What can I do if I can't leave my spouse in charge of the kids' inheritance?

What can you do when you're worried that your spouse won't be able to properly look after assets you want to leave to your children? Recently a reader asked me that very question, and I'm sharing the answer here. Here's the question:

"I can not trust my husband with money as he always ends up losing everything in stocks. so is it possible to appoint my 2 minor children as beneficiaries to my life insurance plans, property and other assets? if so, then how do i insure my husband does not get access to the money while my kids schooling and daily expenses are financed through their inheritance?"

Yes, it's possible to name minor children as beneficiaries of insurance policies, but before you do that, there are other options to consider.

If you name a minor on an insurance policy, the child will receive his or her share of the policy on his/her 18th (or 19th, depending on where you live) birthday. The children have no access to any of the money before that. And once they receive it, there are no controls on it. Many parents feel that this is not a good way to deliver funds to the children, as the kids won't have any guidance, help or protection in dealing with the money.

Let's look at what happens when you name your estate as the beneficiary of the life insurance policy. If you do this, it is absolutely critical that your will be set up properly to bring about the outcome that you want. This is too important for you to do a home-made will, so you would need to see a lawyer to ensure that your will is solid.

If you name your estate as beneficiary, and then use your will to leave the funds to your children, your first concern appears to be ensuring that your husband is not in control of the money. The person you name as executor is the one who is in control of the money in the estate, unless you say otherwise. You would have a couple of options here. One is to name someone other than your husband as the executor. The other is to allow him to be the executor but to specifically name someone else to handle the trusts for the children, if you are comfortable with him having even that much control. You could name a sibling, a trusted friend, or a trust company.

If you pass away while your children are minors, your insurance proceeds would flow into the trusts you've set up in your will. If the will is properly drafted, the trustee of the children's funds would be able to pay for things for the children before the age of majority, for example, a school trip when the child is 16, or hockey equipment at age 14.  You would make the decisions about how money can be used at the time you make your will because that's when the trust is written into your will. The wording is very important.

Using your will, you can also decide that your children might not get the full insurance proceeds at the age of majority. Depending on the amount of the proceeds, you might think it a good idea to give them some of the money at 18, and the rest at 21, for example. These is another decision that you make at the time  your will is set up.

Some wills contain specific instructions that the surviving parent is not to be put in control of the money.

There is another side to your question. As I answer this, keep in mind that as far as I know from your question, this is not a second marriage situation. You appear to be asking whether you can leave everything you own to your children. This is probably not a good idea. Simply stated, you can't simply leave your spouse entirely out of your will.

Your spouse is entitled to a share of your estate, simply by being your spouse. If you leave your spouse out entirely, you run a very strong risk that your spouse will make a claim against your estate to be given some or all of the estate. And his chances of winning are pretty good. It's a better idea to figure out a way to benefit both him and the children.

One option is a spousal trust, which would mean putting your assets into a trust for your husband's whole lifetime. He could then use the assets (for example he could live in the house) but he couldn't sell them or mortgage them. Now, there are plenty of downsides to this plan. For one, nothing that is jointly owned can be put into the spousal trust because your husband will already own them by right of survivorship. Second, your children wouldn't get anything until your husband passes away.

Another option is finding a way to divide the estate between them. For example, if your husband receives the home, personal belongings and bank assets by right of survivorship, your children could receive the life insurance policy. And then you'll have to trust him to leave the kids whatever he owns in his own will when the time comes.

You have options, but every decision has pros and cons. I'm really glad that you're doing your research and finding out how to protect your kids. Why not take this information that I've given you and talk it over with a lawyer in your area?

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.

Passing the torch to the next generation

There's a good article in www.globeadvisor.com that talks about several issues relating to passing your estate on to your children. It covers a bit of everything, from choice of executor to life insurance, but the main topic is saving on taxes when passing on property. I wish more people would read articles like this one before going ahead with steps like putting their children's names on the cottage.  Click here to read the article.

Business owner dies leaving a mess that could have been prevented

I recently received this letter from a reader talking about the fact that one of his business partners has passed away. This letter was so frustrating for me to read, because the lack of planning by the deceased and the partners is so obvious (and if it's frustrating for me, I'm sure that's nothing compared to how the people involved must feel). There are several issues arising from the situation and everyone involved is bogged down in them. An hour or two with an estate planning lawyer could have averted the mess. Anyone who is operating a small business, please read this post!

Here is the reader's note:

I'm one of three partners in a small business. One of the partners passed away and has willed his shares to his two children. However the company has made only a couple of thousand dollars and has over $70,000 in debt. The partner’s executor claims there is nothing in the estate and therefore his share of the company debt can't be paid. Our shareholders' agreement states that myself and my other partner have to purchase the shares back to either our selves personally and if we chose not to do this then the company has to buy them back. The thing is the company has not been successful so paying anything to buy them back of a worthless company seems odd when we will be responsible paying the deceased partner's debt.

 

The first issue is the deceased's will, which gives his shares to his children. His shareholders' agreement states that the shares must be purchased back by the company. Normally this would be resolved by the shares passing to the children (assuming they are of legal age) and then being purchased by the partners or by the company, as opposed to the shares being purchased from the estate. It's adding an extra step but it works for everyone.

 

If the children are not of legal age, there is the added problem that they cannot inherit the shares until they are adults. Normally an inheritance would be held in trust until that time. A properly drafted will that took the shares of the company into consideration would have dealt with this specifically.

 

In this case, however, nothing is going to work as it should, because apparently there is no life insurance in place. Generally, when shareholders sign an agreement that they will buy back someone's shares, they insure that person's life. The company should have owned life insurance policies on all three of the shareholders for exactly this situation. This is a huge problem for this particular company. They still have a binding agreement to purchase the shares.

 

Another problem brewing in this particular case is the misinformation about the payment of debts. One of the major goals of individuals who incorporate a company is to separate the business from the personal. This reader seems to think that the deceased's estate is responsible to pay the debts of a company. But it is not. The estate is only responsible for the deceased's personal debts. The debts of the company are not the estate's problem. Isn't that protection one of the main reasons people incorporate in the first place?

 

However nobody seems to be aware of that, as the reader has asked for payment from the executor, and the executor has said there is nothing in the estate (as opposed to refusing to entertain the request). So the executor isn't aware of the law as it affects the estate either.

 

It seems to me that the people who set up and operate this company, who unfortunately lost a partner before they had a chance to get things up and running properly, are operating with some real handicaps, including:

- lack of understanding about how corporations work

- lack of understanding the effect of a shareholders' agreement

- failure to foresee the need for life insurance, even though this is pretty much standard when there is a buy-back provision

- lack of personal planning that takes the family and the company into consideration

 

I understand that doing things yourself saves costs in the short term, but an experienced estate planning lawyer could have prevented all of the problems this poor fellow is going through in the long term. It's worth it to get some decent advice at the beginning to ensure that everything works the way you think it will.

 

 

Should I designate my children's guardian as the beneficiary of my life insurance policy?

How many times has something blown up in your face, even though it seemed like a good idea at the time? It happens to all of us, and mostly we can live with the consequences. But what if the consequences included leaving your minor children penniless after your death?

Unfortunately do-it-yourself estate planning can have consequences like this - serious, distressing, life-changing consequences that can't be reversed except with an expensive lawsuit and maybe not even then.

I'm attaching a link to a recent blog post by Rania Combes. She's a lawyer in Texas, but the same principles she talks about in her post apply here in Canada. She describes some of the things that can go wrong with a beneficiary designation that on the face of it would seem to make sense.

If you have made designations on your life insurance policy, or are thinking about doing so, this is a good article for you to read. Click here to read it.

How to screw up your estate planning with one signature

Donna Neff, an estate planning lawyer in Ontario, has written a blog post with one of the best titles I've seen for a long while.

The article very clearly illustrates how easy it is to make a mistake with estate planning. In Ms. Neff's example, a client created the very situation he wanted to avoid with one signature. Thank goodness he showed her the paperwork so that she could explain what would happen, giving him time to fix it.

What can we learn from this article? When you're getting a will made, take all of your paperwork with you to see the lawyer. By this I mean life insurance documents, pension paperwork, property titles, account statements, etc. There is absolutely no point making a will that says one thing if you have other paperwork that directly contradicts it. Your lawyer should help you to make sure that everything works together to achieve what you want.

Click here to read Ms. Neff's blog post.

Not everyone needs life insurance

According to http://www.canadianfinanceblog.com/, not everyone needs life insurance. Do you know whether you are among those who need it, or those who do not? Click here to read this article by Nelson Smith.

I agree with Mr. Smith's comments but would like to add that you likely will hear life insurance mentioned during your estate planning process. Life insurance proceeds are used to pay expenses, pay debts or taxes, create legacies, pay out shareholders of private companies, and to equalize inheritance among children. In other words, your life insurance needs may change over time.

How life insurance can protect your wealth

Life insurance is often mentioned during the estate planning process because it can be used in so many ways. The article from http://www.money.ca.msn.com/ talks about ways in which life insurance can be used for estate preservation as well as for wealth creation. Getting the most out of life insurance doesn't always mean buying a new policy; it could well be that a change of beneficiary might benefit your estate plan. Click here to read the article and be sure to cover life insurance questions with your estate planning lawyer.

Are you insured against alien abduction? 5 bizarre insurance policies

It's almost the weekend - time for a smile! Click on this link to read an entertaining article from Investopedia that talks about some strange but true insurance policies. Attached photo is from http://www.financialedge.investopedia.com/.

Life insurance fertilizes next generation of farmers

Estate planning for farming families is complex. It's also very satisfying for a practitioner like me, because there are so many effective strategies that can be used to help transfer the family farm to the next generation. The attached article from http://www.capitalmagazine.ca/ describes how life insurance policies and mortgages can be used to meet the needs of all parties to the transaction. Click here to read it. The attached photo is also from that story.

Don't delay when claiming for life insurance benefits

This post by Megan Connelly, who blogs at http://www.torontoestatemonitor.com/ , is a look at a recent court case in which the courts said the wife and executrix of a deceased man waited too long to claim his life insurance. She ended up without the insurance money. Click here to read the article.

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.

Just what are the assets of an estate?

It's important for an executor to have a thorough understanding of which assets are in the estate he or she is trying to administer, for several reasons. The executor has to create an inventory of assets and liabilities, which is sworn to be accurate and filed at the court. Also, the executor is personally liable for errors and negligence, and neglecting to deal with an asset would certainly count as negligence. Also, the executor usually has to answer a lot of questions from beneficiaries who are counting on the executor to be the most informed person in the group.

Some assets cause problems for executors just by their existence, and often the problem has arisen because nobody really understands whether those assets are in the estate or not. So let's try to clear up those misunderstandings.

As a general rule, assets that are held in joint names with a right of survivorship are not in an estate. This is because when the deceased person died, all of his or her right in the property automatically transferred to the surviving joint owner. An executor doesn't have to deal with the jointly owned property if he or she is looking after the estate of the first joint owner and does not have to include it in the estate inventory. All the executor has to do is inform the surviving joint owner of the death, and provide a death certificate.

The exception to that general rule is an asset that is held between a parent and an adult child as joint owners. Now those joint assets are to be considered as being held in trust by the child when the parent dies. Unless there is clear evidence that the parent did in fact want the child to own the joint asset, it must be paid into the estate and looked after by the executor.

If the deceased person owned real estate as a tenant-in-common with another person, the deceased person's share of the real estate is included in the estate.

Another asset that is not going to be part of the estate is a life insurance policy that names a specific person as beneficiary. Again, the executor isn't responsible for looking after this. The executor should let the insurance company know that the policy owner has died and provide a death certificate but after that, it's up to the beneficiary to get the money paid out.

If the insurance policy named the estate as the beneficiary, then it is the executor's job to get the money paid to the estate so that he or she can deal with it.

If the deceased owned assets such as RRSPs, RRIFs or LIRAs that name an individual as the beneficiary, the executor's duty is once again restricted to advising the plan holder (e.g. bank) of the death of the owner and providing a death certificate. If any of these plans name a beneficiary who has already passed away, the funds will be payable to the estate and in that case it's the executor's responsibility to look after it.

Usually the household goods of a married (or common law) person are only included in the estate if the spouse does not survive.

Vehicles, equipment, collections etc that are in the name of the deceased only are included in the estate. In fact, any items of any kind, from land to digital assets, that are owned by the deceased alone are included.

When the executor is preparing the inventory of the estate for filing at the court, he or she must include all assets that the deceased owned on the date of death, even if that asset has been sold or given away on the day in the inventory is done. For example, if Joe owned a car on June 19, the day he died, then his executor sells the car on July 30 and prepares the inventory on July 31, the car should still be shown on the inventory. This is because the inventory is intended to be a snapshot of the deceased's financial situation on the date of death, not on some random later date.

Ex-wife gets insurance funds when husband fails to change forms

The Manitoba case of Chanowski v. Bauer (2010) should remind all of us how important it is to pay attention to detail with estate-related paperwork.

A fellow named James had a group life insurance policy at work worth $55,000. He designated his common-law wife, Janet, as the beneficiary. A few years later, he and Janet split up. Janet married someone else.

James later entered into a new common law relationship with Michelle. James designated Michelle as the beneficiary of most of his work benefits, including dental and medical. He even took out life insurance on the lives of Michelle and their kids. On the life insurance form, James stated that Michelle was his spouse, and filled in everything except the "beneficiary designation" box. In other words, he failed to change the beneficiary from Janet to Michelle.

James died 13 years after he and Janet split up. He was still common-law with Michelle when he died. There is no question that Michelle was his current spouse. Michelle assumed that she would get the life insurance money, but the forms that James signed said to pay it to Janet. The insurance company paid the insurance money to the court (this is standard procedure when it's unclear who gets the money). That left it up to the court to decide.

The judge said that Janet, the first common law, would get the insurance money because James had not made a change of beneficiary. Michelle appealed to the Manitoba Court of Appeal. The higher court agreed with the first judge that the money would go to Janet.

This decision isn't an anomaly by any means. When a person wants to change his or her beneficiary, it's essential that the decision be clearly set out so that when the person is gone, the intentions are there for all to see. In a case like James', it's possible that he intentionally left the box blank so that he could leave funds to Janet.

However, the case does illustrate how thorough and careful you must be when setting up documents that will operate when you're no longer around to explain your intentions.

The big ugly business of death

This article from CNNmoney.com is pretty powerful stuff. It talks about individuals who buy insurance policies on their own lives with the sole intent of flipping it to an investor to make money, and the industry that allows this practice. Click here to read it.

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.

Really? A Will in your 20s and 30s?

This link goes to my latest article, appearing in today's Globe and Mail. In it I discuss in some detail why people in their 20s and 30s might want to start on their estate planning. I cover Wills, business planning, looking after children, insurance, beneficiary designations etc. Check it out.

How is life insurance used in estate planning?

As you go through the estate planning process, you may find that at some point the conversation veers off into a discussion about life insurance. This is because life insurance can fill a lot of gaps in a person's estate by creating new wealth that can be used in a dozen ways.

When you buy a life insurance policy, you are asked to name a beneficiary who will receive the proceeds of the policy when you pass away. Sometimes the buyer will name his or her estate as the beneficiary, usually because he or she wants to achieve a particular estate-planning goal.  For example, life insurance money that is paid into an estate can be used to pay the general debts and expenses of the estate such as the funeral, legal fees and liabilities such as loans.

When an estate has a significant tax liability, life insurance can be very important. For example, the capital gains tax hit on a cottage can be quite large. Having insurance money available to pay the tax can mean the difference between being able to pass the cottage on to the kids and having to sell it.

Life insurance money can be used to pay a gift to a child of the deceased when another of the deceased's children is going to get the main assets of the estate. This would apply, in particular, where one child is going to get the deceased's business, farm or cottage. The child who is not going to get that asset can receive life insurance money instead.

Parents of minor children can hold life insurance funds in a trust for their children through their Wills, to supplement any other assets the children might be inheriting. This would create a larger inheritance for the children, which might be important if the trust has to help support a child for years before he or she reaches adulthood.

The above examples all involve naming the estate as the beneficiary. Other beneficiaries may be named, such as the children directly, or the policy owner's spouse. Many married couples will name each other as the beneficiaries of their policies so that no matter what happens to the estate, such as being held up for years in litigation, there is still money being paid directly to the spouse.

Life insurance policies also come into play for owners of incorporated businesses where they are not the only shareholder. Ideally, the owners create a shareholders' agreement, or buy/sell agreement in which they decide how shares of one of them will be dealt with if one of them passes away. Typically the agreement will state that the company will buy back the deceased's shares from the estate. In order to have cash flow available, the company buys an insurance policy on the life of each shareholder, and designates the company as the beneficiary. Then when the person passes away, the life insurance flows to the company, which then uses the money to buy the shares from the estate, leaving the estate with money for the beneficiaries.

Life insurance, though widely used, is not necessarily for everyone. However, it should be part of the discussion if the discussion is about expenses or taxes.

Insurance arrangements in your estate plan

I have so many interesting things to share with you today, I'd better get started. First of all, this article by Derek de Gannes talks, somewhat briefly, about the various kinds of insurance that you might consider as part of your estate planning. Click here to read it.

Estate planning and last-to-die insurance

Something I haven't talked about before in this blog is joint-and-last-to-die life insurance, a pretty popular arrangements for couples doing their planning. Not being an insurance seller or broker, I leave the details of the policies to the pros! This article does a good job of explaining how this type of policy works. Estate planning and last-to-die insurance