If you’re thinking about estate planning and wondering where to start, the first thing to keep in mind is that developing an estate plan is bigger than just writing a will.
A well-prepared estate plan can help ensure that in the event of your death, any dependants you have are taken care of, that your plans for your medical practice and your medical professional corporation (if you are incorporated) are carried out, and that your assets are distributed in the way you want.
A well-thought-out estate plan will also ensure that if you become incapacitated, you and your family will be supported. As Canadian life expectancy continues to increase, planning for incapacity becomes more important — because the chance that we may be affected by some sort of mental or physical incapacity increases as we age.
To begin, your estate plan might consist of a will; the selection of your executor(s); 1 and power of attorney documents (or provincial equivalent) in which you appoint personal representatives to manage your affairs if you are unable to.1 But in more complicated situations, you may need an estate plan that covers assets in other countries and your medical professional corporation. It could include more than one will and even advanced strategies like an inter vivos trust or estate freeze.
Whatever your situation, this guide is meant to help you get started in thinking about how to meet your estate planning needs.
PART 1: UNDERSTAND THE IMPORTANCE OF AN ESTATE PLAN
Why you need an estate plan
First things first: why is an estate plan important? If you die without a will and estate plan in place, your assets will be distributed according to the intestacy law in your province or territory, which can be quite different from the outcomes you would have chosen.
What’s more, settling an estate without a will can take much longer — and cost much more in taxes, legal and other fees — than it would have otherwise.
What are your goals?
If you’ve made the decision to put an estate plan in place, you’ll need to start identifying your broad estate-planning goals. They might include any number of the following:
- preserving family wealth
- ensuring your spouse, children and other dependants are provided for
- minimizing tax now, and for your heirs
- controlling how and/or when assets are transferred to your beneficiaries
- leaving a financial legacy to a charitable or philanthropic cause
- planning for your medical practice when you die or should you become incapacitated
PART 2: TAKE STOCK OF YOUR WEALTH
Start by itemizing your assets
Once you’ve identified your main estate planning goals, it’s time to look at your financial assets and liabilities, to give you an idea of what your estate might include.
One way to do this is by creating a “personal balance sheet” to provide a snapshot of your wealth today. A personal balance sheet combines your assets and your liabilities to come up with your net worth – all of which will change over time. Use MD Financial Management’s net worth calculator to estimate your net worth.
Think about how you’d like to distribute your assets at your death, including plans for your friends, family and causes you care about. Make sure to consider a range of scenarios, such as your beneficiaries predeceasing you.
Know how things will be taxed on your death
In order to decide what you want to happen with your assets, you need to understand how things will be taxed when you die. Taking tax into account when planning the distribution of your assets can be complex, but it’s important. Otherwise, you could inadvertently undermine your intended distribution of assets because of the tax implications to your estate.
From an income tax point of view, when you die you are deemed to have disposed of all your capital property for proceeds equal to fair market value. The result is that, on your final tax return, your estate may have to pay income tax on the accrued increase in value on these assets. You may also be taxed on the fair market value of your registered plans.
- Real estate: Your principal residence is usually exempt from tax at your death. If you own a cottage or rental property, though, the accrued increase in its value may have to be included on your final personal income tax return and the tax paid by your estate.
- Your RRSP/RRIF: Any funds in an RRSP or RRIF will be 100% taxable in your year of death, unless they can be “rolled over” to a surviving spouse or other eligible dependant, in which case the tax is deferred. Where the named beneficiary is not a spouse or other eligible dependent, the RRSP/RRIF will be distributed to that person, and any tax will still be payable by your estate and due on your final return. If your estate is insolvent, the Canada Revenue Agency will collect the income tax that attributes to the RRSP/RRIF from the named beneficiaries. That’s why it’s important to consider where your RRSP/RRIF is going and who is paying the income tax on that asset. In the province of Quebec, a beneficiary generally cannot be named on an RRSP/RRIF and these assets must be bequeathed through a will.
- Life insurance: Death benefits from a life insurance policy are paid out tax-free to the beneficiaries. If your estate is the beneficiary, the death benefits can be a source of cash to pay the estate’s debts, legacies or taxes owed.
Bequests don’t have to be cash
You will also need to think about whether you’d like to pass on your assets in their current form (known as an “in specie” distribution). This can be an important decision in the case of some assets, like a family cottage, that can affect family harmony.
In addition, you will need to decide whether you’d like to transfer assets directly or in a more controlled way by using trusts.
Leave money for paying the estate bills
As you’re considering how your assets might be distributed, you’ll also need to make sure there will be enough liquidity — i.e., enough cash or assets that can be readily converted to cash — to pay any debts the estate has and your estimated final tax bill. In some jurisdictions (excluding Quebec), your assets may also be subject to an estate administration tax, or “probate” tax, in addition to any income tax owing.
Another thing to consider is how taxes can alter the value of an inheritance. Beneficiaries who receive assets through an estate — via the deceased’s will — could get a reduced amount because of tax the estate has had to pay. In contrast, other beneficiaries might receive assets outside of the estate. In these instances, no tax is deducted from the value of the asset; instead, the estate has to pay the tax on it. The result can be an uneven and perhaps even unintentional distribution of assets that can cause discord in a family.
Make plans for your medical practice
As a physician, it’s not only your personally held assets and liabilities you have to think about. You also need to make plans for what will happen with your medical practice in the event of your death — including any partnership agreements or group practice arrangements, the proper storage or disposal of patient records, and winding down your medical professional corporation if you have one.
PART 3: CHOOSE YOUR REPRESENTATIVES
Once you’ve identified your goals and itemized the assets that may form part of your estate, you’ll need to choose and appoint your personal representatives.
Power of attorney for managing property
Your power of attorney document (usually called an “enduring” or “continuing” power of attorney in some provinces) will empower a person (or people) you name to handle your property and your finances if, during your lifetime, you become unable to make decisions. Although these people are called your “attorneys,” this term is not to be confused with “lawyer,” and there is no need to appoint a lawyer to act in this role.
In the province of Quebec, you can choose to either sign a power of attorney which includes a protection mandate, or a protection mandate only.
Normally, you will name more than one person in case your first choice becomes unable or is unwilling to take on the role of attorney. You should choose people you believe are trustworthy and capable of making good financial decisions on your behalf. Alternately, you could name a professional, one such option is a trust company.
Representative for healthcare and personal care
Power of attorney for personal care, personal directive, healthcare directive: this type of legal document goes by different names depending on the province or territory you live in. Essentially, they allow you to name someone to make decisions about your healthcare and personal care if, at some point, you become unable to make (or express) these decisions yourself. Some of these documents also allow you to clearly set out your wishes about your care.
The person (or people) appointed to make these decisions on your behalf should be someone you trust to carry out your wishes, however you’ve communicated them.
Your will nominates the executor or executors of your estate. An executor, called a liquidator in Quebec and an estate trustee in Ontario, administers your estate after you’ve passed away, based on your wishes as outlined in your will and in keeping with all applicable laws. You can name a friend or family member, a trust company, lawyer or accountant, or some combination of the above to act as your executor or executors.
If you have set up any kind of trust, it will require a trustee, who will control and look after the trust until it’s time to distribute the assets to the beneficiaries (according to the terms of the trust).
Trusts are used for different reasons in estate planning — for example, holding property for minor children or dependants with special needs.
Your trustees should be willing and able to carry out these responsibilities. A trustee doesn’t have to be a person, however. You can also choose a trust company to act as an independent, third-party trustee.
Guardian for minor children
Finally, if you have minor children, you will most likely want to choose a guardian or guardians who would be responsible for their care should both you and the other parent die. 1 Naming a guardian provides a way to establish your wishes for the care of your minor children. It’s important to note, however, that any guardianship arrangement set out in your will would only be temporary until it is confirmed by a court. (In the province of Quebec, if the guardian is named in the will, the court does not need to confirm the choice.)
Before choosing your representatives
As you can see, the process of estate planning can involve appointing a series of representatives to fulfill different roles in the event of your incapacity or death. In choosing representatives for each of these roles, it’s important to reflect on whether a person is right for the role. For example, do they have enough time, expertise and interest to carry out their appointed duties and will they work well together?
- Before naming a representative in your estate planning documents, take the time to ask them whether they’d agree to take on the role.
- Ideally, your representatives will live in the same province or territory as you; and will not be significantly older than you.
- If you’re setting up trusts for children and grandchildren that may exist for many years, it’s especially wise to consider a corporate trustee in addition to a friend or family member.
- A professional trust company can serve as your executor, provide power of attorney for property services, and act as your trustee.
PART 4: DEAL WITH SPECIAL SITUATIONS
Your estate plan needs to deal with the particulars of your personal situation. This can mean that more complex or specialized strategies are required.
Canadians who own property in the U.S. — for example, a vacation property — need to be aware of the American estate administration requirements, as well as the tax treatment they can expect as part of settling their estate. The U.S., unlike Canada, has a specific estate tax. Even if you are not a U.S. citizen or resident in the U.S., your estate may be subject to this estate tax, depending on the value of property you own in the U.S.
Special attention is often required for cottages, especially if the cottage is not your principal residence. In many cases, cottages bought or built long ago can be subject to substantial capital gains tax if sold or upon your death, when they are deemed disposed of. If the cottage is being kept in the family, it can be challenging to find a way to pass ownership down to the next generation that makes everyone happy and fits their financial circumstances.
Jointly held assets
When you own property with another person — for example, if you and your spouse jointly own your home or have a joint bank account — you’ll need to take these assets into consideration as part of the estate-planning process. There are several different forms of property ownership in Canada, each with different estate-planning implications, so it is important to review the legal outcomes of your joint property ownership as well as any legal arrangements you have with any co-owners.
Your professional corporation (or holding company, if you’re retired) also takes careful attention, especially managing its tax impact on your estate. One strategy is an estate freeze. This essentially “freezes” the value of your shares today (capping the amount of capital gain on them) and passes the growth you expect from the freeze date forward to the next generation, for their benefit. This allows you to reduce or defer taxes that might otherwise be due on your estate. An estate freeze must be implemented before your death.
Worries about incapacity
There are people who worry about people taking advantage of them when they become infirm. Others may have a family history of dementia or Alzheimer’s. One strategy to consider is an “inter vivos” trust, which means the trust is put into effect during the lifetime of the person or people setting it up.
An alter ego trust is set up for one individual while a joint partner trust is set up for a couple. These trusts are very flexible and can help you with wide range of objectives — from tax efficiency to unique personal needs. Having an inter vivos trust in place can provide peace of mind as you develop plans to deal with your financial affairs in the event of your own incapacity, illness or injury.
PART 5: GET IT DONE
If you’re just thinking about creating an estate plan, don’t stop there. Instead, take the initiative and the time to make sure you get it done. This may mean assembling a professional team that includes an Estate and Trust Advisor from MD Private Trust Company, a lawyer to draft your will, power of attorney documents and trust deeds (if required), and a tax professional. With your team, you’ll want to put in place a plan that includes the following elements:
An up-to-date will that meets your specific needs, including strategies to meet your personal estate and legacy goals, and to address the tax implications of your estate. In Quebec, a notarial will does not need to be certified by the court to be recognized as valid.
The appointment or naming of your executor, personal representatives, and any trustees or guardians.
A review of the beneficiary designations on your RRSP, TFSA, other registered accounts and life insurance policies to ensure they are up to date and that they dovetail with the provisions of your will. In Quebec, you can only name specific beneficiaries on insurance policy. If you want to provide instructions about your registered assets, it can generally be done through your will, with some exceptions.
Your medical practice
A plan for your medical practice, developed with your partners or group practice representatives, if you are not a sole practitioner.
A schedule for regular reviews of your estate plan, say, every three to five years. You should also review your plan whenever there is a significant change in your personal situation (for example, a marriage or divorce, death of a family member, change in number of dependants) or in the value of your estate.
With decades of experience helping physicians with estate planning and estate settlement, MD Private Trust can provide you with objective advice and professional guidance to help you achieve the outcome you want.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
Estate and trust services are offered through MD Private Trust Company.
1 In the province of Quebec, an “executor” is called a “liquidator”, a “power of attorney” is called a “procuration” or a “mandate”, a “continuing power of attorney” is called a “protection mandate” and the “Public Guardian and Trustee” is called the “Public Curator.” An attorney is your “procureur.”
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.