Rule one of estate planning—don’t wait

Sometimes the hardest part about getting in shape isn’t the actual workout—it’s mustering the will to go to the gym in the first place. The solution? Stop procrastinating.

The same rule applies when it comes to planning your estate. Putting off this vital part of your financial planning can have major consequences for your loved ones if you wait until it’s too late, so the sooner you get on top of it, the better.

That said, there are several options available when it comes to passing on your assets or otherwise planning your estate, and it’s important to know the basics before making any major, perhaps irrevocable decisions.

Wills

There are some cases where a will isn’t necessary—for example, if you have little in the way of assets to pass on and don’t particularly care who in your family will inherit it—but for most of us, the first step in estate planning is creating a will. The advantage of a will is that it can spell out exactly what you would like to happen with your estate in the event of your death, including complications arising from having young children, children from multiple relationships, shared business assets or any other complicating factors.

Creating a will starts with sitting down with an estate lawyer or, for simple wills, an experienced notary public. Do not try to create a will on your own. The cost of hiring an experienced professional is relatively little compared to the potential benefit, as a professional can guide you and address potential issues—including ones you’d never even thought of.

When you create your will, you should name an executor, your beneficiaries and a guardian for any minor children. It’s also a good idea to name alternates in case you outlive your first choices or they are either unable or unwilling to act. Without back-ups, these duties will be decided by the courts, who could leave it up to a public guardian, public trustee or someone you did not intend to interpret your will. If you’re unsure about who to entrust with these important roles, you could name a corporate representative.

Trusts

A trust can come into effect either while you’re alive or upon your death, and creating one is another good way of ensuring that assets from your estate are passed on how, when and to whom you want them to be. The trust is a separate legal entity from you, and any assets transferred to the trust operate independently, which may save probate fees (in BC, an estate tax of up to 1.4 percent) or significant income tax for your beneficiary or even your estate. A trustee—this could be a family member, a friend, a corporate trustee, or joint trustees—administers the trust in the manner that you spell out, for the benefit of the trust’s named beneficiaries.

Beyond being a smooth way of transferring assets, trusts also have the advantage of aligning to other needs. For example, if you have a dependent adult child you want to provide for after your death, you could create a trust to supplement their income while preserving access to valuable government assistance. A trust could also provide for a favourite charitable organization. However you want to assign your assets, a trust can be a good option.

Joint ownership

Another way to pass on assets is to join them with their intended recipients while you’re still alive. When you die, goes the plan, they get full possession, thus avoiding probate fees and a whole lot of headache.

While this can work in some cases, it also has its drawbacks, some of them major.

One problem is that while you do avoid some probate fees, you may have to pay capital gains tax immediately. Plus you sacrifice control over your asset, and some future tax opportunities that could far exceed the probate fees.

Joint ownership can also fall short with complicated estates. For example, what if you create joint ownership with three of your adult children, and two of them predecease you? The third could end up receiving sole ownership of the assets, leaving the families of the other two out in the cold, contrary to your wishes.

Another problem is opening up other asset risks. Let’s say, for example, that the person you’ve shared your house ownership with gets sued. Now your jointly owned house can be at risk.

Finally, there is the issue of trust. With joint ownership, you’re vulnerable if the other party decides to use the joint assets in a way you disagree with. In a worst-case scenario, they could even drain your joint accounts entirely. This isn’t a pleasant thing to think about, but it does happen, and you’d be wise to consider carefully before creating joint ownership.

Insurance contracts

An easier way to avoid probate fees is to make sure your insurance contracts name your preferred recipients as beneficiaries. This allows you to pass on the death benefit with a minimum of hassle. Best of all, the contract remains a private document between you, the insurance company and the recipient, letting you distribute your estate as you see fit without inviting public scrutiny.

Power of attorney and representation agreements

When you create your will, it’s also a good idea to designate someone power of attorney in the event that you're incapacitated to the point where you can no longer manage your business or property. The person (or persons) you select will be responsible for managing your finances in a manner that he or she believes to be in your best interests, so it’s vital to choose someone who is both personally trustworthy as well as financially competent. As with executors or trustees, you can also choose a corporate power of attorney.

Through a representation agreement, you may also designate someone to make decisions about your health care, including plans for end of life, in the event that you’re physically or mentally unable to do so yourself. Another option is to create a health directive that states in writing what you would like to happen when you’re no longer able to communicate your wishes, sparing your loved ones from potentially difficult choices.