Methods of Transferring Your Estate
There are four methods of asset transfer that should be considered when creating an estate plan. Each of these methods has advantages and disadvantages.
The Will represents the most common means of estate asset transfer, but all methods should be considered. Use of these alternative methods must occur in conjunction with a valid Will. Without a Will the dissolution of the estate will be complicated by provincial intestacy rules.
Wills (Probatable Assets)
A Will represents the most fundamental element in any estate plan. A Will is also essential to ensuring your wishes are carried out with minimum expense and delay.
A Will is a legal document signed by you and normally witnessed by two individuals whom are present at the signing. The Will can be revised at any time in the future to reflect changes in your financial or personal situation.
The instructions outlined in your Will only take effect upon your death and are in no way binding upon you during your lifetime.
While the four previously outlined methods of estate transfer should be considered in an estate plan, the Will is a necessary document in all circumstances. A Will serves two basic purposes:
1. to ensure that your property will be distributed to your beneficiaries according to your wishes
2. to appoint an executor (called a liquidator in Quebec), who is the individual or corporation who will act on your behalf and carry out your wishes
In addition to the above two items, a Will typically includes the following:
Your beneficiaries can be any person or entity (i.e. a charity) that you wish to name. In many provinces there are restrictions provided under provincial family law preventing you from excluding from the estate persons such as your spouse, children or anyone to whom you may be providing ongoing support.
- an outline of the administrative powers of the executor, liquidator(s) and trustee
- an indication of how you want your estate to be managed and distributed, which may include immediate distributions to your beneficiaries and/or the creation of a testamentary trust to allow distributions at a later date
- naming of a guardian for your minor children (referred to as a tutor in Quebec)
- instructions to minimize income taxes, if possible
- specific instructions for the distribution of your personal effects as well as your wishes regarding burial
Types of Wills
There are two types of Wills that can be created with a third option in the province of Quebec.
1. Formal Will
A formal Will is a usually a typed document signed by you in the presence of at least two witnesses. These witnesses cannot be your beneficiaries or their spouses. Most formal Wills are normally created by a lawyer or notary and written in "legalese" to ensure that your Will achieves your stated objectives.
There are pre-printed Will documents as well as software programs to produce a "do-it-yourself" Will, but you should be careful when using either of these alternatives to ensure that the document does actually state your desired objectives.
2. Holograph Will
A holograph Will is written entirely in your own handwriting and is signed by you. It is not necessary to have a witness to your signature.
Most provinces recognize this type of Will as being valid, but there are numerous potential pitfalls. For example, if any of the text in the Will is ambiguous or can be interpreted in a different
way the estate may not be distributed in accordance with your original intent. Use of a holograph Will is not recommended.
3. Notarial Will
This is only an option for residents of Quebec. A notarial Will is created by a notary and normally signed in the presence of only a single witness. The original copy of the Will is kept by the notary.
How Often Should Your Will Be Reviewed?
Frequently people execute their Wills and file them away, never again to see the light of day, until their death. Big mistake! In some situations, an out-of-date Will can be worse than no Will at all. Your Will should be reviewed at least every two to three years to ensure that it continues to accurately reflect your wishes. More frequent review may be necessary as significant changes in your financial or personal situation occur (i.e. birth of a child).
Also, your Will should be revised if you move to another province; if there are changes in legislation; you marry or divorce; or if an executor/trustee or significant beneficiary predeceases you.
In addition to a direct or outright distribution of estate assets to beneficiaries, assets can be left to a testamentary trust for the benefit of your beneficiaries. A testamentary trust only takes effect at death. The creation of the trust is documented within the text of the Will.
A testamentary trust allows you to pass specific assets to beneficiaries without allowing them to gain control of the assets. The assets held in the trust are invested and managed by the trustee of the trust with income and capital distributed to the beneficiaries in accordance with your wishes as stated in the Will.
Often the trustee is also the executor/liquidator of the estate although you may wish to consider a separate person to act in this capacity.
Non-Probatable Assets (Joint Ownership)
One of the simplest forms of transferring assets from the estate is through the registration of assets in joint ownership. There are two ways of owning property with one or more persons. One is Joint Tenancy With Right Of Survivorship (JTWROS) and the other is Tenancy-In-Common.
Joint Tenancy with Right of Survivorship (Joint Tenancy)
This form of ownership allows two or more people to own an asset together. All persons listed as joint tenants share ownership and control of the asset, and upon the death of one of the persons (i.e. a tenant), the ownership automatically passes to the surviving tenant(s). By passing directly to the surviving tenant(s), the asset does not form part of the estate and thus is not subject to provincial probate taxes (discussed later).
While this method of ownership can be effective in avoiding probate administration costs, there are a number of complications that may result from its use. The following list outlines some of the potential problems with the use of Joint Tenancy:
The deceased cannot control the disposition of the jointly held property once they are gone. The property passes to the surviving joint tenant(s) regardless of the provisions in the deceased tenant's Will. Hence, it is important that the other joint tenant(s) added in Joint Tenancy are also the intended beneficiaries. Otherwise the asset will pass to an unintended heir upon death.
- Each joint tenant has an equal, undivided interest in the whole property.
- Property that is held in Joint Tenancy by a bankrupt tenant is severed on bankruptcy. The severing of the tenancy makes the arrangement a Tenancy-In-Common arrangement with the other tenants.
- Changing ownership of an asset may have tax implications. A change in ownership to Joint Tenancy is treated as if you have actually sold an equal portion of the asset to the other tenants. This may trigger a tax liability if a capital gain is recognized on the artificial sale. This artificial transaction is referred to as the deemed disposition rules in the Income Tax Act. Basically, the transfer of the assets to the Joint Tenancy is done at fair market value (FMV). Hence, if the asset has an unrealized gain it will be triggered on the transfer and a tax liability will have been created. The deemed disposition rules also apply with transfers between spouses. However, instead of the asset being transferred at FM_ it is transferred at cost. Therefore, no gain would be triggered (i.e. no immediate tax liability).
- Changing ownership to joint tenancy may expose the jointly held asset to family law or creditor claims.
- The use of Joint Tenancy ownership may ultimately cause property to end up in the ownership of persons other than those who the deceased would like to see receive the property.
- Joint tenancy may, in some instances, be severed by legislation (i.e. joint ownership of matrimonial home with a person other than your spouse in Ontario.)
Note: Residents of the province of Quebec cannot use a Joint Tenancy With Right Of Survivorship (JTWROS) agreement since an automatic right of survivorship does not exist under Quebec law.
A Tenancy-In-Common is another form of co-ownership. It is the ownership of an asset by two or more individuals together, but without the right of survivorship that are found in a Joint Tenancy. Unlike a Joint Tenancy agreement, co-owners in a Tenancy-In-Common arrangement can own equal or unequal interests in an asset. Thus, on the death of one of the co-owners, his or her interest will not pass to the surviving owner, but will pass according to the Will of the deceased. If the deceased did not have a Will then the provincial intestacy laws would dictate the distribution regime.
Unlike Joint Tenancy, the assets held under a Tenancy-In-Common agreement will be subject to probate taxes because the assets would have passed through the estate of the deceased tenant.
Gifting Assets Before Death
Without question the easiest method of transferring assets is to gift them to your heirs prior to death. Gifting is frequently used without the motivation
of its estate planning merits, but simply to assist children and family members with activities such as a home purchase or business financing.
Gifting of assets can have potential tax benefits if the asset is given to a registered charity or if the asset was income producing, resulting in less taxable income. Be careful when gifting income-producing assets such as stocks or bonds. Your altruistic act may trigger an unexpected tax liability for you. Generally, gifting an asset to an individual (other than a spouse) is treated as a sale (at fair market value) thus triggering any unrecognized capital gain on the asset. Also, the income attribution rules will be applied if the gift is to your spouse or a minor child. Under this rule, the income earned on gifts to either of these persons will still be taxable in your hands (except for capital gains received by a minor child).
Another drawback to gifting is that you relinquish all control over the asset, which may not be an acceptable outcome. Finally, while gifting assets represents a simple method of transferring the estate as well as reducing probate taxes, like most things, it should be done in moderation. Before a gift is made you should ensure that by making the gift you do not jeopardize your own lifestyle. This is best evaluated within a comprehensive financial plan.
It is also possible to gift assets on your deathbed by using an enduring Power of Attorney or mandate. Timing is everything with this strategy.
For more information on gifting to charities ask an advisor for a copy of the RBC Investments publication, Charitable Giving.
The use of a trust in estate planning represents a slightly more complex method of estate transfer. The essence of a trust is that it is a relationship rather than a separate legal entity. This confusion arises from the fact that the Income Tax Act treats a trust as a taxpayer, requiring it to file a separate tax return annually.
However, this relationship is between the trustee, who holds legal ownership of the trust asset for the benefit of the beneficiaries, and the beneficiaries who are entitled to the use and enjoyment of the asset.
In Quebec, the concept of the trust is slightly different. A trust is created when a "settlor" transfers legal title to a "patrimony" and then names a "trustee," who manages the property for the benefit of a "beneficiary." Unlike the common law jurisdictions that permit ownership to be split between the trustee and the beneficiary, under civil law in Quebec the ownership resides in only one person. Nevertheless, the operation of this trust in Quebec is very similar to trusts in the rest of Canada.
In simple terms, a trust provides an intermediary between yourself and your intended heirs. By using a trust you can transfer ownership of an asset out of your hands, allowing your heirs to benefit from the asset and at the same time allowing you to retain control.
There are two types of trusts. An inter vivos trust (living trust) is a relationship that is created during an individual's lifetime. The second type of trust is a testamentary trust, which is created on and as a consequence of the death of an individual.
A living trust can be structured to provide the person gifting the assets (i.e. the settlor) with significant control and flexibility over the timing and amount of assets distributed to the trust's beneficiaries (your heirs). Control of the trust assets by the settlor is derived from the trust indenture (document), not from controlling the assets directly.
Note that all income retained in a living trust is taxed at the top marginal tax rate.