While 2020 has been a tough year with the on-going COVID-19, many of our clients, and myself included, were delighted to found out that we are expecting. Not surprisingly, the first thing I did was to draft a comprehensive Will for myself, ensuring that our little one will be taken care of even when the unexpected happens. Although our clients have often thought about writing a Will, there was never a sense of urgency pushing them to sit down and get it done. With the baby coming, now is more important than ever to get this item checked off on their to-do list, and here is why.
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Ensure Your Children are Taken Care of
The top concern for many parents is who will take care of their children if something unfortunate happens to them. In their Wills, parents can choose one or more designated people to act as the children’s guardian and custodian. A guardian is someone who “guards” and manages the child’s property until he/she reaches a certain age. In contrast, a custodian is a person who makes all decisions regarding a child’s upbringing, such as where he/she goes to school. As its name suggest, custodians have “custody” of the children. Guardian and custodian may be the same person.
A guardian is especially important for certain type of assets which may not be held under the child’s name until he/she reaches a specific age. A common example is real estate, which may only be owned by a person who is at least 18 years old. The guardian typically needs to manage and invest the property held for the benefit of the children to at least match inflation rate.
Seeing the wide authority that custodians and guardians have over your children, it’s essential to appoint one or more persons whom you trust deeply. Of course, you can always enclose instructions regarding how the children will be raised (custody) and how the assets will be passed onto your children (guardianship) in your Will, which the appointed custodian and guardian must follow.
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Facilitate Smooth and Quick Transfer of Assets
Typically, the appointed custodians and guardians are trustworthy people, but also commonly, they have little knowledge of the law. Hence, ensuring the smooth transfer of your assets to your children may be difficult and slow.
For example, Mary and John wants to transfer their bank accounts and house to their son Luke. To do that, their estate trustee (the person responsible for distributing their assets) will first need to complete 2 crucial tasks:
- Figure out the location and amount of Mary & John’s assets and debts (which will likely be difficult if Mary and John only stated “all our bank accounts” in their Will without specifying the bank or their account numbers)
- Submit a series of Court forms, pay estate administration tax, and then receive the Appointment of Estate Trustee that will enable the bank to release Mary and John’s money to the estate trustee for transfer to Luke
Often, parents think writing a Will is very simplistic and unnecessary. We only have 2 children, won’t all our assets just split evenly between them? This assumption would be true if the parents set up all of their assets to be automatically transferred after they passed away. For instance, if Mary and John’s house is held as joint tenants with Luke, then the house will be automatically transferred to Luke when they are both gone. However, often parents do not put their children on the deed to the house (for good reasons – if Luke is a joint tenant, then he can oppose his parents’ decision to sell the house). As well, Mary and John did not put Luke as a joint account holder to their bank accounts (also for good reasons – we don’t want Luke to take out any of that hard earned cash any time he wants from the bank account).
Therefore, when any assets are not set up to be automatically transferred, a third party holding the assets, such as banks, will not release the funds to Luke unless a Certificate of Appointment of Estate Trustee is issued. And such certificate is hard to obtain unless the parents have identified the assets in appropriate details in their Wills (good example: We give all the funds of our Toronto-Dominion Bank account #XXXXX to Luke; bad example: We give all the money in all of our bank accounts to Luke).
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Tax Planning
We are lucky to be in Canada, where the beneficiary to a Will (e.g. Luke) does not need to pay any taxes on gifts they receive from a Will.
However, there are still two more types of taxes to consider:
- Estate Administration Tax (“EAT”)
While this tax is not significantly high, it’s good to factor into your consideration from the beginning. The rate of EAT is:
- No tax required if the total value of the estate (all assets minus all debts) is less than $50,000.00
- For estate over $50,000.00, you pay $15.00 per every $1000.00
So for example, a house with a value of $500,000.00 (fair market value minus mortgage outstanding) would require payment of $6,750.00 of EAT to the Ministry of Finance.
There are quite a few ways to avoid paying EAT. In essence, any assets that are automatically transferred to the beneficiaries are tax exempt, including:
- Real estate owned as joint tenants;
- Bank accounts owned as joint account holders;
- Any designated financial plan with one or more named beneficiaries (e.g. RRSPs, RPPs, TFSAs);
- Any insurance policies with one or more named beneficiaries;
- CPP death benefit.
- Final Income Tax for the Deceased
When a person passes away, the Estate Trustee still must file a final income tax for that person. Unless the deceased and the beneficiary are spouses of each other, then any assets passed from the deceased to the beneficiary are considered “sold” to the beneficiary at fair market value.
For instance, if Mary and John both passes away at the same time, and leaves their summer cottage to Luke, then for tax purposes it’s considered they sold their cottage to Luke at fair market value and earned that much “income”. This income must be included in Mary and John’s final tax return as taxable income. This is the case even if no actual money were given by Luke to Mary and John for the cottage.
The good news is, if Mary and John only have one house under their names, then that house is their Principal Residence, which is tax exempt. Thus, the fair market value of the house does not need to be included as part of their taxable income for their final tax return.
Conclusion
Phew, and you thought being a parent was hard enough without all those legal concerns! Not to worry, the experienced lawyers and legal professionals at Varity Law can walk you through all details of your Will and draft an estate plan tailored to your situation. Call us today at 905-597-9357 or visit our website at www.varitylaw.ca to book an initial free consultation.
This article is only meant to give general legal information. For legal advice on your specific situation, please consult a legal professional.
Yi Dan (Sabrina) Ding is the Owner & Principal Lawyer at Varity Law Prof. Corp. Varity Law is a one-stop-shop law firm practicing in real estate law & wills and estates law, and business law & business immigration.
