If you think your heirs are not quite old enough or prepared enough to discuss the wealth they will inherit on your death, you’re not alone. Unfortunately, this way of thinking can leave your beneficiaries in a decision-making vacuum: an unnecessary predicament which can be avoided by facing your own mortality and creating a plan.
Avoiding the subject of your own mortality can also be an extremely costly to those you leave behind.
If you have a will in place you are ahead of the game. However, authors of the 2017 Wealth Transfer Report from RBC Wealth Management point out that a will is only a fundamental first step, not a comprehensive plan.
“One generation’s success at building wealth does not ensure the next generation’s ability to manage wealth responsibly, or provide effective stewardship for the future,” they write. “Knowing the value (alone) does little to prepare inheritors for managing the considerable responsibilities of wealth.” Overall, the report’s authors say the number of inheritors who’ve been prepared hovers at just one in three.
Two thirds of the survey’s respondents say their own wealth transfer plans aren’t fully developed – a critical barrier to having this discussion in the first place.
While the report focuses on wealthier beneficiaries in society, the lessons remain true for most: to make the best decisions about your wealth transfer, there needs to be planning and communication with your heirs.
1. Recognize that action today can help you create a better future.
First, it’s important to acknowledge that creating an estate plan means contemplating your own death – an inescapable element of the process. It can also involve some awkward conversations, particularly if you’re not in the habit of talking about money with family and loved ones.
Without planning the outcome you leave may not be the one you would choose:
“Despite their efforts, parents don’t always succeed in translating good intentions into effective actions. They tend to resort to the informal, in-house learning methods they received in childhood,” say the RBC report’s authors. “Without intending to, parents repeat the lessons that contributed to the weaknesses of their own financial education. In the end, they are not equipping the next generation with the right skills to build lasting legacies.”
2. Understand the tax implications early.
To many, the taxes due on death will almost certainly come as a shock. In many cases, the single largest tax bill you will pay could be the one that your executor handles for you.
In Canada, leaving your assets to your spouse will defer these taxes until he or she disposes of the property or dies. However, if a spouse is not inheriting your assets and real property, planning for this “deemed disposition” is needed to allow your heirs time to make appropriate decisions about your property and legacy.
You may want to consider strategies that will greatly reduce the impact of the taxes to your estate. These strategies could include the use of joint last to die life insurance.
To illustrate how the growth in value of property can result in taxes payable at death, consider an asset which many Canadians own and enjoy – the family cottage.
Recreational real estate in many cases has “been in the family for years.” It often will have appreciated in value significantly since its purchase. Say you purchased the family cottage for $100,000. If the property is now worth $500,000, half of that gain - $200,000 is added to your income and taxed as such in the year you die. That will result in a tax bill of approximately $100,000.
If your family does not have the liquid funds available to pay this bill, the cottage or some other asset will need to be sold to pay the Canada Revenue Agency. Purchasing life insurance to pay the taxes due at death is one way to bequeath the family cottage to heirs. This will allow your children to continue to enjoy the property without having to raise the money to pay the taxes.
All capital property – except your principal residence and investments held as a Tax-Free Savings Account – is dealt with in a similar manner. If your stocks, real property, and other assets have appreciated in value since you first purchased them, half of that amount will be added to your taxable income in the year you die. If your assets included commercial or rental property against which the Capital Cost Allowance has been claimed, there may also be a recapture of depreciation. Again, deferral is available when assets are left to a spouse but if they are left directly to children or other heirs, the taxes become payable when you die.
As if this is not bad enough, the full value of your RRSPs or your RRIF must also be deregistered and included on your final tax return if the RRSP or RRIF is not left to a surviving spouse.
3. Get help to build your plan, then share it with those who matter.
Estate planning typically isn’t a “do-it-yourself” project. Instead, you’ll probably need to rely on a network of professional advisors who can bring their expertise to different parts of your plan.
Once you have your plan in place, it’s time to ensure that the people who are impacted by it are aware of your wishes.
Members of your professional network can help explain your plan to beneficiaries and help those who inherit your assets to understand your preferences and the decisions you’ve made.
Let’s get together to review or create your wealth transfer plans and discuss how you can get assistance in communicating those plans to the people who matter the most.
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