 

When it comes to the estate planning process, consider these questions:

• How do I want my legacy to look?
• How should my assets be distributed to my beneficiaries?
• Do I want to leave an inheritance?
• Are there minor children to consider?
• Does insurance make sense to help cover the tax costs associated with my estate?
• Should I consider an estate freeze to reduce the taxes owed upon my passing?
• How might my family benefit from a trust? 
• Should I consider gifting during my life instead of through my estate?
• How does charitable gifting fit into my plans?
• Are there other ways to minimize the tax that my estate will owe?
• Who should I appoint as my executor? Could I benefit from selecting a corporate executor?
• Is there someone I trust who can act as my power of attorney?

Estate planning for high net worth individuals

For high net worth individuals, estate planning becomes even more critical. Those with substantial assets will have more considerations for intergenerational wealth planning and more opportunities to implement complex estate planning tactics. A few strategies that may exclusively benefit high net worth and ultra-high net worth individuals are estate freezes, family trusts, and charitable foundations. There are also specific life insurance strategies that may be advantageous for high net worth families.

Many wealthy individuals will have more complicated estate plans and benefit considerably from appointing a corporate executor. A corporate executor is a professional firm that provides executor services in exchange for a fee. By choosing a corporate executor, you can ensure any complexities in your estate are looked after by a firm with the knowledge and experience necessary. It is also beneficial because the company can look after the disbursement of your estate, leaving your loved ones with the time and space to grieve.

Those high net worth individuals who are business owners will also need to consider what happens to their company upon their passing. As part of estate planning in Canada for business owners, consider succession planning, corporate insurance, and key-person insurance. 

Related Reading: Wealth Management and Independent Advice

What is the difference between a will and an estate plan?

A will is a legal document that details how to distribute your possessions after you pass away. It includes the appointment of an executor — the person responsible for the administration of the estate and splitting up the assets amongst the designated beneficiaries. 

A will is part of an estate plan, though not the entire estate plan. An estate plan consists of several components and covers the will, inheritance planning, tax minimization strategies, end-of-life care, and post-mortem wishes. 

Do you need a lawyer for estate planning?

Just one of the many advantages of hiring a lawyer for estate planning in Canada is that you have access to a multitude of legal knowledge and strategies. The key to benefiting the most is not just hiring any lawyer but an estate planning attorney. An estate planning lawyer is highly trained and specializes in estates. These lawyers can suggest strategies to safeguard your property, protect your loved ones upon your passing, and even minimize the taxes due on the wealth transfer. 

Canadians with dual citizenship can also turn to an attorney for cross-border estate planning advice. There are added complexities for dual citizens and additional tax planning issues, so it is especially advisable in this case to hire professionals. 

Can I do estate planning myself?

While it can be tempting to do estate planning yourself, it is not ideal. A proper estate plan is best left to professionals, especially if you are a high net worth individual with a complex estate. Often hiring an estate planning lawyer can save you time and ultimately money. It can also help avoid some of the hassles associated with the lengthy probate process. 

Bypassing professional estate planning can leave your loved ones with an unnecessary burden upon your passing. As with anything this important, it is often best to consult with a professional.

How to find a good estate planning lawyer

There are several ways of finding a good lawyer in Canada, but one of the best resources is to get a referral from a close friend or a trusted advisor. If you can get a recommendation from a friend or family member, you can be sure they felt the lawyer was trustworthy and knowledgeable. 

Wealth advisors also work closely with estate planning lawyers as part of their holistic approach to money management. They should be able to provide you with the contact information of a lawyer who has experience working with clients with similar needs. 

Related Reading: Custodians in Canada: Their Role and Importance in Wealth Management

The cost of estate planning

The price of an estate plan is highly dependent on the intricacy of your financial situation. Ultra-high net worth individuals will often benefit from more extensive planning, which will also have a higher cost. Those who have fewer and more traditional assets may find they need less tax planning and specialized estate preparations. In turn, this will reduce the cost of the plan.

In addition to the fees charged by lawyers, financial planners, and accountants, your estate plan may also require you to cover the cost of setting up a trust, a foundation, or even implement an estate freeze. Regardless of the exact price, proper estate planning can help preserve your assets and minimize costs down the road. The saying “you get what you pay for” rings true in this case.

What is a trust agreement in estate planning?

A trust agreement is a legal document that outlines the terms of a trust, its beneficiaries, and the trustees. Assets can be transferred to the trust and are no longer your individual property. Instead, the assets are held “in trust” for the beneficiary by an appointed trustee who is responsible for administration.

Types of trusts

There are two major categories of trusts to consider when estate planning in Canada: a living trust and a testamentary trust.

A living trust is created before your passing and is effective during your lifetime. If the entity is revocable, you can change the trust agreement at any time. It is also possible to create an irrevocable trust where you can not update the terms of the trust after its creation.

On the other hand, a testamentary trust arises out of your will. The creation of the entity will only take place upon your passing.

A few of the types of trusts in Canada are as follows:

• Discretionary trusts – Trustees have the power to decide how much beneficiaries get from a trust and when they get it.
• Fixed interest trusts – Trustees do not have discretionary powers over asset distribution.
• Alter ego trusts
• Joint partner trusts – Both alter ego and joint partner trusts are set up while you’re alive, i.e. inter vivos. More on these two trusts here.
• Testamentary spousal trusts – Set up for the benefit of a surviving spouse or commonlaw partner.
• Family trusts – Often a part of business succession, a family trust holds and protects assets for the trust’s beneficiaries.
• Insurance trusts – Allows policy owners to dictate the timing and use of insurance proceeds after the insured person dies.

It is important to note that the exact details on the taxation of a trust will depend on the type of entity it is. 

Is it better to have a will or a trust?

One of the benefits of a trust is that assets held in the entity are not part of the estate and therefore do not require probate. Instead, the assets are stored for the beneficiary of the trust directly. This is true for the assets in the trust only. 

A will covers many other areas of the estate and is necessary for proper estate planning.

Related Reading: Trust Return Guide

Estate taxes in Canada

Canadians are used to filing an annual tax return and paying taxes to the Canada Revenue Agency (CRA). Taxation at death, however, is different.

The CRA calculates taxes assuming a deemed disposition on the date of death. This means that in addition to taxing any income earned by your estate, CRA requires you to pay capital gains tax as well. Your executor will file the final tax return for your estate upon your passing. 

In Canada, there is no inheritance tax. Your estate is required to pay tax, but your beneficiaries will not. For more information on how inheritance works in Canada, click here. Of course, planning ahead is the best way to minimize the taxes that your estate will pay if you pass away. 

How do I avoid paying estate tax?

There is a saying that only two things are certain in life: death and taxes. While we agree with this statement, there are ways to minimize the amount of taxes your estate will need to pay. Working with a professional tax advisor, accountant, or financial planner can help put these strategies in place in the most efficient manner. 

Ultimately, there is no way of avoiding paying taxes altogether, though you can shift the timing of taxation in some cases, ensuring your estate pays less in tax. Gifting early is also an option to avoid taxation, however, make sure you consult with your financial advisor before doing so. 

How should I store estate planning documents?

Your estate planning documents will include personal financial information. As such, they should be kept in a secure location, such as a locked filing cabinet or a home safe. You might be inclined to put these documents in a safety deposit box, but that could be risky. There’s a chance your executor and/or family could run into problems accessing the box, leading to delays and, honestly, some headaches. Definitely keep copies of your estate planning documents in a safety deposit box, but keep originals securely at home or with a lawyer or trust company.

Regardless of what you choose, be sure that your executor and your immediate family members know how to access the information should anything happen to you. It should be emphasized: ensure these documents are in a safe place that cannot be easily accessed as they are crucial documents. 

What happens if you die without an estate plan in Canada?

If someone in Canada dies without a will, they have passed away intestate. Even without a will, the deceased’s assets still pass to their beneficiaries. The exact rules on who can claim the estate, however, depend on provincial law. The precise details of who can claim ownership of the estate will depend on the deceased’s province of residence at their passing. 

Dying intestate is different than dying without an estate plan, though. Without an estate plan, the post-mortem process can be more challenging for family and close friends. They will need to make decisions regarding funeral arrangements, care for minor children, and charitable gifting. Passing away without an estate plan may also mean paying more estate taxes than necessary. For high net worth individuals, the burden can be even greater as many tax minimization strategies need to be put into place while the individual is still alive.

What are the legal documents needed for estate planning?

You will need to complete several legal documents throughout the estate planning process. These documents are a will, a power of attorney, and trust agreements, where applicable. Each is subject to legislation based on your province of residence.

A power of attorney (POA) document grants authority to another person or persons while you are still alive. The two sections of a POA are a financial POA and a POA for health care. 

The POA for finances and property allows the appointed attorney to take over your day-to-day decisions and personal property. Depending on the specifics of the document, it may be active immediately or only when you cannot manage your affairs anymore. An enduring POA grants authority through mental incapacitation. 

A POA for health care, often called a health care directive, covers all medical-related decisions. This includes your preferences for end-of-life care, organ donation, etc., and appoints an individual to fulfill your wishes. The document allows the designated person to make medical decisions on your behalf.

How to create an estate plan in Canada: a checklist

The exact process and documents you will need to create an estate plan vary depending on your situation. Below is an estate planning checklist to ensure that you cover all aspects during your estate planning:

• Meet with the key individuals involved in your estate plan, including:
  • Executor (individual or corporate executor)
  • Financial POA (individual or corporate POA)
  • POA for health care
  • Estate planning lawyer
  • Accountant or tax-planning specialist
  • Financial planner
  • Wealth management advisor
  • Insurance specialist
  • Business succession advisor (where applicable)
  • Legal guardian for minor children (where applicable)
• Create and/or update the following legal documents:
  • Will 
  • Power of attorney
  • Health care directive 
• Ensure beneficiary designation forms are up-to-date on all your registered investment accounts
• Review your life insurance needs
• Consider cross-border estate planning issues and meet with an accountant
• Consider if any other estate planning strategies are right for you, including:
  • Estate freeze
  • Family foundation
  • Trust 
  • Charitable giving
  • Gifting 
• Confirm survivorship rules on your pensions
• Discuss your preferences for funeral arrangements with your family
• Create a list of all relevant financial information and let your loved ones know where to find your estate plan upon your passing. Include a copy of your insurance policies, investment accounts, legal documents, digital assets/cryptocurrency information, real estate holdings, pension documents, etc. Be sure to store this information in a secure spot.  

Takeaway

Estate planning in Canada is so much more than just creating a will. Creating an estate plan can ease the burden on your loved ones and ensure that your assets pass in a tax-efficient manner to the intended beneficiaries. That is a goal of the vast majority of the population, but many people will put off estate planning because they think they have time and it is not urgent. 

Once you have created an estate plan, be sure to revisit it regularly, including when you have a major life change. Not only can your financial situation change over time, but any updates to provincial legislation may impact your plan as well. Spending your free time and money on estate planning may not be your first choice. Ultimately, though, it will be worth it.

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