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Wednesday, 19 June 2013
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.
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.