Common Estate Planning Errors
Every so often we are reminded of the importance of proper estate planning by the consequences of improper planning. Sometimes assets are left to beneficiaries that were not intended because documents were not properly updated. Othertimes, estates experience liquidity issues due to taxes that must be paid by the estate.
Have you updated your estate plan lately? If you are in the process of reviewing or updating your estate plan, here are some common errors to avoid:
Forgetting what comes before the will — The importance of a properly drafted will is paramount, but individuals often forget about planning for situations that may occur before a will is invoked.
Having updated powers of attorney, or financial and health directives (requirements depend on province of residence), is important. In situations in which an individual may become incapacitated, these documents can provide valuable protection when important decisions need to be made.
Not keeping up-to-date — As we discuss on page 3 of this newsletter, it is important to keep your beneficiaries updated following life events such as marriage, divorce, birth or death. Updates to an estate plan may also be necessary after major purchases/sales of assets. For business owners, it may be necessary when there are anticipated changes in the succession of the company.
Underestimating the requirements of administering an estate — When choosing an estate trustee/executor (or liquidator in Quebec), the individual’s personal attributes, ability to carry out the tasks required and relationship with you are all important. However, it is equally important that the person understand the time commitment required.
Administering an estate can often take over a year, or even longer if there are tax issues or other complications. Many individuals are unaware of the required commitment of being an estate trustee/executor/liquidator. In some circumstances, it may make sense to name a professional for that role.
Overlooking liquidity issues — The tax consequences of passing on assets may be overlooked resulting in liquidity issues for the estate. A common example is the transfer of family property, such as a cottage or cabin. If property is not deemed a principal residence, it may be considered a capital asset and may trigger a capital gains tax liability at death.
There may be ways to overcome liquidity issues. Life insurance may be one way to help avoid potential liquidity problems, by providing a means to pay off liabilities such as taxes owing on an estate.
Remembering the “who” but forgetting the “how” — How you structure your estate plan can make a difference in the amount of assets passed on to heirs. There are a variety of estate planning tools that can be used to your advantage. The use of a holding company, family trust or insurance, as examples, may be helpful in minimizing the amount of your estate that may be required to be paid in the form of taxes to the government.
Not anticipating the U.S. estate tax — By simply holding U.S. equities in your investment portfolio, you may be exposed to the U.S. estate tax. If you own U.S. situs assets, which include U.S. real estate or shares of U.S. listed corporations, that are in excess of US$60,000 and if the total value of worldwide assets in your estate (including your Canadian assets) exceeds US$5.25M, you may be subject to the U.S. estate tax. Proper planning can minimize this potential risk.
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Let us know if we can put you in touch with an estate planning specialist who can assist with this or provide other estate planning support as it relates to your personal situation.