Estate Planning

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Advance planning can help cover or minimize estate costs you may not have considered.  When you die, your debts must be paid first – before any money or property you leave behind is passed on to your loved ones. There may also be funeral costs, legal fees and other administrative expenses in settling your estate. And there may be other estate costs, such as probate fees and taxes on investments.

1. Estate Administration (Probate) fees

When you die, your executor often needs proof (requested by financial institutions, government agencies and others) that they are the person authorized to represent your estate. Probate is the process that provides court certification of this fact. There can be a cost to this – and probate fees to settle your estate can be high depending on the province you live in. In Ontario, the fees (officially called an estate administration tax) equal just under 1.5% of your estate’s value.

2. Tax on capital gains

You’re deemed to dispose of all capital property at death. Your estate must cover the tax on any capital gains. 

3. Tax on tax-sheltered savings plans

Registered plans such as Registered Retirement Savings Plans (RRSPs) can be transferred tax-free to your spouse’s plan.  If you don’t have a spouse, these savings are fully taxable as income in the year of your death.

6 ways to reduce or cover estate costs

1. Leave a valid will

If you die without a valid will, your estate gets settled according to the laws of your province, rather than according to your personal wishes. This can be a more complicated process, with higher legal fees and the potential for costly disputes.

2. Name beneficiaries for insurance and savings plans

When you buy life insurance, a segregated fund, or open an RRSP or other registered plan account, you can name a beneficiary to receive the money when you die. This means the money bypasses the estate process and is paid directly to that person. So there are no probate fees relating to these amounts and no delay in your beneficiaries receiving the money.

3. Jointly own property

Holding assets – such as a home or cottage – with another person is another strategy for reducing probate fees. Joint assets pass automatically to the surviving joint owner – and are generally not considered part of your estate and subject to probate fees.

However, there can be complications to joint ownership, especially if you co-own an asset with someone other than your spouse. For example:
  • If you transfer half-ownership of an asset to an adult child – and they have a spouse who they later separate from – the spouse could have a claim on your child’s half of the asset.
  • If your child has financial problems or declares bankruptcy, their ownership in the asset could be subject to claims by creditors.
  • If the asset has increased in value, you may have to pay tax on any capital gains when you transfer your half ownership. This is because a transfer is considered a sale for tax purposes.
  • You can no longer deal freely with the asset and must make joint decisions in managing or selling it.
Professional advice is essential
Joint ownership arrangements can be complicated. Get expert legal and tax advice before entering into one of these arrangements.

4. Pre-plan and prepay your funeral

Pre-planning and prepaying your funeral doesn’t necessarily save you money, but it does remove a key expense that your family or estate must cover upon your death. When you prepay, the money goes into a trust account or insurance fund until your funeral.
You gain certainty over costs because you choose the type of funeral you want in advance. And your family is saved the difficult job of making decisions during a time of grief.

5. Buy permanent life insurance

Life insurance proceeds can be paid to your estate to cover estate costs or left directly to a beneficiary to provide additional amounts to a particular person. The proceeds are always paid tax-free.
Consider a permanent insurance policy for estate planning purposes. Permanent insurance covers you for life, no matter how long you might live.  Term insurance does not.

6. Hold your investments in Segregated Funds.  

Guaranteed Investment or "Segregated" funds are more fully described here.  

Probate fees and Life Insurance and Segregated Funds

When you name a beneficiary for your insurance proceeds or your segregated funds, the money is paid directly to your beneficiary. It does not form part of your estate and is not subject to probate fees, nor the delays associated with settling an estate.

You can also use insurance to cover estate costs. To do this, name your estate as the beneficiary. Your estate will pay probate fees on the insurance proceeds, but it gives your estate the cash to pay debts, taxes or other obligations. This can avoid the sale of estate assets – such as a home or cottage – that beneficiaries may want to keep in the family. Taking out a life insurance policy can also help cover the cost of capital gains taxes.

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