What happens when I
die?
Often the conversation I have with my clients leads to the inevitable
question, “What happens when I die?”
If you are like many of our clients, you assume that upon your death,
all of your money will automatically go to your spouse, kids, place of worship
and charities.
In our experience, the wills and personal finances of most people are
not properly set up to realize these goals.
Often, I can make a few simple changes to allow your bequest wishes to
be much more valuable and effective, while making the handling of estate
matters much simpler for your executor.
In this article I’ll explain a few examples of things that normally occur
when someone dies that create some common problems and impediments, and how you
can easily solve them.
Problem 1: You don’t
have a will.
As in most places in North America, dying in Ontario without a will
essentially means that your assets will flow in pre-set proportions to people
and creditors the government deems to be ‘next in line’. If you want your
entire estate to go to your spouse and kids, this will happen though maybe not
in the proportions you imagine and only provided your debts don’t outweigh your
assets. However, when a provincial trustee must step in to administer your
estate, they deduct very high fees and probate taxes, which reduces the value of
your estate and can also result in all kinds of other unforeseeable
problems. For example, your family home may need to be sold to pay these
taxes and fees. Also, your estate is likely to be frozen and inaccessible for
at least one year – or even many years depending on the complexity of your case.
These common outcomes cause significant financial and emotional hardships on surviving
family members who continue to rely on the proceeds of your estate.
If you are living common-law and die without a will, it’s extremely
important to know that your rights as a married couple end immediately on your
death. Your partner may be put in a position where they may not be able to claim
any of your estate.
Solution 1: In almost all cases, directing
your wishes through a will is a very inexpensive way to prevent many unwanted outcomes.
Even though I am not a lawyer, this is very nearly always the first thing I recommend
to my clients.
Problem 2: Heirs and
creditors can challenge your will and reduce the size of inheritances and
charitable gifts.
Even if you have a will, there are still many circumstances that can
reduce the value of your estate, and obstruct your bequest intentions. There are simple ways to set up your bequests
to allow you to be completely sure that your bequest wishes are followed.
Let’s say you have set aside money to go specific beneficiaries
including your children, grandchildren and a few charities. You have specified
who will get what in your will.
However, probate taxes and fees, legal fees, and funds going to
creditors will cut into your inheritances. Because money can do strange things
to people, your children may challenge your choice of beneficiaries and even
your charitable donations. Also, if you’ve not listed your charities by their
formal legal name, charities of a similar name may each lay claim your donation.
These common problems can tie up your estate for years.
You can make many simple and free changes that will make your estate
much more valuable, and free from any contentious tug-of-wars over your money.
Solution 2: Another way to
eliminate any challenges
is to give
your community-based legacy gifts through charitable Community
Foundations. Many offer you the attractive option of making a charitable contribution
now and deciding later which causes will get your money, and how much each will
receive. You can make as many tax-deductible donations through Foundations such
as these as you like, and they will then follow your wishes and efficiently
dispense your funds upon your death.
Solution 3: If you are sure you
won’t need the money you’ve set aside, consider giving it to your beneficiaries
while you’re alive. This will reduce the size of your estate and therefore probate
taxes and fees. When your beneficiaries are charities, gifts made while you are
alive produce tax credits that you can use to your reduce current taxes – and
unused credits can be carried forward for as much as five years. Lower taxes now
will allow you to give more to all of your beneficiaries.
Solution 4: If you have income that
is more than you spend, consider making significant ongoing contributions to
your favourite charities. The charitable tax credits can significantly help to offset
your current taxes.
Solution 5: If there is a chance
you may need the money you’ve set aside as you grow older, or you want control
over changing your beneficiaries in the future, or you want to completely avoid
probate taxes, fees and delays, consider moving your funds from bank savings
accounts, mutual funds or money market funds into identical products offered by
insurance companies. By doing so, you can directly assign beneficiaries and
easily change them at any time, without incurring any costs as you would to
change your will. Then when you die, these funds will pass to your
beneficiaries outside of your estate. Your beneficiaries will receive the funds
within three to four weeks of the insurance company receiving your death
certificate.
In addition, some insurance companies will provide a 100% guarantee on
your principal so you’ll know for sure that your investments and subsequently
your bequests won’t be negatively affected by market fluctuations.
Even better, leaving your bequests in this way removes this money from
your estate (just as if you gave it away during your lifetime), which will lower
your estate’s probate taxes and fees on remaining assets in your estate. Lower
taxes means you will leave even more to your beneficiaries!
Solution 6: Purchasing a life insurance
policy with money that’s already set side for beneficiaries is a simple way to significantly
multiply what you’ll bequest to these beneficiaries. You simply use the money
that's set aside to pay your life insurance premiums. In particular, if you
want to leave money to charities, it is often to your advantage to pay your
policy off in one lump sum or over a few years.
As it is with any insurance product, your bequests will go to your beneficiaries
tax free and outside of the estate. They will flow quickly and directly to your
beneficiaries, usually within three to four weeks of the insurance company
receiving your death certificate. No hold-ups, no taxes, no hassles.
These are some simple options available to you that will allow you to
have complete control over what happens when you die. If you'd like to discuss how
you can easily create a more valuable estate that reflects your personal
circumstances, please feel free to contact me anytime.
Next: Including your favourite charities as your beneficiaries is not only a
good thing to do but can help significantly reduce the taxes owing on your
estate.
