Happy Halloween!
This week, I introduced you to my friend Meena, who is a life and disability insurance broker and a financial planner, who loves to talk about all the things that can go wrong in her client’s lives and ways to protect them, so we decided that a great Halloween Special would be to talk about DEATH and how to plan for it – we covered wills, end-of-life documents, power of attorney, living wills/health directives, taxes at death, and life insurance.
WILLS, POWER OF ATTORNEY, HEALTH CARE DIRECTIVE
First, Meena told us what can happen when somebody dies and there is no will in place:
• No will means no named executor, so no one will be able to access your money and other property, until someone goes to court and requests a beneficiary to be assigned, which can take a long time.
• In the meantime,
o Your bank account can’t be used to pay bills or funeral expenses.
o If you own a home or a business, it can’t be sold.
• Also, as for who gets your money and property, there are provincial laws (remember every province is different, but here is some information specifically for Alberta) to determine who gets your money. This can be especially problematic if you have children, living with someone and not legally married, or are with someone who is still legally married to someone else.
Meena suggested that using a lawyer to draw up your will to safeguard any opportunities for misinterpretation or confusion, but using an online will kit or the kits you can purchase at the registry are better than having nothing in place at all. Commonly, a lawyer will offer a package of 3 documents: a will, a power of attorney, and a health care directive (sometimes called a living will).
The Power of Attorney allows someone to deal with your money if you become physically or mentally unable to take care of your own affairs. The Power of Attorney makes sure that while you are alive, your bills can be paid, house sold if necessary, and that your assets can be accessed if required.
The Living Will, or Advanced Health Care Directive describes the kind of medical treatment you would prefer if you are unable of making your own decisions. Do you want life support? Pain killers? You can also indicate if you want to donate your organs (you can also register here in Alberta).
When drawing up your will, Meena gave some helpful advice on things to think about that may not be front of mind:
• Check on how property and assets are titled
• Be sure to discuss joint bank accounts, particularly those that are joint with somebody other than a spouse
• Remember to change all your beneficiaries if you get separated/divorced or married – including RRSPs, TFSAs, and insurance policies
But none of these documents are useful if you can’t find them. We recommended keeping the original documents in a safety deposit box, and have a copy at your house, safe from fire and water, and copies at your executor or other trusted person’s house. Keeping copies in the cloud could also be a solution.
On top of this, there are a lot of important items that included in a will. Such as who to contact if you die, where are your life insurance policies, what banks do you use? Even if you plan for your spouse to be your executor, if you both die, someone else is going to need to find all this stuff.
Meena provided us with a magical spreadsheet where you can fill in a lot of this information (and make changes as needed without having to pay for an amendment to your will).
LIFE INSURANCE
Then, we were warned about the repercussions if there is no life insurance policy in place:
Even if you left behind a spouse who can pay their own bills (and in most families both paycheques are required to make ends meet), there are extra expenses, such as:
o Funeral costs
o Costs of taking care of your estate (which can easily be $10,000 without a will)
o Time off work (do you really want your spouse to have to immediately return to work?)
o Childcare, tutoring, counseling for children
o Taxes
You may be thinking – I have life insurance on my mortgage or car loan, so I should have no problem there. There are downsides with those polices. The big one is that all of the money goes to the lender. You don’t get any cash in order to pay for the extra expenses mentioned above. Also, those usually aren’t transferable so if you move or change banks, you may lose that insurance.
Meena also recommended to take the policy offered by the lender when you are receiving your mortgage, and then immediately talk to your broker about your own policy. Don’t cancel the bank policy until you have a new one in place – this will ensure there are no gaps in coverage for the liability you’ve taken on.
TAXES
Taxes? Yes, sometimes there can be a tax burden that arises due to death. Some common examples are:
1. RRSPs are deemed to be cashed the day before you die by Canada Revenue Agency, which results in taxable income to your estate. This income can be transferred to the RRSP of a spouse, minor child, or other disabled adult who is financially dependant on you, and as long as the full amount is deposited directly into their RRSP in the same year as death, the tax will be deferred. BUT, if that transfer doesn’t happen (i.e. you don’t have a life insurance policy so that cash is needed to pay for your funeral costs), your estate will be taxed on that RRSP income – depending on your tax rate, this could be upwards of 40% of your RRSP’s gone to taxes.
• Second house (vacation or rental, cottage) going to anyone other than your spouse will become taxable as a capital gain to your estate. It would be nice if your children (for example) had the cash to pay for the taxes on this without having to sell the property.
• Land (Qualified Fishing & Farming land may or may not qualify for the capital gains exemption)
• If investments are continuing to make money after the year of death, the estate (trust) will continue to pay tax on that income.
These are just a few examples and is really just scratching the surface – when doing estate or succession planning, be sure that your financial planner is considering all of your property and any tax burden that may arise, and planning to minimize that accordingly.
FINAL TIPS
As you know, EVERYBODY DIES! Just like taxes, it’s unavoidable. Give your loved ones a gift this Halloween, and:
1. Speak to a lawyer about drawing up a will, health care directive, and power of attorney.
2. Speak to a life insurance agent about life insurance.
3. Speak to a financial planner to deal with succession and estate planning.
4. Speak to a tax professional about how to reduce your tax burden at death.
