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Tuesday, August 30, 2011

What's in an estate anyway?

A reader has asked another good question, this time about what is in an estate, and how the estates of a married couple work together. Here's the question:

"Just how is an 'estate' is defined? Is it the assets and liabilities held by a couple, or by an individual? When the first of my parents passes away, will it be necessary to 'execute' the estate, or will this only happen when the second of them is gone? Their only property (their home) is of course held by the two of them together. It seems a bit ridiculous to have to go through the entire process of executing an estate twice."
Each individual has an estate, which holds all of the assets owned by that individual, as well as his or her liabilities. Sometimes, though, ownership depends on other people, so the individuals can't be completely separated. You have to understand how assets are owned and the effect of the type of ownership.

What does one half of a couple actually own? Let's say the husband jointly owns the home with his wife. He has a life insurance policy that names her, and a RRIF that names her. His bank account is joint with hers. Yes, he owns those assets during his lifetime, but none of them would be included in his estate if his wife were alive. The house and bank account would go to her by right of survivorship, so are not part of the estate. His RRIF and life insurance policy have a direct beneficiary named so they don't form part of the estate either.

How different the situation would be if the same man had the same assets but his wife had already passed away. With no joint owner any more, the house and the bank account are in his name only and are now part of his estate. With no surviving named beneficiary, his RRIF and life insurance would pay to his estate.

Most couples will intentionally set up their financial arrangements to ensure that when the first one of them dies, the other automatically receives assets either by joint ownership or by beneficiary designation. It's significantly more complicated in a blended family of course. If things are properly set up, it's not necessary to deal with the estate when the first one of the couple dies. In fact, there usually is no estate. Only on the death of the second half of the couple does it become necessary to deal with an "estate".

To achieve this proper set-up, the couple must have wills and powers of attorney. They must consult a financial planner, banker, or estate planning lawyer to ensure that they've properly named their beneficiaries on RRSPs, RRIFs, life insurance policies etc. All aspects of their finances must work together.

1 comment:

  1. Thank you for answering this way. As far as I can tell, based on what you have outlined here, we seem to have everything in place for a basically smooth 'transition' ...

    ReplyDelete

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