Why you should make estate planning a priority in 2013

Estate planning isn't really about money. Many people jokingly tell me that they haven't done any estate planning because they don't have much of an estate. I understand that not everyone has tons of assets, but what is being missed is that your marriage or divorce, your joint account with your kids, and your insurance policies are all big parts of your estate plan. When you pass away, what assets you do own are going to change hands, and perhaps not in the way you anticipate or would like.

The National Post has a recent article that discusses some of these issues and the way they impact our lives. It makes a lot of sense, and applies to each and every one of us who has a spouse, divorce, children, life insurance policy, RRSP, TFSA... you get the point.  Click here to read the article.

Canada Revenue Agency - what to do when someone has died

Here is an extremely useful link for executors from Canada Revenue Agency. It's called "What to do when someone has died" and contains information about which tax returns need to be filed. It also contains information and forms for dealing with RRSPs and RRIFs of a decceased person. Personally, I would never try to handle an estate without consulting an accountant, but I like to be as informed and prepared as possible to make the most of my consultation. This page is also great for just getting that overview of what your job as executor is going to take. Click here to visit the page. I'll add it to my "interesting links" section so that executors can find the link in the future.

RRSP/RRIF spousal transfers on death - not so automatic

Warning! This post talks about tax. I realize that not everyone finds tax information as interesting as I do, but it's important stuff for all of us.

I'm attaching a link to a blog post by accountant Mark Goodfield, better known as The Blunt Bean Counter. In this post he talks about the transfer of an RRSP or a RRIF from a deceased spouse to a surviving spouse. You might be surprised to find that a spouse can choose simply to take the funds outright rather than receive the funds into his or her own RRSP or RRIF. If that happens, the estate may end up paying the tax.

Click here to read the article, which is very readable and contains tons of good information.

Not knowing this simple tax rule causes problems in estates

I recently dealt with a question from a reader about paying "his portion" of the taxes on a RRIF, which he and another person are going to receive as they are the named beneficiaries of the RRIF. This is something that I hear very frequently, as it's commonly thought that a person receiving an asset must be the person who pays the tax on it. Unfortunately, this is not correct and it causes many problems and disputes in estates where executors don't seek professional guidance.

Let's say that the RRIF in question is worth $100,000, or $50,000 per beneficiary. Let's also say that the tax owing on the RRIF is going to be $30,000, or $15,000 per beneficiary. Plenty of executors (and beneficiaries for that matter) believe that this means instead of getting $50,000 each, the two beneficiaries are going to receive $35,000 each (50,000 - 15,000 = 35,000). This, however, is not the way the tax is paid.

What happens in reality is that each beneficiary receives his or her full $50,000. The $30,000 tax comes out of the estate itself. This means that the tax on the RRIF is paid from the bank accounts, investments, house or other assets owned by the deceased, even if the estate is being left to other people.

This is because the tax on the RRIF is a debt owed by the person who passed away. The RRIF itself is no smaller on the date of death, and so the whole thing must be given to the person(s) named. The law says that debts of an estate are paid from the residue of the estate first, so that's where the payment must come from.

Many people who do estate-planning without legal or tax advice never realize how easily their intent to treat everyone fairly can be upset by their failure to understand this rule. For example, let's say a mother leaves her $200,000 RRSP to her son, and the rest of her estate, which also adds up to about $200,000, to her daughter. She wants to treat them equally and thinks she has achieved this.

What she doesn't realize is that when she passes away, her son will get the whole $200,000 RRSP. The estate will pay the tax on the RRSP. Let's say the tax is $60,000. This means her daughter will receive $140,000. If there are other bills or taxes, the daughter will receive even less. This isn't even close to what the son will inherit, the mother's wishes don't go as planned, and it's quite possible that a dispute will ensue between the son and daughter.

The same rule applies to other assets that give rise to tax when the owner dies. For example, a person who owns rental properties or a lake cottage will also have tax to pay on death, and these taxes are paid out of the estate.

It's possible to draft a will to state that the person receiving an asset should also pay the tax bill associated with the asset, but almost nobody ever does that. I think more people would do that if they were only aware that it was possible. And if they were only aware of the rule in the first place.

Divorce doesn't change your beneficiary designations

Today I had a phone call from one of the Scotiabank branches I work with. A customer was dealing with her father's estate. The father's will said that everything he owns should be divided between his two kids. Now here's the problem: when the father got divorced years ago, he didn't change the beneficiary designation on his RRSP. He left the designation as his ex-wife.

The RRSP contained $100,000 and was by far the largest asset of the estate, which was otherwise modest. The customer found out from our branch that not only was the ex-wife going to receive the RRSP, but the rest of the estate was going to be used to pay the tax on it. The kids weren't going to see a dime.

It was at this point that our staffer called me to see if this could possibly be right, since it seemed so unfair. Unfair or not, it is the law. The will didn't change the beneficiary designation on the RRSP. Neither did the divorce judgment. If the father didn't want his ex-wife to receive the money, he should have changed it some time over the years since they divorced. Otherwise the law will presume that he intended to leave her on as beneficiary.

This is not an uncommon situation by any means. I see several estates like this every year. Unfortunately, if this client's father, who made his own handwritten will, had spent even ten minutes talking to an estate planning lawyer, he would have found out that his money would go to his ex and not his kids. He probably didn't realize the importance of changing what must have seemed like a paperwork detail.

All divorced or separated people should realize that nothing automatically changes your beneficiary designations. They don't change unless you take steps to change them. A divorce settlement, separation agreement or Minutes of Settlement that contain standard boilerplate words to the effect that you and your ex won't make claims against each other's estates won't change anything. Receiving money when you're the designated beneficiary is not "making a claim" so this clause doesn't apply.

It's bad enough to lose a parent. Having them leave an estate mess behind is a nightmare. Do your children a favour and find out how the law affects you before you sign a legal document, even if it's one you wrote yourself.

Which assets does an executor deal with and which are outside of the estate?

This reader has questions about the powers and responsibilities of an executor and trustee, and which assets fall within their control. This information is essential to the estate administration process, so I thought I'd cover it here for all to read.

Here's the question:

"When an estate is probated do all assets fall under the probate or can some things be dealt with before hand such as banks, life insurance and investments and if something needs to be done through probate can we proceed at that time? If the executrix/trustee is not a joint tenant of the house, who is responsible for selling the house? Would it be the joint tenant or the trustee?"

Parts of this question are quite clear to me, though I'm not sure I understand the part about dealing with assets "before hand". I'll get to that, though.

All assets owned solely by the deceased fall into the estate. The two types of property that don't fall into an estate are both mentioned in the reader's question. One type is an asset that is jointly owned by the deceased with someone else. The other type is an asset with a designated beneficiary. These are usually life insurance policies, RRSPs, RRIFs and pensions.

Note that this does not include RESPs, which do not go to the child named in the plan, but stay in the deceased's estate.

If the house was owned by the deceased and a joint tenant, on the death of the deceased the ownership passes to the other joint owner. It would be up to the other owner to arrange for the title to be changed. Please note that where the joint ownership is between generations, such as between a parent and a child, this is THE OPPOSITE. Joint title doesn't automatically go to the child joint owner when the parent dies. The child is deemed in law to be holding the title on trust for the estate, and it's for the executor to deal with.

If the house was not held in joint tenancy but was held just by the deceased alone, it becomes part of the estate and it's the executor's job to sell it or transfer it in accordance with the will. This cannot be done before probate is issued by the court.

I'd like to get into the part about dealing with assets before hand. If the question is whether any of the assets can go out to the beneficiaries before the deceased actually dies, the answer is no. To me that seems starkly obvious but I'm asked the question frequently enough to know that not everyone sees it that way. If the person hasn't died, keep your hands off their assets even if they have named you specifically as beneficiary.

Once the deceased has passed away, the executor should advise any joint owners of the death of the deceased and tell the joint owner it's up to them to change the title. The executor should advise life insurance companies of the death of the deceased, and let the insurance company deal directly with the person named as beneficiary in the policy. The executor should also advise the bank that holds the RRSP or RRIF and let the bank deal directly with the beneficiary who will receive the funds. The executor should co-operate by giving copies of the death certificate etc to allow these other parties to get on with the business at hand. Probate is not required for these transactions.

The deceased certainly can - and should - deal with these assets before death by naming the beneficiaries on the life insurance, RRSP etc. During the estate planning process, joint assets and beneficiary designations are part of the same big picture that includes the will and power of attorney. It all has to fit together.

Anyone with this type of question who lives in Alberta can check out my "Alberta Probate Kit" book, as it covers these topics in much more detail.

Naming the estate as beneficiary

I'd like to talk about this reader question in today's post, as it's something that almost everyone will think about during their estate planning. Here's the question:

"It would seem to me that naming a person as a beneficiary instead of an estate would be the easiest and fastest route for distribution. Is there some benefit that I can't see to naming an "estate" as a beneficiary."


Assets that can be designated as going to a certain beneficiary are RRSPs, RRIFs, LIRAs, segregated funds, life insurance policies, pensions and a few less common assets. Designating a beneficiary means that at the time you buy or set up the asset, you state on the asset itself who is to receive that asset when you pass away. Assets with designated beneficiaries are not controlled by your will, unless they name the estate.


This brings us to the reader's question. Why would someone designate their estate to get the funds rather than leaving them directly to a beneficiary? Keep in mind that there is no right answer for everyone. For many people it's a good idea to name a beneficiary directly, while for others it's clearly advantageous to name the estate. Each person (hopefully with the help of an estate planner) will have to figure out his or her best course.


Let's look at an RRSP or RRIF. As most people know, money goes into these plans without being taxed first, and the tax is paid when the money comes out. When you pass away, the law says you are deemed to have cashed in your RRSP or RRIF, so the entire amount becomes taxable all at once. The only way you can save this tax is to designate your spouse (and in limited circumstances a dependent child) as your beneficiary and roll the plan over to him or her. This usually, though not always, means that designating the spouse is a better idea than naming the estate. If the estate were named as beneficiary, the tax would be payable.


Not every asset carries a tax liability, which gives more flexibility in naming a beneficiary. For example, life insurance policies are not taxable in the hands of the person who receives the funds. And the reader is correct that naming a beneficiary can be simpler. If the life insurance money goes directly to a person rather than the estate then there is no need to get probate just to deal with the life insurance.


However, life insurance is often left to a person's estate. This is not at all unusual because naming your estate as the beneficiary of your life insurance policy is a way of creating more cash in your estate. The estate doesn't have to pay tax on the life insurance money  it receives. Business owners like this because it allows them to leave something in the estate for their children who are not inheriting the family business. Individuals with cottages like to leave insurance money in their estates to pay the capital gains tax on the cottage so that the cottage can be kept in the family. A person with lots of debt or taxes might leave life insurance to cover those debts or taxes. These are just a couple of examples but there are several good reasons to leave life insurance to the estate. 


Estate planning is designed to ensure that all aspects of your financial life - will, business agreement, power of attorney, joint property and designated beneficiaries - all work together to achieve your goals.

Ex-wife inherits IRA - OUCH!

As much as estate-planning disasters make me wince in sympathy for both the deceased and the survivors, real-life examples are pretty vivid reminders of what not to do. This story from American lawyer Kyle Krull is one of those awful but instructive ones. Though the story is American, if you substitute "RRSP" for "IRA", the principles are identical here in Canada. Click here to read it (and I highly recommend that you do read it if you have an RRSP or RRIF and have been divorced).

The importance of beneficiary designations

Naming a beneficiary for certain assets is an essential part of your estate planning. It's important to understand how the beneficiary designations will work with your will, your joint property and your intentions. This article from http://www.capitalmagazine.ca/ talks about the types of assets that should have designated beneficiaries, and their importance. Click here to read the article.

When maxing out your RRSP makes sense and when it doesn't

More good advice and information from the Globe and Mail, this time about tax planning and RRSPs. Click here to read the article.

Can I name my sister as the beneficiary of my RRSP?

As I've said before, the question is never "can I?" when it comes to legal and financial decisions; it is always "should I?"

A reader asked me whether he could name his sister as the beneficiary of his RRSP. To answer this question for a customer, I'd want to know a couple of things first. I'd want to know who else is in the picture that he might name. I'd want to know what other assets were available. And I'd want to know if there was any specific reason for leaving this asset to his sister.

All of these factors work together. One outcome that is affected by the choice of beneficiary is taxation. Money put into RRSPs is not tax-free; it's tax-deferred. That means that the tax is paid when the money is taken out of the RRSP. If the reader names his sister as the beneficiary of the RRSP, tax must be paid at the time he dies and she receives the money. But if he had named his wife, the RRSP could roll over to the wife without any tax being paid.

Let's look at how this affects his estate. If he had an RRSP with $250,000 in it, and rolled it over to his wife on his death, the wife would receive the entire $250,000 and no tax would be paid. If he named his sister, on his death the sister would receive the entire $250,000. However, his estate would have to pay the income taxes on the money, which could amount to as much as 40% of the money.

This means less money for someone else in the estate. If the reader was trying to create an equal distribution among a group of people, say his siblings, he would have accidentally messed up his own estate plan.

There is always the possibility that the reader asking the question doesn't have a spouse, but if he does, he should be aware of the effect of naming his sister rather than his wife.

If the reader's goal is to give some financial help to his sister, there might be another asset that could be given to her with a better tax result. For example, he could leave a life insurance policy to his sister without triggering any tax to his estate.

When making decisions such as who should be named as a beneficiary of a specific asset, the entire estate must be looked at as a whole to make sure one decision isn't adversely affecting another.

Can my RRSP be willed?

The answer to this question from a reader will depend on the facts. You may have noticed that pretty much every time you ask a lawyer a question, we ask for more facts!

The main thing to consider is the beneficiary who has been named on the RRSP itself. When you buy an RRSP, you are asked who is to receive the money when you die. You can leave it to your spouse, your kids, another individual, a charity or to your estate. Who you choose always depends on who is in your life and the various tax advantages of each choice.

If you have named a person or charity, when you pass away, the money is paid directly to that person. This means that your will doesn't touch it. If your will says that you leave your estate to certain people, it won't include the RRSP.

If the person you've named dies before you, that's a different story. If they are not alive to receive the RRSP money, it's paid into your estate instead. Once it's in your estate, it's covered by your will.

If you named your estate as the beneficiary, then when you pass away the RRSP money is paid to your estate. Again, once it's in your estate, it's covered by your will.

Avoid RRSP tax with a proper beneficiary

This article from the Globe and Mail does a particularly good job of explaining the error that many parents make when leaving their estates among their children. The mistake I'm referring to is forgetting or not understanding who is paying the tax on their RRSP or RRIF when they pass away. Click here to read the article.

Is my willed RRSP taxed?

This short question, asked by a reader, has a complicated answer.

First of all, let's look at the fact that the reader is asking about a "willed" RRSP. When you set up an RRSP, you have the opportunity to name a beneficiary. If you have done so, and most people do, the RRSP is not controlled by your will. It's controlled by the beneficiary designation you made when you set it up. This means that the RRSP goes to whoever was named at the time, regardless of what it says in the will.

So why would an RRSP be covered in the reader's will?

It's not impossible. It could be that the beneficiary the reader named is his estate. It could also be that the beneficiary named in the RRSP has already passed away. In a case like this, the RRSP proceeds are paid into the estate and, like everything else in the estate, are distributed according to the will.

It could also be that when the reader was making his will, he changed his mind about who should be the beneficiary of his RRSP. He could be using his will to change the named beneficiary. This is possible, but I generally advise clients who want to make a change like this to go right to the bank or financial advisor and have the change made on the RRSP itself. There is always a chance that a change made in a will is not specific enough to be effective, particularly in home-made wills. There is also a significant risk that the financial institution is never advised of the change and pays out the proceeds to the person who was named in the first place.

In any event, let's assume that the RRSP is properly governed by the will. I would make a further assumption that the person named in the will to receive the RRSP is not the reader's spouse. After all, since the reader could roll the RRSP to his spouse on a tax-deferred basis by naming her on the RRSP itself, it would make absolutely no sense for him to have the RRSP paid to the estate, have the tax paid and then have his spouse receive the net amount through the will.

If the reader's RRSP is paid to his estate, then yes it will be taxed. Taxation will be based on the idea that the reader cashed out his RRSP one minute before he died, and all the money cashed out is taxable.

Keep in mind that the tax hit doesn't happen just because the RRSP goes into the estate. It's the choice of beneficiary that is important. For example, if the same reader changed his beneficiaries on his RRSP to his two children and the proceeds were paid to them directly, there would still be tax payable. And the tax would be payable by the estate, not the children. As many of my clients grumble to me on occasion, the tax man gets you one way or another. However, that's the nature of RRSPs and the reason that TFSAs are becoming so popular.

A person can roll over his or her RRSP on a tax-deferred basis to his or her spouse. He or she can't roll it over tax-deferred to his or her children except in very limited circumstances where the child is financially dependent.

It's always a good idea to talk over the tax implications of your RRSP beneficiary designations with your estate planning lawyer or your accountant. At that point you get to move past the general tax information that's available, and find out about your own specific situation.

Is the RRSP down for the count?

This new article from the Globe and Mail talks about how TFSAs (tax free savings accounts) are being embraced by Canadians and are turning out to be more of a financial contender than many expected. Click here to read the article.

An estate planning checklist (or, Stop Going Out in a Blizzard in Nothing But Your Boots)

What's the difference between estate planning and getting a Will made? It's approximately the same difference as going out in the middle of a -40 Alberta blizzard wearing a parka, mitts and boots, versus going out into that same freezing weather wearing nothing but the boots. The parts that are covered will be fine. The uncovered bits, not so much.

The elements of an estate plan, pared down to their essence, are:

1. A Will. Important issues are the choice of executor, the choice of a guardian for minor children, distribution of your assets to your beneficiaries according to your wishes, and the inclusion of powers for the executors and trustees.

2. A Continuing, Enduring or Durable Power of Attorney. Important issues are the choice of attorney to represent you, how or when the document is to come into effect, and controls on the attorney. May include addressing immediate needs due to incapacity.

3. A Health Care Directive. Again important is the choice of agent to represent you, and the clear expression of your wishes. For older individuals, may include discussion of various supported living arrangements to address limitations.

4. Title to various properties. Important decisions are joint ownership and tenancy in common, right of survivorship, tax effects, potential disputes, and effect on overall estate plan.

5. Insurance coverage. Major issues are ensuring liquidity to cover tax liability, creating new wealth for distribution and keeping up with changing lifestyle insurance needs.

6.  Beneficiary designations. Tax savings are important. Also important are obligations to a spouse, the impact on the overall estate plan and creditor-proofing. Affects RRSP, RRIF, TFSA, ESOP, LIRA, DRIP, pension and life insurance.

7. Business succession planning. Important issues are choice of family successor, other possible exit strategies, tax planning, future income and timing. Should tie in with shareholder's or buy-sell agreement and company-owned life insurance.

8. Tax planning. Looking for ways to minimize taxes and maximize funds for distribution in the estate.

9. Trusts. Important issues are income-splitting for tax purposes, protection of handicapped adults, protection of children, and preserving assets to be inherited by a beneficiary at a later date.

10. Charitable giving. Important issues are giving back to the community, creating lasting legacies and creating tax credit.

11. Retirement planning. Includes discussion of dissipation or sale of current assets, business succession timelines, planning for incapacity and changing insurance needs.

12. RESP. Appoint a successor director of the plan.

13. Family dynamics. All of the items on this list are discussed in the light of the roles, abilities, shortcomings and personality of the various members of the family. Issues that may crop up are subsequent marriages, children from different marriages, separation agreements, divorce, common law arrangements, illegitimate children, disabled children, children vying for a place in the family business, belligerent or overbearing children, disputes between spouses or children, estranged family members, greedy or untrustworthy family members, and children with addictions.

As you can see, the items listed here overlap and loop back to each other. The idea is to make sure that everything works effectively together to achieve your goals. So use this checklist for your own planning and stop going out in just your boots.

Basics of RRSPs

This link goes to an article from Canadian Tax Resource  Blog that gives the ABCs of an RRSP. Something the article doesn't cover that I believe is extremely important is the choice of beneficiary of your RRSP. I'd like to talk about that here as a supplement to the attached article.

When you set up your RRSP, you may name someone to receive the proceeds of your RRSP on your death. The choice of beneficiary affects the tax your estate will pay. As described in the attached article, you don't pay tax on your RRSP until you take the money out. Canadian law says that on your death, your RRSP (and all other assets) are deemed to be cashed out immediately before your death. Therefore the money has been taken out of the RRSP and your estate will have to pay tax on it.

This is where the choice of beneficiary comes in. If you name your spouse as the beneficiary of your estate, on your death your RRSP can roll over to your spouse's RRSP. This means that no tax is payable at the time of your death; the tax is deferred until your spouse dies or takes out the money. This is a popular arrangement for married and common law couples as it provides the best tax advantage.

If you name someone else as the beneficiary, or you name your estate, on your death, your estate will have to pay the tax on your RRSP.

When choosing your beneficiary, remember to keep the big picture of your estate in mind. It can be a mistake to take individual asset - RRSP, house, bank accounts - and deal with each separately. Try to envision your estate as a whole so that you can see the effect of how everything works together. This is something an estate planning lawyer can help you do.

Can you afford to dip into your RRSP early?

This article from today's Globe and Mail gives some facts and figures about penalties and other things to think about, for anyone who is considering retiring before the "usual" age. Click here to read it.
Attached photo is also from the Globe and Mail.

Retirement Shocker

This article talks about beneficiary designations, something we've talked about a number of times on this blog. It's definitely worth repeating though because it continues to trip up so many people. Estate planning is not just about getting a Will made. It's about setting up a comprehensive plan that includes all of your assets and liabilities, and all of the people that are important to you. Click here to read the article. It's American and therefore refers to US 401Ks, but the very same principle applies to Canadian RRSPs and RRIFs.

Rights to property when a husband or wife passes away

The laws that touch on estate planning and estate administration favour spouses over other people in many ways. For example, if someone dies without a Will, the person having first priority to apply to become the administrator of the estate is the spouse. As another example, a person can roll over his or her RRSP to his/her spouse on death on a tax-deferred basis whereas he or she can't get the same rollover tax break with other people.

But what are the limits on the rights of a spouse when his or her better half passes on? Many people decide not to make any estate plans because they somehow assume that the spouse left behind will own everything and have the right to look after everything. That isn't the case of course, so let's talk about the real situation and what you should do.

First of all you must realize that the simple fact that you got married doesn't change joint ownership of property you already own with someone else. If you own a cottage jointly with your brother, or your home is still jointly held with your first spouse, simply getting married without you taking any other steps won't change the ownership.

Getting married doesn't automatically change your life insurance policy designation or your RRSP designation. If your policy still names your mom or your children from the first marriage as the beneficiaries, the fact that you got married will have no effect unless you contact the insurance company or bank and request the change.

If you haven't made a Will, your spouse is probably only entitled to a portion of your assets (depending on where you live and whether you have children). So if you want your spouse to "own everything" after your death, you have to take some steps to make that happen.

A number of things have to work together. You need to make a Will that deals with all of the assets that are in your name alone. If you want your spouse to own real estate that you currently own jointly with someone else, you are out of luck unless you take steps to change the title while you are alive. Saying in your Will that you want him or her to own your joint property will do nothing as the joint owner has a right of survivorship that a Will can't touch.

You also need to look at beneficiary designations on your life insurance, RRSPs or RRIFs, and pension plan. If your spouse is not the beneficiary designated then your spouse is not going to inherit it after you pass away. An exception may be pension plans, as many are payable to your spouse even if you have not updated your records with them. Unlike joint property, you can change a beneficiary designation on many financial plans using your Will.

The other part of spousal rights after a partner's death is the right to deal with your assets. I often hear a person make a statement like "my wife can sell my stuff after I'm gone" when that person hasn't made a Will naming his wife as his executor. If she is going to sell anything that isn't hers, she is going to have to apply to the court to become the administrator of your estate first.

The bottom line is that although there are special allowances made between a married couple in tax laws and other relevant laws, a husband and wife are still two people, not one. If you want to bring about a certain set of circumstances, you have to actively take steps to set things up that way.