Estate Planning For Non-Lawyers (How to work with estates lawyers for the benefit of your clients)

1. Estate Planning For Non-Lawyers(How to work with estates lawyers for the benefit of your clients) Cynthia J. Kett, CA, CGA, CFP Stewart & Kett Financial Advisors Inc. ckett@stewartkett.com

2. Outline • Why is estate planning important? • What can you do to help your client through the process? • Should you be an executor/trustee?

3. Why Is It Important? • Orderly succession • Assets to desired beneficiaries • Minimization of family disputes • Expeditious transition • Tax minimization • Estate liquidity • Payment of taxes • Payment of debts • Provision for spouse’s/CLP’s and dependents’ ongoing living expenses

4. What Can You Do to Help? • Estate Net Worth • Cash management • Tax planning • Retirement planning • Investing and risk management • Wills • Intestacy • Family law issues • Outright distribution • Trust will • Probate and probate fees • Powers of attorney for property and personal care

5. Estate Net Worth • Complete list of assets and liabilities • Current fair market values and costs • Assets held jointly with other individuals – joint beneficial ownership or assets held in trust? • Net asset values as of the date of marriage • Check title and beneficiary designations • Differentiate between registered and non-registered accounts • Identify liquid versus non-liquid assets • Include life insurance proceeds • Include personal assets • Quantify tax liabilities – prior years, current and contingent • Other legal liabilities • Support obligations to dependants • Contingent business liabilities (personal guarantees) • Estimate probate fees

6. Cash Management • Identify surviving dependants’ needs • Spouses/CLPs • Minor children • Disabled dependants • Quantify immediate need for cash on death to cover testamentary expenses • Quantify current cash flow available for purchase of insurance (if required/desired and client is insurable) • Consider charitable giving objectives

7. Tax Planning • Objective is to execute testator’s/ testatrix’s desired distribution at minimum tax cost • The death of a taxpayer triggers a deemed disposition of all his/her assets at fair market value • Net unrealized capital gains are subject to income tax unless a rollover applies

8. Tax Planning Strategies • Income splitting • Rollover to spouses/CLPs or spousal/CLP trusts • Family trusts • Registered proceeds trusts • Life insurance trusts • Assets left to disabled beneficiaries may disqualify them from receiving government disability benefits • Henson trusts – not valid in Alberta • Registered Disability Savings Plans (RDSP)

9. Tax Planning Strategies • Estate freezes • Consider future financial needs of the freezor, including potential emergencies • Multiple tax returns upon death of the taxpayer • Choice of non-calendar year-end for testamentary trusts • Unapplied capital losses in excess of capital gains can be deducted from any source of income in the deceased taxpayer’s terminal return or in his/her return for the immediately preceding year • Net capital losses and terminal losses realized in the first taxation year after death can be carried back to the final return • Alternative Minimum Tax (AMT) carried forward from previous years can be claimed in the terminal return • AMT does not apply in the year of death

10. Retirement Planning • Quantify resources needed to support testator’s/testatrix’s desired retirement lifestyle • Excess or shortfall? • Provides estimate of potential size of the estate • Sets parameters for estate planning strategies

11. Investing and Risk Management • Assets in excess of clients’ projected future financial needs may be invested for multiple generations • For clients • For beneficiaries • Impact on asset mix • Consider the appropriate use of insurance products and the impact on the estate plan • Life insurance, LTC insurance, critical illness

12. Wills and Will Components • Will • Legal appointment of an estate executor/trustee • Legal declaration of a person’s wishes regarding the disposition of his or her assets after death • Will components • Identification of Testator/Testatrix • Appointment of executors/executrices and trustees • Registered proceeds and/or insurance clause • Payment of debts and funeral expenses • Specific bequests • Distribution of residue • Primary, secondary, giftover • Family law provisions • Custody of minor children • The appointment of custodian is only valid for a limited period following the date of death as set out in the relevant statute • The permanent appointment will be determined by the court, but the client’s recommendation will play a significant role in that determination (specify reasons for the choice)

13. More Will Components • Residue trust provisions • Hotchpotch clause • Acknowledge disproportionate gifts made during lifetime • Spousal trust • Other income-splitting trusts • Henson trust • Powers of trustees • To accumulate and distribute income • To encroach on capital • To make payments to minors • To employ agents • To deal with real property (sell, lease, mortgage) • To distribute in specie • To make income tax elections • To borrow or to lend • To act as the testator/testatrix could act with respect to business interests and shareholdings • To deal with claims against the estate • To settle trusts on other trustees • Clauses protecting the trustees (limiting liability) • Executor’s compensation clause • Burial arrangements • Legally the wishes are binding, but intent should be communicated to your executors in advance • Memorandum of personal effects • Not binding on trustees unless signed and dated prior to the will and incorporated by reference in the will

14. Intestacy • Intestacy • If an individual dies intestate (without a valid will), provincial legislation dictates how his or her property will be distributed • Preferential share • The surviving spouse of the deceased receives a preferential share (varies by jurisdiction) • Distributive shares • If the value of the estate is larger than the preferential share, the remainder of the estate is divided between the spouse and the surviving children or grandchildren in the form of distributive shares

15. Other Intestacy Issues • The distribution of intestate estate by legislation may not reflect your client’s wishes and may not result in what is best for his/her estate or beneficiaries • If there are no trustees appointed by way of a will, the court will appoint one or more for the estate • Generally look to intestate beneficiaries in the order of their interest in the estate • The appointed trustee(s) will not have the broad powers that the client might otherwise wish them to have • The trustee may have to post a bond unless the requirement is waived by the court • May be difficult to obtain • A bond must also be posted by non-resident trustees

16. Family Law Act, R.S.O. 1990 • Applies in the case of death or marriage breakdown • Applies to common law spouses only with regard to support provisions • Major provisions of the Family Law Act (FLA) • Spouses have equal entitlement to possession of the Matrimonial Home(s) • Neither spouse may sell, mortgage, lease or encumber the Matrimonial Home without the other spouse’s consent • Each spouse’s Net Family Property (NFP) is calculated as at the Valuation Date • The spouse with the lower NFP is entitled to an equalizing payment equal to one-half the difference between his/her NFP and that of the other spouse • NFP equals the net value of property owned on the date of separation, divorce or the day before the date of death, less the net value of property owned on the date of marriage, other than property excluded by the FLA

17. Outright Distribution versus Trust Will • Two basic alternatives for disposition • Outright distribution • All assets are left outright to beneficiaries • Beneficiaries have complete responsibility for administration and investment of funds once they receive them • Subsequent income is taxed in the hands of the beneficiaries • Trust will • Assets are left to one or more trustees who are charged with the responsibility of administering and investing funds • Upon the death of the primary beneficiary, estate capital is passed onto the residual beneficiaries • Income retained in a testamentary trust is subject to marginal personal tax rates • Maximum accumulation of income is 21 years from the date of the Testator’s death (The Accumulations Act - Ontario) • Limitation on the length of the trust: life in being at the time of death + 21 years = distribution (ThePerpetuities Act - Ontario) • Deemed disposition every 21 years unless transferred to beneficiaries at tax cost (The Income Tax Act)

18. Outright Distribution • Advantages • Simplicity • Freedom from ongoing administration costs • If the spouse is the beneficiary, deemed capital gains can be deferred until the death of the surviving spouse • If the spouse and others are beneficiaries, trustees may have some flexibility with respect to the deemed disposition of estate assets • Capital gains can be triggered to utilize the deceased’s unrealized capital losses or his/her remaining capital gains deduction (small business shares or farm property) • Disadvantages • No control over estate assets after they have been distributed to beneficiaries • Beneficiaries may lack the ability to manage the inherited capital • Less flexibility than trusts with respect to income splitting

19. Testamentary Trusts • Trusts categorized by intended beneficiaries • Spousal trusts • Family trusts • Spendthrift trusts • Henson trusts • Reasons to use trusts • Control of assets • Provision of ongoing asset administration for beneficiaries (minors, disabled beneficiaries, financially uninformed beneficiaries, multiple beneficiaries with potentially conflicting objectives) • Minimization of taxation • Tax deferral • Income splitting • Protection from creditors of the beneficiaries

20. Deemed Disposition Upon Transfer to Trusts • Deemed disposition upon transfer • No deemed disposition if it’s a rollover trust • Spousal/CLP trusts • Alter ego trusts • Joint partner trusts

21. Spousal/CLP trusts • The spouse must be the only income beneficiary • Until his/her death, no one other than the spouse may be entitled to capital distributions out of the trust • Rollover • No deemed disposition upon transfer • Capital gain taxes are deferred until the death of the spouse

22. Probate & Probate Fees • What is probate? • Probate is the process whereby a provincial court • Confirms the authority of the personal representative or administrator, in the case of intestacy, to administer the estate of the deceased • Certifies the validity of a will (if one exists) • Why is probate needed? • Probate is generally required before third parties (banks, mutual fund companies, and investment dealers, for example) will allow the executor to access and administer the assets of the estate • What are probate fees? • Estate fees charged by the courts to probate a will or to appoint an administrator

23. Probate & Probate Fees • In some Canadian jurisdictions, the probate fees are reasonable (Alberta, for example, has a maximum of $400) • Probate fees in Ontario are significantly higher • The fees are charged on the total value of the assets of the estate at the time of death, less any mortgages on real estate • The rate in Ontario is rounded up to the nearest $1,000 • 0.5% on the first $50,000 • 1.5% on the remainder • How to avoid and minimize probate fees • The basic rule • Non-estate assets are not subject to probate fees

24. Avoid and Minimize Probate Fees • Gift Assets Before Death • These assets will not pass through the estate, thus avoiding probate fees • However, income tax and other consequences should be considered: • Deemed disposition upon gifting • Gift tax-friendly assets like cash or GICs, since these won't trigger a capital gain • Gift investments that have not appreciated significantly in value since purchased • Gift assets that have appreciated in value over a number of years to avoid a tax hit all in one year • Income attribution • Gift assets to children age 18 or older to avoid income attribution • The gift is irrevocable and control of the asset will be lost • The asset will become available to creditors of the beneficiary • US gift tax may be applicable (US citizen or US assets)

25. Avoid and Minimize Probate Fees • Hold assets in joint tenancy • Assets held in joint tenancy will automatically pass to the surviving co-tenant and will not form part of the estate, thus avoiding probate fees • Tax and other considerations: • Deemed disposition upon transfer from sole ownership to joint tenancy • Income attribution • Control of the asset is shared • The asset becomes available to creditors of the other owners on title • If there is a question of the transferor’s intent, the asset may be assumed to be transferred in trust or treated as held as tenants in common • Confirm intent using a Declaration of Trust or by confirming a gift by legal document • May be challenged by other estate beneficiaries if the transfer results in an unequal distribution of estate assets • Two Supreme Court of Canada decisions – May 3, 2007 • Pecore v. Pecore • Found in favour of the daughter; dismissed appeal by daughter’s ex-husband • Madsen Estate v. Saylor • Found in favour of siblings; dismissed appeal by daughter who was joint account holder

26. Avoid and Minimize Probate Fees • Name beneficiaries directly for registered plans and life insurance • Establish multiple wills • Primary – everything that requires probate • Secondary – “Only these items” such as personal effects; shares of private corporations/bare trustee corporations; an interest in an inter vivos trust controlled by the family; assets held in trust in joint name with the deceased • Use of inter vivos trusts • Alter ego trusts • Joint partner trusts • Use of Alberta trusts

27. Alter Ego Trusts & Joint Partner Trusts • Created after 1999 • The transferor is at least age 65 (partner can be <65 years old) • Under the terms of the trust: • The transferor, or the transferor and his/her partner, are entitled to receive all of the income derived from the trust property during his/her lifetime, or during the period ending on the death of the survivor of the two of them • During the transferor’s lifetime, or the trust period, no person other than the transferor, or the transferor and his/her partner, is entitled to receive or otherwise obtain the use of any income or capital of the trust • Advantages • Privacy • Less likely to be challenged than a will • Disadvantages • Income retained in the trust will be taxed at the highest marginal tax rates • No testamentary trusts for income splitting

28. Powers of Attorney • For property • The client designates someone to act on his/her behalf in his/her absence, inability or incapacity • The attorney will be able to do anything your client can lawfully do with respect to his/her financial affairs except make a will and make testamentary disposition decisions (such as beneficiary designations) • As such, the document is very powerful and should be safeguarded • Consider specifying that the attorney can designate a beneficiary for a RRIF if the beneficiary is consistent with the one for its predecessor RRSP • For personal care • The client designates someone to make personal care decisions for him/her if he/she becomes incapable of doing so • Types of decisions might include • Health care (including authority to refuse or consent to medical treatment) • Shelter • Nutrition • Clothing • Safety • Hygiene

29. Powers of Attorney • Considerations regarding your client’s choice of attorney include: • His/her degree of trust in the person • The attorney’s ability to understand all aspects of the client’s financial affairs and to manage the client’s assets (for property) or to understand the client’s philosophy of life (for personal care) • The proximity of the attorney’s residence to the client’s • His/her willingness to act as the client’s attorney • If joint attorneys are appointed, ensure that they are compatible • The naming of an alternate attorney is strongly recommended • A power of attorney may be revoked at any time while the client has capacity • Someone can apply to the court to be appointed guardian in place of the named attorney • A power of attorney becomes null and void upon the client’s death

30. Should You Be an Executor/Trustee? • Considerations • Conflict of interest • Potential liability • To creditors • To CRA if all assets distributed without Clearance Certificate • To beneficiaries • To spouse under family law if assets are distributed too soon • Duties • Compensation

31. Duties of Executor/Trustee • Duties include: • Carrying out directions specified in the will • Acting personally except where authorized • Can delegate administrative functions • Can delegate decision-making in certain circumstances • Written agreement with the party to whom delegated • Retain responsibility for the results • Acting honestly and with the level of skill and prudence expected of a reasonable person of business administering his or her own affairs • Acting in the best interests of the beneficiaries • Maintaining an even hand with regard to beneficiaries • Exercising discretion without extraneous bias • Maintaining accounts regarding the estate/trust administration and reporting to beneficiaries • Consult an estates lawyer, who will be paid for by the estate, to ensure that you are aware of all the requirements of your role as executor/trustee

32. Compensation • No pre-determined formula • As agreed with the testator/testatrix or the beneficiaries • Otherwise, guided by the provisions of the applicable Trustee Act • S. 61(1) of Ontario’s Trustee Act reads: • “A trustee, guardian or personal representative shall be entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice”

33. Ontario Compensation Guideline • The sum of: • 2 ½% of capital receipts and disbursements; • 2 ½% of revenue receipts and disbursements; • 2/5%/year of the value of assets under administration where trusts are involved • On a $1 million dollar estate with assets held in trust and yielding a 5% rate of return, the approximate compensation under this formula would be: • $50,000 (once all assets have been distributed) • $2,500, annually • $4,000 annually • Compensation is divided equally amongst the executors/trustees unless you agree to a different allocation • The cost of preparing and passing accounts is borne by the executors/trustees (courts have been awarding reasonable costs out of the estate)

34. Alternate Compensation Arrangements • Consider whether to negotiate payment based on hours spent x your professional billing rate (ideally at the drafting stage of the will, when you can discuss the matter with your client) • You may ask that the will specify that you are only to perform the duties within your capacity as a professional • If you choose not to act (whether based on compensation or for other reasons), do so at the start • Moral obligation to act if you had previously agreed to do so • Once you begin to act, you may be restricted in your ability to resign your duties – especially if you’re the sole executor/trustee • Instead of acting as executor/trustee, you could choose to be an advisor to the estate

35. Summary • You have the background and expertise to guide your clients through the estate planning process • Depending on your business focus, you may be able to provide “expert” advice in certain areas • You know their financial and family circumstances • You have gained their trust during your professional relationship with them • Therefore, you can help to make them more comfortable with: • Their mortality • The legal process • Their fears regarding the well-being of dependent survivors • You may gain significant personal satisfaction by helping your clients with their estate plans • Assets to desired beneficiaries in an expeditious and cost-effective manner • Estate planning may provide profitable business opportunities for you