Wills
Topics
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A Will is the only
opportunity you have to control what happens to your assets after your
death. Without a Will, Ontario law provides for payment of your debts and
a distribution of any remaining assets among the next of kin. However,
this "default" distribution may not be carried out in the manner you would
have preferred.
In addition to losing control of your inheritance,
many unfortunate results can occur if you die without a Will. Depending
upon your circumstances and the status of your family, these results can
include:
- Applications to the Court by various family
members and beneficiaries to obtain legal authority to deal with the
estate. This can be costly in terms of government fees and legal
expenses. It is also time-consuming and stressful for your heirs. This
is an additional burden at a time when they are already grieving and
upset.
- If you have minor children, you will have passed
up your chance to designate your choice of guardian for them. Without
this guidance, someone other than your preference, perhaps even someone
unacceptable to you, may end up as guardian. The least that can be
expected is confusion in the family, and disputes often arise over which
family member is best suited to care for your children.
- If your children are relatively young, even if you
leave a sufficient estate to provide for them until they become adults
serious problems can arise when they turn 18. Without a Will, each child
will receive his or her inheritance upon his or her 18th birthday. Most
children are still in high school at that age: how many 18 year olds who
are handed $20,000 or $100,000 will have the maturity to deal wisely
with their inheritance? How many will drop out of school and squander
the money that represents the only financial help you will ever be able
to provide? A Will can ensure that the inheritance is protected and
available solely for education and all of your child's legitimate needs
until he or she is 21, 24 or whatever age you feel is appropriate.
- If your child is married when he or she inherits,
but later becomes separated or divorced, claims for support and
equalization of property can be made under the Family Law Act by the
divorcing in-law against any value of the inherited estate that
increased during the marriage. With a Will that includes proper wording,
the original bequest can be protected from claims by your child's
divorcing spouse.
These are just a few
of the many reasons why it is important to have a Will. A properly
prepared Will protects your loved ones and their inheritances from risks,
and provides you with the peace of mind that comes from knowing you are
not leaving a legacy of trouble.
When times were
simpler, people made do with simple Wills. Now, our children and
grandchildren face tremendous challenges to their financial security, the
risk of marital breakdown, and government tax grabs. Relying upon simple
or outdated Wills these days may be leaving a time-bomb as a legacy to our
loved ones. A modern Will is an essential part of proper estate planning.
Every Will should contain provisions as follows:
Family Law
protection While all of us hope that our children will remain
happily married, Statistics Canada reports that for every 100 marriages
there are 38 separations or divorces. This unfortunate trend is
undoubtedly accelerating. Parents may not be able to protect their
children from all the consequences of marital breakdown, but they can
ensure that the inheritance received by a married child is protected. The
Ontario Family Law Act provides that if the appropriate clause is
incorporated into the parents' Will, the inheritance of a married child is
exempt from claims made by the other party upon separation or
divorce. This protection extends not only to the amount of the original
inheritance, but also to any increase in value during the marriage.
However, only Wills made or updated since 1986 can contain this vital
protection.
Executors All Wills should appoint an executor to administer
the estate after death and to carry out the terms of the Will. Serious
problems may arise if the executor named is unable or unwilling to act:
for example, if the executor has died, is in poor health, has become
mentally incompetent, or has moved to another jurisdiction. It is very
important to ensure that there is provision for a substitutionary or
back-up executor in case the primary executor cannot act on your behalf.
Special concerns arise if there are several children who might be
executors. Your lawyer can identify these potential problems and discuss
solutions.
Double probate avoidance Tragically, common disasters can befall a family. A
car accident may take the lives of both husband and wife. It is then
doubly unfortunate if the death of both results in the doubling of estate
administration costs. This occurs when all the legal and probate fees are
paid by one spouse's estate simply to put the assets into the other
spouse's estate (e.g. the husband's assets go into the wife's estate). The
legal and probate costs are then duplicated when the second
spouse's estate (e.g. the wife's estate) is administered in order to pass
the assets on to the children or other heirs. A properly drawn Will can
reduce or avoid this costly risk.
Guardians If you have children under 18, it is essential that a
guardian be named in the Will. The guardian will act as a substitute
parent in the event that both the mother and the father have died. The
age, marital status, place of residence and relationship with the children
are all critical matters to be weighed in the the selection of a guardian.
For many people, this is one of the most difficult decisions to be
resolved in their Will planning. If you fail to provide for a guardian in
the Will, you have seriously failed your minor child. If there is a
tragedy reulting in the death of both parents, the child's future will be
uncertain indeed.
Trust provisions
Most Wills provide that upon the death of the
parents, the estate goes to their children. They also usually provide that
in the event a child has predeceased the parents, the deceased child's
share is to go to the children of that child. Although this is a good
basic plan, bad results can flow from it. Consider what would happen if a
child or grandchild received the inheritance at 18. He or she may well
drop out of school and live off the money until it is gone. By that time,
it will be very difficult for the child to go back to school to complete
his or her education, and of course he or she would have acquired no job
training. Accordingly, all Wills must contain prudently drawn trust
provisions that ensure the money is available for legitimate educational
and other needs. It must also prevent uncontrolled access by the young
person before he or she has had an opportunity to learn money-management
and life skills. Careful consideration needs to be given to the timing of
the payment of capital, as well as income, directly into the hands of the
young beneficiary. Otherwise, instead of helping, your bequest may well
have the effect of hurting the child or grandchild's future. A word of
warning: many wills provide that a beneficiary must wait until 21 or some
later age to inherit the capital. Unfortunately, these Wills often leave
open a legal loophole that allows an 18 year old to inherit anyway.
Further, even enforceable restricitions on capital may be ineffective if
there is nothing in the trust provisions to prevent uncontrolled access to
the income from the capital.
Powers and
authorities
Wills must provide the executor with sufficient
flexibility and authority to deal with whatever financial and tax concerns
may arise. There must be clauses permitting borrowing by the estate,
election for tax purposes, and power to sell and postpone the sale of
assets to ensure that the estate can be effectively administered.
Should
my Will be updated?
If you already have a
Will, good for you. You have taken charge of your own affairs, and taken
steps to ensure that your family and heirs will benefit from your estate
to the greatest extent possible after your death.
However, remember that your Will is of necessity a
reflection of the circumstances of your life at the time you made it.
Changes to your family situation or finances and the introduction of new
laws can all mean that your carefully planned Will is obsolete. If this is
so, and if you do not take fresh steps to update your Will, the problems
of outdated planning will not become apparent until after you have passed
away. Then it is too late for you to make the corrections, and your heirs
will suffer the consequences.
You can best protect your heirs against the dangers
of an outdated Will by performing regular reviews of it. This does not
mean that you must see your lawyer every few months to go over your Will.
It does mean that you should read over your Will copy at least once a
year.
We tell our clients to pick a memorable day -- an
anniversary or a birthday, New Year's Eve, even April Fool's Day -- and on
that day to make a point of pulling their Will copy from the drawer or
file cabinet and reading it over. If you realize from the review that the
person you chose as an executor is dead or ill, or if your preferred
guardian is undergoing a messy divorce, or if the financial provision made
for a child or grandchild is no longer sufficient, then you should contact
your lawyer and discuss the need for changes. Below is our Will Review
Checklist. Take the time to read it through and see if any of these
conditions apply to you:
Will Review Checklist
- My Will was made before
1987.
- I have married since I made
my Will.
- I have separated or divorced
since I made my Will.
- My spouse has died since I
made my Will.
- I have had children since I
made my Will.
- My Will provides that my
children inherit at age 18 or 21.
- My children are under 18 and
no guardian is named in my Will.
- The guardian has moved since
I made my Will.
- The guardian has separated
since I made my Will.
- The guardian in my Will is
over 55.
- The guardian in my Will is
in poor health.
- The guardian has died since
I made my Will.
- I can now think of a better
guardian since I made my Will.
- The executor has moved since
I made my Will.
- The executor is over 55 and
my children are minors.
- The executor in my Will is
in poor health.
- The executor in my Will has
died.
- My children have become
adults since I made my Will.
- I have had grandchildren
since I made my Will.
If any of these
situations apply to you, then your will is in need of professional review.
It may still work properly, but to be certain, please see a lawyer without
delay. Please note: this checklist only covers some of the
common ways in which a Will can become outdated. Even if none of these
conditions applies to you, your Will may still require revision.
In addition to an informal annual review, we also
recommend to our clients that they see a lawyer for a formal review at
least once every 5 years. We then thoroughly review their family
circumstances, financial status and any new laws that affect our planning.
If we do find ways to improve the Will, and if the client agrees that it
is worth doing, then and only then will a bill be rendered for the actual
services provided.
Remember: an outdated Will may cause more
problems than having no Will at all. Reviews should be regular and
inexpensive.
How can
I obtain a Will?
If you are a resident
of Ontario, there are three ways to obtain a Will. One is to purchase a
Will kit from a book store. These are simplistic, fill-in-the-blank
documents that may or may not fulfill your expectations. Often, they cause
more problems that they resolve.
Another method is to prepare a holograph Will. This
is a document entirely in your own handwriting, and signed by you, in
which you set out your wishes. Again, in many cases your best intentions
may not be accurately expressed, or you may have overlooked some matter of
critical importance, and problems can arise.
Both the Will kits and the holograph Wills are risky.
If you make a mistake, it will not become apparent until you have passed
away when it will be far too late to correct it. Your heirs will have to
suffer the consequences of that mistake, for better or worse.
The best way to ensure that your wishes are carried
out, and that your estate passes effectively to your loved ones, is to
seek the assistance of a lawyer. A lawyer experienced in estate planning
can ensure that your wishes are correctly set out with the support
provisions necessary to ensure they be carried out properly. In addition,
your lawyer should be able to advise you on methods to avoid or mimimize
the payment of probate fees upon your estate, and to defer capital gains
taxes triggered by your death. Your lawyer can also build in protection
for your heirs against creditors, Family Law Act claims, and inheriting at
too early an age for competent money management.
A few years ago a
client came to see us to discuss his Will instructions. He was a widower
in his seventies and over the years, through hard work, careful management
and good luck, he had built up a substantial estate. He had a son and a
daughter, and he wished to leave everything to them.
He was not worried about his daughter, but he did
have concerns about his son. His son was in business, and like many
businessmen at the time, he was being seriously challenged by the
recession. The man was most distressed by the thought that after his death
his son's creditors might grab the inheritance.
We were able to recommend to him an estate planning
technique called an asset protection trust. Without getting into technical
details, it works like a faucet on the inheritance. The son does not get
the inheritance outright, but recieves as much of the income and capital
as is appropriate. However, if there is a bankruptcy, then the faucet
turns off and the money ceases to flow. Following the discharge from
bankruptcy -- when the creditors are no longer a threat -- the faucet can
again be turned on.
This approach was greatly reassuring to our client,
and he instructed us to build this proection for his son into the will.
The fear of financial reverses provides an excellent
reason to include an asset protection trust in your Will. There are also
other circumstances that might cause parents to consider this technique.
One example would be a spendthrift child, or a child
with a problem such as habitual gambling or alcoholism. Parents know that
any capital left to these children will quickly be wasted, leaving little
or nothng for the future needs of the child. This type of trust again
controls the flow of money from the inheritance, ensuring that the money
is used for beneficial purposes.
The technique can also be employed to assist disabled
children who are entitled to governmental support. Another use is to
provide valuable security for the inheritance against claims by your
child's spouse upon separation or divorce. While asset protection trust
may be right for some families, it also has its drawbacks. It is somewhat
complicated in its planning, and it can be difficult to ensure that the
trust accomplishes its purpose. There may well be additional costs in its
operation, with trustees' compensation and trust tax returns that need to
be factored into your decisions. This planning technique is not for
everyone, but if you think you have a realistic need to protect your
child's inheritance either from the child him- or herself, or from attacks
by others, then you should ask your lawyer about asset protection trusts.
You may sleep much more soundly.
Retain Family Law
protection
In 1986 the Ontario Family Law Act was passed. This
fundamentally changed many of the legal consequences of marriage. One
important aspect of the Family Law Act is the way in which it provides for
equalization of family property in the event of a separation or divorce.
Very simply, the Act states that if a married couple
separates, the value of the wife's and the husband's assets that have been
acquired or increased during the marriage are totalled. If the husband's
total exceed the wife's, then he must pay her enough so that their totals
are equal.
The rationale for this is that marriage is an
economic partnership. If the husband has been able to work full-time and
acquire assets in his name, it is probably due to the fact that the wife
has fulfilled the domestic and child-care functions. Thus, her
contribution permits him to improve his financial situation, and upon the
marriage breakdown, her value to the economics of the marriage should be
acknowledged financially.
However, the Family Law Act also provides for
exceptions to the general rule. One of the most significant of these
relates to gifts or inheritances received by one of the spouses during
marriage from a third party. The best example of this would be a child's
inheritance under his or her parents' Wills. The law recognizes that
parents will usually leave assets to their children upon death. This
bequest is not a function of the marriage relationship, and, accordingly,
on marriage breakdown the other spouse may be exempted from a claim
against it on separation.
It is very important to realize that if this
protection for children's inheritances is to be provided, the Will must
specifically include the proper wording. Of course, if the Will
predates the 1986 passage of the Family Law Act, then it cannot contain
the protection at all.
If you do inherit something from your parents, and
their Wills have the proper clause to provide protection against Family
Law Act claims, it is of course critical to ensure that this protection is
not lost. You do not lose the protection by changing the asset itself. If
you inherit cash, and invest it in a mutual fund, and later use the
proceeds to purchase a cottage, even the value of this cottage years later
is sheltered under the umbrella of the clause in the Wills. You do not
lose the protection even if you gift the asset into your spouse's name, or
transfer it into joint ownership.
The purpose of this article is not to suggest that
you refrain from sharing the benefit of an inheritance with your spouse.
However, when Statistics Canada reports that for every 100 marriages there
are 38 separation or divorces, it is naive to ignore the possibility of
marital breakdown and the financial consequences of this under the Family
Law Act. We recommend that all parents review their Wills to ensure that
the proper wording is there. We also suggest that children inheriting from
their parents discuss Family Law Act protection with an estate lawyer to
ensure that it is not inadvertently lost.
The essential
executor
The executor's
role
Too often people make the mistake of
putting the cart before the horse, and begin their Will planning with
the end result, the beneficiaries who inherit. Of course this is important, but the best starting point for Will
planning is the choice of executor.
The executor is the person you
choose to administer your estate when you are gone. No matter how cleverly the rest of your Will is structured, or
how generously you have provided for your beneficiaries, if your
executor choice is flawed, the administration of your estate is in
trouble. The funeral cannot be held, the creditors cannot be paid and
the beneficiaries cannot inherit unless and until the executor does his
or her job properly.
The list of executor responsibilities is long. Typically the first executor
task is to arrange the funeral.
Occasionally the deceased has had the foresight to provide some
guidance about funeral, but usually this is not the case. Whether or not guidance is
available, legally it is up to the executor to make the
decisions.
After the funeral, the executor must ensure that the assets of
the deceased are located and secured. This may involve changing the
locks on a house, or locating investments, or notifying financial
institutions of the death.
This can be more difficult than it sounds. Each and every year millions of
dollars default to the federal government, often because an executor did
not know the asset existed.
Payment of debts is another duty. Executors are not normally
responsible for the debts of the estate, but if they do not do their job
properly they can be personally liable to creditors. If the assets of the estate are
distributed to the beneficiaries without proper notification of
creditors, the executors may have to dig into their own pockets to
satisfy the debt. They can
then try to get reimbursed from the beneficiaries, but this can be
unlikely or impossible.
Once all the assets
are located and debts paid, the executors must then distribute the
estate in accordance with the Will directions. If the estate consists of just
money, this is relatively simple.
If the estate includes investments and real estate, then
questions of valuation may arise, and complex sales procedures may be
involved. Personal
effects, family heirlooms, jewellery and items of sentimental or special
significance are all potential time bombs for executors to defuse
fairly, without appearing selfish, biased or
heartless.
The executor's job can be
complicated and risky. Make
sure the assistance of a lawyer and other professional advisers is
obtained to avoid the many tricks and traps. The result will be a safe and
satisfactory administration, to the benefit of all.
Choosing your
executor
In planning your Will it is critical
to choose the best possible executor to navigate the minefield of estate
administration. The wrong
choice will have serious consequences for your loved
ones.
Most people look among their beneficiaries to select an
executor. This makes sense
because the beneficiaries are the ones who benefit most from a properly
administered estate. The usual first choice as to executor is
the spouse. He or she is
most intimately familiar with the finances, and the most directly
affected by the death.
Normally it is recommended the spouse act alone, so as to
maintain control within the same
generation.
However, sometimes a spouse is unable to act because of poor
health, or mental incapacity, or prior death. Accordingly it is necessary that
your Will contain provisions for a backup executor. This is true even if you are
relying upon a corporate executor.
Trust companies do not always agree to accept the position. If so, unless an alternate
choice is set out in your Will, a time consuming and relatively costly
application to the Court is required to appoint a
replacement.
The most frequent choice for backup is an adult child or
children. This is for the
same reason that the spouse was the primary choice. The children are now the most
closely connected, and if beneficiaries, the ones most directly
affected.
If the children are to be involved as backup executors, it is
generally preferable to involve more than one child, acting
together. There are several
advantages to this.
Firstly, I am convinced that in most cases two (or three) heads
are better than one, particularly considering the sometimes difficult
decisions that must be confronted.
Secondly, the often onerous executor duties can then be shared,
rather than all resting on one set of tired shoulders.
Finally, it is much less likely that family strife will arise if
more than one child is involved in the decision making. If only one of three children is
chosen to act as executor, it is human nature for the others to feel
left out. It is only a
short step from there to resentment, second guessing and
trouble.
Don't forget to ask your executor if he is she is willing to
do the job. This is not
only polite, but also necessary.
Most will say yes, but some will have reservations. Perhaps their own health
concerns hold them back, or a fear of being caught up in family
disputes. The time to find
out is now. If there is a
problem, you can react accordingly with another selection. If you do not, following your
death an unwilling executor may not do the job as well as you hoped, or
may even renounce the position entirely.
Trusts in Wills protect children
A few weeks ago a client was discussing his
will instructions with me.
Over the years, through hard work, careful management and good
luck, he had built up a substantial estate. He had a son and a daughter, and
wished to leave everything to them. As we talked, I could tell that
something was bothering him, and eventually he told
me.
He was not worried about his daughter, but did have concerns
about his son. He was in
business, and like many businessmen, was seriously challenged by the
recession. The father was
most distressed by the thought that after his death, the creditors of
his son might grab the inheritance.
I was able to recommend to him an estate planning technique
called an asset protection trust.
Without getting into technical details, it works like a faucet on
the inheritance. The son
does not get the inheritance outright, but receives as much of the
income and capital as is appropriate. However, if there is a
bankruptcy, then the faucet shuts off and the money ceases to flow. Following the discharge from
bankruptcy, when the creditors are no longer a threat, the faucet can
again be turned on.
This approach was greatly reassuring to my client, and he
instructed me to build in this protection for his son into the
will.
The fear of financial reverses provides an excellent reason to
include an asset protection trust into your will. There are also other
circumstances that might cause parents to consider this
technique.
One example would be a spendthrift child, or a child with a
habitual gambling or alcoholism problem. Parents know that any capital
left to these children may be squandered, leaving nothing for the
child's future needs. This
type of trust again controls the flow of money from the inheritance,
ensuring that it is used for beneficial
purposes.
The technique can also be employed to assist disabled children
who are entitled to governmental support. Another use is to provide
valuable security for the inheritance against claims by your child's
spouse upon separation or divorce.
While the asset protection trust may be right for some families,
it also has its drawbacks. It is somewhat complicated in its
planning, to make sure that it accomplishes its purpose. There may well be additional
costs in its operation, with trustees' compensation and trust tax
returns that should factor into the decision.
This
planning technique is not for everyone, but if you have a realistic need
to protect your child's inheritance from the child him or herself, or
from attacks by others, then you should ask your lawyer about asset
protection trusts. You may sleep much more
soundly!
Trusts in Wills save
tax
Most spouses in their Wills provide for the
surviving spouse to inherit directly as the primary heir of the
estate. The advantage is
simplicity. As in many
other areas of the increasingly complicated legal, tax and financial
world we live in, the simple solution is not always the smart
solution. A spousal trust
is an alternate way for the surviving spouse to receive the benefit of
the estate. This approach
may provide substantial advantages.
Upon the death of a spouse, his or her estate
will pass to a spousal trust.
This trust provides that all of the income and as much of the
capital as desired is paid to the surviving spouse. By the use of the spousal trust,
thousands of dollars of income tax that would otherwise go to Revenue
Canada remains in the estate for the benefit of the spouse, and in due
course the children and grandchildren. This savings continues for every
year that the surviving spouse outlives the first spouse, by taking
advantage of the graduated marginal rate of taxation of the spousal
trust.
This tax saving is because a spousal trust is
entitled to file a separate income tax return. This means a further set of
graduated marginal rate of taxation is available. It is effectively income
splitting, with the reduction in overall tax as the result. In some cases, the tax liability
on the estate income can be cut in
half.
The income tax reduction value of the spousal
trust can be extended and multiplied for children. After both parents have died,
instead of passing on the inheritance to the children directly, the
child's share can be held for him or her in a trust. Again the child has the benefit
of all of the income, and again access to the capital of his or her
inheritance. While the inheritance remains in the trust for the child,
the income is taxed at the lower marginal rate of the testamentary
trust.
In addition to the tax savings from the child's
trust, Family Law Act protection is enhanced to avoid claims by
divorcing in-laws. A child
with financial difficulties can also obtain creditor protection from
having the inheritance in the trust.
A testamentary trust for children provides other valuable
protection. Most children
can manage their own income and expenditures effectively. Few are used to coping with the
challenge of a substantial inheritance in a lump sum. Many will be overwhelmed, and
make mistakes they will later regret. Often by the time the lesson is
learned it will be too late to recover the inheritance. The trust can assist the child
by permitting the child to learn money management and investment skills
over time, instead of in a crisis.
Trusts
inheritances can provide substantial tax savings and significant
protections. Ask your
lawyer to help you decide if spousal or children's trusts are right for
your family and estate situation.
They could be the smart solution to inheritance
planning!
