Hi everyone, I’m Sabrina, Founder and Wills & Estates Lawyer at Varity Law. Last week, we welcomed our second (and final!) child into our arms. Holding her, my first thought is that I must provide security for my two children in this uncertain world. Luckily, with my knowledge and experience, I can do just that. Today, I will give everyone my essential estate planning advice on how to structure your estate so that your children can receive their inheritance in a fast, affordable, and simple way – whether you pass decades from now or suddenly in an accident.
Specifically, this essential estate planning advice covers the following:
- How to prevent your children’s spouses and your other relatives from getting a share of your assets when you pass
- How to do estate planning so your children can receive their inheritance in a fast, affordable, and simple way
- How to avoid inheritance disputes and conflicts between multiple children
(Below is a stock image, not my actual children haha. To protect their privacy, I won’t share their photos for now).
How to prevent others from getting a share of your estate
The Spouses of Your Children
In Canada, married couples must follow the Family Law Act. A central concept is “equalization”, meaning that when the spouses get divorced, their assets gets “equalized”. This involves a very complicated calculation process. Simply put, the increase in value of assets during marriage is to be split evenly between the two spouses. The assumption is that each spouse made an equal contribution to the marriage, regardless of whether this is true.
Additionally, the entire value of the matrimonial home is split evenly between spouses, not just the increase in value during the marriage. A matrimonial home is any real estate property under the name of one spouse but routinely lived in by both spouses. There can be more than one matrimonial home if the married couple have more than one principal residence. For example, they can own a house and a cottage/vacation home. Since they routinely live in both properties, both may be considered their matrimonial homes, subject to equal division upon divorce. If you want to just appoint one property as the matrimonial home, you can hire real estate lawyers like us to register a matrimonial home designation – read more info on transferring properties within a family.
But do not worry, there is good news yet. Inheritance may be exempt from being split upon a divorce if it is clear that the inheritance is meant for your child and not their spouse. To achieve this, we always include a clause in the Will that excludes inheritance from net family property. This means that unless your child(ren) hand over the inheritance willingly to their spouse, the spouse will not get half or any part of it.
However, there are two exceptions to this rule, as below:
- The inheritance must be given to your children through your Will, which only takes effect after you pass. Thus, if you decide to give money or other assets to your children while you are still alive, the Will cannot help. There are other ways to protect those assets, such as registering a family private loan onto their real estate property. For more information, please book a 1st free consultation with us here: https://calendly.com/sabrina-668/1stfreeconsult
- The matrimonial home is above all. So, if your children took their inheritance and spent it on the matrimonial home, then that money would become part of the net family property. This means that those spendings will be split by their spouse upon divorce. The best way is to teach your children to put all their inheritance into an individual account and not use any of it towards the matrimonial home.
Your Spouse and Other Blood Relatives
Now that you prevented your children’s spouses from getting part of the inheritance, what about your spouse and your other blood relatives? Here is where having a valid Will is essential.
In Ontario, without a valid (correctly done) Will, the law requires that your inheritance first goes to your spouse (major share) and all of your children. If they do not exist at the time of your passing, then it goes to your parents, brothers and sisters, other blood relatives in sequential order. If you want certain specific children to get the inheritance and not those people, then you must name them in your Will.
What I mean is that you cannot just put in vague phrases like “all my assets go to my children”. You must specifically state who your children are. For example, you need to say, “all my real estate properties shall be split between my two children, Sam Jackson and Tina Jackson, equally” (note: this phrase is for clarification only, and it’s not in proper legal language. Please do not use this phrase verbatim in your Will).
When checking your Will, the Court must not have any doubt about who your beneficiaries are. If you only stated that the beneficiaries are “all your children”, and the Court believes you may have other children who are not listed on your probate application, then the Court will require your executor to buy a bond insurance, costing around 5% of the total estate value.
As well, many clients have asked me, may I have unequal distributions in my Will? You certainly can! For instance, you can give 90% of the inheritance to your eldest child, and only 10% to your youngest. As long as your Will is written correctly, the youngest child cannot dispute it.
The only legitimate claim the youngest child can bring forward is that you were not of sound mind when making the Will, or you did not understand what the 90-10 distribution means. To prevent this claim, your Estate lawyers should include an affidavit anytime there is an unequal distribution. The affidavit would state that you understood the unequal 90-10 division and that you fully intend it to be that way. If you want, you could even list the reasons why certain beneficiaries are getting less inheritance, such as that they refuse to provide care for you during your elderly years. This is not necessary; it simply goes to show you were of sound mind when making the Will. As long as the reason for unequal division is not against mainstream society values (e.g. my youngest only gets 10% because he/she is homosexual. He/she will get 50% if they decide no longer to be homosexual), then it is valid and cannot be disputed.
How to distribute the estate so your children would receive it in a fast, affordable, and simple way
This is definitely the wish of most parents. To achieve this goal, one must ensure that both probate and estate administration will be approved and completed quickly and correctly.
Probate is the process by which the Court approves an executor to manage your estate. Probate can be done with a Will or without a Will. Of course, with a Will would be much cheaper (half to a 1/3 of legal fees compared to without a Will) and faster (half to 1/3 of the processing time compared to without a Will) (for more information, please visit https://varitylaw.ca/wills-poas-trusts/).
It is essential that you hire a lawyer who is experienced in doing probate applications to draft your Will. Only they know from actual experience what the Court is looking for when accepting or rejecting a Will (for more information, please visit: https://varitylaw.ca/probate-application-ontario/).
Estate administration is the process of distributing your estate after the executor receive probate approval. All of you assets would go into a single estate account. From there on, the executor must pay out all debts and taxes, and the rest goes to the beneficiaries (for more information, please visit: https://varitylaw.ca/lawyer-as-executor/). Now, let’s take a look at those debts and taxes.
Estate Debts
Any assets that have debts attached to it cannot be transferred to your beneficiaries, even if the Court has already granted probate approval. To make things easier for your children, it is best to pay off all your debts during your lifetime. Or, you can purchase life or mortgage insurance, and your children can use those to pay out your debts immediately after you pass.
If there is no way to pay out the debts during your lifetime, then your children must sell your assets before your creditors do. A common example are estate properties with outstanding mortgages when you pass. The banks have the legal right to sell those properties within 15 days of your passing, though they will usually wait 6 months to a year out of compassionate reasons. As probate without Will takes around a year, it is crucial that your children apply for probate immediately after you pass, and it is important for you to have a correct Will, so probate approval process can be shortened to 3 to 6 months.
After receiving probate approval, your children should sell the property right away, before the creditors take action. Also, maintaining good communications with the creditors and giving them a reasonable deadline to pay off the debt is essential, as it would delay them from starting power of sale and charging you for their expenses. As most people find creditors and their legal departments intimidating, hiring a lawyer to be the estate’s executor can really help (for more information, please visit: https://varitylaw.ca/lawyer-as-executor/).
If your children wants to keep the estate properties instead of selling it, then they must apply for a new mortgage under their names. Once approved, they can use the new mortgage to pay off the old mortgage. When processing the mortgage transfer, it is crucial to hire a law firm who is skilled in both Real Estate and Wills & Estate law, as they can best explain to the banks what needs to be done. Most mortgage agents are unfamiliar with estate properties and how to transfer mortgages without a lawyer’s guidance and paperwork.
Here, I should point out that children often have disputes regarding how to handle the property. They may have different opinions regarding whether to keep or sell the property, which year to sell the property, and who pays for the property maintenance fees (e.g. property taxes, condo fees, renovations and repairs fees, cleaning, grass cutting, and snow shovelling fees) if the estate runs out of liquid funds. My suggestion is reducing the number of properties left to your children in order to minimize those conflicts.
Keep in mind that the longer it takes for the children to reach a unanimous decision on the property (e.g. to sell, or to get a new mortgage and keep the property), the more expensive it would be in the end. Mortgages left unpaid would be subject to high interest penalties. As well, the more time it takes for them to finalize a decision, the less patient the creditors would be with them. This leads to increased likelihood of creditors selling the property before they do.
As well, other types of debts, such as credit cards, line of credit, and vehicle leases/loans should be paid out immediately to avoid high interest penalties and service fees. When clients come to our firm to do their Wills, we always include a free asset list detailing their debts, amongst other things (for more information, please visit https://varitylaw.ca/wills-poas-trusts/). This will help their children to easily discover all liabilities and pay them off immediately after the parents pass away. Often, it’s only because the children are unaware of the debts that they go into default and incur high penalties.
Estate Taxes: EAT
There are two types of estate taxes in Ontario.
The first is called Estate Administration Taxes (“EAT”), which is collected by the Court who approved the probate application. For the first $50,000 of estate, it is tax free. For any value above $50,000, it is taxed at 1.5%.
There are only a few types of estate assets that are exempt for EAT. Those include any jointly held assets (e.g. joint bank accounts, real estate held as joint tenants), any bank or investment products with designated beneficiaries (e.g. RRSP, TFSA, RRIF), life insurance with designated beneficiaries, mortgage insurance, company assets if the deceased created a corporate Will with their lawyer, and assets held in a trust (for more information, please visit https://varitylaw.ca/wills-poas-trusts/).
All other types of assets (e.g. real estate, bank accounts, and vehicles under the deceased’s sole name) are subject to EAT. Previously, EAT could be paid after the executor receives probate approval. However, recently an increasing number of executors are missing the EAT payment deadline, so Courts have been requiring EAT to be paid at the time of submitting the probate application. To avoid paying this out of pocket, executors could hire an experienced estates lawyer to negotiate with the deceased’s bank and get them to pay the EAT from the deceased’s existing bank account (a very difficult task since probate has not been approved yet).
Estate Taxes: Terminal Income Tax
The second type is the deceased’s last year of income taxes. Basically, in the year that the deceased passed, they still have to file income taxes. In fact, this filing requirement continues until all the estate assets have been settled (aka debts and taxes paid, rest distributed to beneficiaries). If it takes the executor 1 year after probate approval to complete estate administration, then the estate only need to file terminal income taxes once or twice. But if it takes the executor 5 years, then the estate need to file income taxes for the next 5 years.
Some types of assets are not subject to income taxes, such as the deceased’s principal residence, TFSA, life insurance, and any bank or investment accounts with designated beneficiaries,. Other types are subject to income taxes, including the deceased’s investment properties, RRSP, and corporate shares.
Unfortunately, without advanced planning, terminal income taxes tend to be the highest cost in estate administration. This is because CRA considers that the deceased sold all their assets to the beneficiaries in the year of their passing, although the beneficiaries are receiving it for free. The estate must pay income taxes on this “sale proceeds”. The price of the “sale” is the fair market value of the deceased’s assets in the year he/she passed. For example, any investment properties passed down to the children would be valued at the year of death (you could get a realtor or a certified appraiser to value the properties), and the estate would need to pay capital gains in the year of death.
Luckily, the deceased’s principal residence (the property he/she routinely live in) would be tax free, whether it is sold or passed down to the beneficiaries. Thus, my suggestion is for parents to sell their investment properties during their lifetime (you can do advanced tax planning and sell in the year where it is most tax-efficient) and leave their children only the principal residence.
How to reduce conflicts between your children
This is the main goal of most parents when doing estate planning involving more than one child as beneficiaries. How do I structure it, so they won’t fight over the inheritance?
Leave your children more liquid funds and less fixed assets
First and foremost, you need to have a correct Will, so you deter the children from litigating over who gets how much inheritance.
Second, you should make estate administration easy. One way is to include lots of liquid funds and less fixed assets like real estate. With an experienced Estate lawyer, your children can receive all the liquid funds (e.g. bank accounts, investment accounts) within 1-2 months after probate approval (compared to 1-2 years for real estate, taking into account the time to sell the property and evict tenants, if applicable). There is also little opportunity for disputes – your children simply each receive a set amount of liquid funds according to your Will or if there is no Will, according to Estates legislation.
Here, my only advice is to keep a detailed asset list as mentioned above, to avoid banks from missing any accounts when transferring to your children. Unfortunately, I’ve see banks make this mistake several times in the past, especially since their retail and investment departments are completely separate from each other. Thus, sometimes only the retail accounts got transferred over and not the investment accounts, and without an asset list, the children did not even know their parents had those investment accounts so did not pursue the matter further (for more information about the asset list, please visit: https://varitylaw.ca/wills-poas-trusts/).
On the other hand, managing real estate and other fixed assets often lead to disputes between children, as there are many decisions to be made, including:
- Should we keep or sell the fixed asset? Which year should we sell it?
- Who pays for the maintenance fee until the asset is sold?
- As many investment properties have tenants living in them, how can we quickly evict them so we can sell the property? (keep in mind, it usually takes 6 months – 1 year to evict tenants if they are not willing to leave themselves, because the wait time at Landlord and Tenant tribunal is very long)
- If there is a company, should we keep operating it or close it down?
- If we keep on operating the company, can we reach unanimous decisions on everything (e.g. clients, employees, budgets, leasing an office, etc.)?
- Should we take out all of the company’s money at once (if you do so, there will likely be high income taxes) or should we do it year by year (usually reduce income taxes)?
We had a case where the two children had a lot of disputes about how to manage their parent’s estate. Their parents left them a restaurant to operate and two investment properties. After receiving probate approval for more than 3 years, they still have not finished distributing the estate assets, and the estate no longer had enough liquid funds to maintain the restaurant and the investment properties. Also, they had a lot of trouble trying to evict the tenants who live in the investment properties.
Eventually, the interest penalties from the deceased’s creditors started piling up higher and higher. The bank almost started power of sale on the properties – luckily, we convinced them to sell just in time. Most unfortunately, this long and strenuous process really chipped away at the good relationship that the children once had.
Minor Children
Minor children means any child who is under the age of 18. Unfortunately, if you pass away before they turn 18, your estate is going to be extremely complicated to manage. This is because the Office of the Children’s Lawyer (“OCL”) will appoint representative to ensure your minor child gets their legitimate share of your inheritance. This means that the executor must report to the OCL and get their consent before they can manage the estate.
The difficulty is this: your minor child cannot waive their right to inheritance, until they reach 18 years of age. At the same time, if there is no correct Will, your minor child must receive inheritance under Estates Legislation. But until they are 18, they cannot legally own real estate or own bank accounts solely in their names.
So, from the time that you pass to the time your children reach 18 years old, someone must manage and protect their inheritance for them. This person can be a named custodian and guardian in your Will, or it may be the Court.
If you do have a valid Will, then in almost all cases the OCL will respect your wishes regarding who you appointed to manage your children’s inheritance. Nevertheless, that person should be prepared to submit detailed accounting to the OCL on an annual basis, listing all deposits and withdrawals from the estate account. As this process is very technical and complex, often our clients hire us to help with their estate book-keeping.
If you do not have a valid Will, it is unlikely the OCL will agree to have anyone manage the estate asset for your minor child without requiring them to buy a bond insurance. As mentioned above, this cost approx. 5% of the entire inheritance your child is supposed to receive, and it must be paid every single year in which the guardian of property manages the inheritance. Thus, if your child is 13 when you passed, the guardian of property must manage their inheritance and pay the 5% bond insurance every single year, for the next 5 years. For more information, please see our youtube video: https://youtu.be/1nzVVUg5msg
As this is very expensive, most people just choose to have the Court manage the minor child’s inheritance for free, until they turn 18. However, it is very unlikely that the Court will manage anything other than liquid funds. So, if there are fixed assets in your estate, the Court will likely sell them immediately, instead of keeping it for your minor child to inherit in the future. This is another reason why you should avoid leaving fixed assets other than principal residence to your child, if you want your estate administration to be simple and efficient.
Conclusion
As a seasoned Estates lawyer and a new mom of two, I redid my estate plan as soon as my second one is born. I decided to sell off my investment property and company during my lifetime, and leave only principal residence and liquid funds to my children.
Also, although my plan is to pay off all debts during my lifetime, should I unfortunately pass before my retirement age, I need to give them security. To that end, I purchased sufficient life insurance to pay off all estate debts.
Lastly, as they are both under the age of 18, I have duly appointed a trusted guardian of property in my Will to manage their inheritance. This will prevent the Court from managing the estate and selling off all assets immediately in the year that I pass.
Based on what I have seen in my professional life as an Estates lawyer, and my personal life as a mom of two, the key to a harmonious family life is to avoid complexity and disputes when you can. Even the closest siblings may have different opinions about how to manage fixed assets on a long-term basis, especially with the stress of creditors and management fees. Therefore, I believe it’s best to leave them assets that can be received quickly, affordably, and simply.
If you have any questions about your estate planning, or if you are in need of probate application and estate administration services, please book a 1st free consultation with us here: https://calendly.com/sabrina-668/1stfreeconsult
