There is a common misconception that estate planning is only for the wealthy. This is far from the truth, as everyone can benefit from estate planning—whether you think you're rich or not!
When the time comes to pass on, you need to have a plan in place that properly outlines your asset distribution. An estate plan is designed to make sure your assets go to your designated beneficiaries. Without one, you can’t ensure that your assets will be distributed as you wish.
They may seem similar, but a will and estate planning aren't the same thing, although a will is included in estate planning. Before we get into why you need estate planning, let’s outline what it entails:
What is estate planning and why is it important?
Your estate consists of everything you own or owe at your time of death. Estate planning doesn’t just involve distributing your property and finances—it also includes things like your furniture, jewelry, sentimental items, and carrying out donations to organizations you care about.
There are no estate taxes in Canada; however, most provinces charge a fee to process your will—also called probating—which are based on the value of your assets. Proper estate planning can help reduce these fees and taxes owed.
What is the difference between a will and estate planning?
In your last will and testament, you can outline who should take care of your children, inherit assets or property, run your business and other property-related matters after your death. In the will, you can also choose an executor—the person responsible for distributing your assets and carrying out the requests in your will.
Estate planning on the other hand, is a much more extensive process. It’s a comprehensive plan that includes your wishes regarding healthcare decisions, personal finances, and more, even while you are alive. A will is just a part of estate planning, which inevitably lessens the burden on your loved ones during difficult times.
Estate planning documents
The following are the typical documents you may find in a good estate plan:
Your last will and testament is a critical component of the estate planning process because it outlines all your wishes to be carried out after death, including asset distribution, naming your children’s guardian, beneficiary designation, and more. It also includes your appointed executor, who will be in charge of distributing your assets as outlined.
Power of attorney
A power of attorney grants someone the right to make decisions about your legal, financial affairs, personal, health, and property affairs, while you are living (and incapacitated) and after death.
You may also choose to include a “living will” in your estate planning, which includes your healthcare decisions, should you be incapacitated. This frees your loved ones from the burden of making these decisions themselves. While living will is a commonly recognized term, it is not technically a legal term in Canada. The name of a document to outline your medical wishes for end of life varies by province but is often called an advance care or personal directive, or a power of attorney for healthcare.
Business Planning and Succession
In the event you own a business, you need to decide how you'll pass on business assets to beneficiaries, as well as what will become of it after your death. If your business is family-owned, you have probably already considered who will take over when you pass away (which should be included in your will to avoid any uncertainty when the time comes). If your entity is not family owned, however, you need to consider how this asset should be passed on, including:
- Who will control the business?
- Should profits be invested or divided amongst beneficiaries?
- What do you do if your death affects business partnerships?
- Does your executor have experience selling a business?
A trust is another way of transferring your estate, however, it tends to be expensive to create and manage. There are many types of trusts, and they can provide alternatives to direct inheritance of your estate and assets. Trusts can streamline the process of transferring your estate after death, as they bypass probate court. While everyone should have a will, not everyone requires a trust. Consider visiting a lawyer if you think your situation is more complex and may require setting up a trust.
Ten reasons you need an estate plan
Now that we’ve cleared up what goes into an estate plan, here are our top 9 reasons why you should create one:
1. Ensures your assets are given to the correct beneficiaries
Suppose you don't have an estate plan. Your assets and estate will be distributed by the courts according to provincial laws. That means you won't know if your house goes to your son or your business goes to your daughters. When you create an estate plan, you structure the distribution of your assets in a manner you approve of while you’re alive. For example, you might want to exclude ex-spouses from your assets and include close friends that your family may not be aware of.
2. Plans for your healthcare near the end of your life
An estate plan offers more than asset distribution. It gives you a sense of security because you can request who will be in charge of your care close to the end of your life. The documents executed through estate planning help you designate a person to make decisions for you when you're unable to do so.
3. Plans the future of your financial investment accounts
If you have investment capital or accounts you want to continue to grow after your death for your family or personal reasons, estate planning names the executor of your financial decisions. This establishes decisions about your end-of-life preferences for your financial assets, should you be incapable of deciding on your own. You can choose two options:
- Designate financial power to a loved one to care for your accounts
- Designate a trusted individual to make important decisions for you
Both of these options help remove the guesswork upon your death, or avoid your bank accounts and investments being transferred to the wrong person.
4. Protects your young children
If your children are under the age of 18, they are considered minor dependents. You’ll want to name your children’s guardians in your will, in the event that you die. Otherwise, it will be left to the government to decide who takes care of your children.
5. Better prepares your business for continued growth
If you’re a business owner, you’ll want to make sure your business doesn’t die when you do. If you’ve built it from the ground up, you may envision its growth long after you’re gone. An estate plan helps take care of business arrangements, ensuring that your business is placed into the hands of someone you trust.
6. Reduces stress on your family
The death of a loved one is never easy to deal with, and having to manage a family member’s financial and personal affairs after death only increases the stress they’re already facing. By having an estate plan in place, you’ll let your family know exactly how to proceed, reducing their burden and any potential disputes.
7. Leaves a legacy
If you support a specific charity or organization, you can incorporate your philanthropic goals into your estate plan. There are a couple of ways to go about this—you can leave a fixed amount or a percentage of your estate. Even if you're not wealthy, it's possible to make sure both your beneficiaries and favourite charities are well taken care of.
Learn more about how Willful helps you easily leave legacy gifts.
8. Helps your executor pay off your debt
Unfortunately, our debt doesn’t just disappear when we die. If you pass away and have debt, your executor will be responsible for reconciling your debt and closing any bank and investment accounts. Ideally, they should know exactly what debts you owe, so they can make sound decisions and avoid creditors seizing your assets. A good estate plan can include a list of all your debts, to help them make this process smoother for your executor.
9. Averts high taxes
As the saying goes, the only certainties in life are death and taxes—and that includes taxes upon your death as well. Canada doesn’t have an estate tax or inheritance tax; however, when you die, you effectively leave the Canadian tax system and are taxed one last time. Effective estate planning should allow you to live a comfortable life toward the end of your days, but you should have as few assets as possible on paper to avoid high tax rates.
Some strategies to reduce taxes include things like early gifting, including charitable donations in your estate plan, and purchasing permanent life insurance policies. If you own real estate, your executor can also select a property for principal residence exemption, reducing your tax bill. Again, this may look different for everyone, a financial advisor can help you with an estate planning strategy that helps minimize your taxes.
Who needs an estate plan?
Everybody should have an estate plan. For the reasons listed above, creating an estate plan is beneficial to the individual, their loved ones, and their legacy.
For some, an estate plan is especially necessary, such as in the following circumstances:
- You have minor dependants
- You have a health condition, where, at some point in the future, you will not be able to make decisions for yourself
- You have significant assets
- You want your loved ones to be clear on your wishes after you die
- You have financial debt
- You own a business
When in doubt, it’s always better to have one than not! If you’re considering an estate plan, start by creating a will.
A will is crucial to your estate planning—let Willful help
Discussing your death with loved ones is hard, but it's something that needs to be done. You don't want to leave your loved ones organizing the aftermath. Estate planning makes the process easier and guarantees that your dying wishes are met, your family is well taken care of, and your life’s legacy is not forgotten.
When you opt for a will, you leave your assets in the hands of the government. Willful can help you quickly and easily create a will for your estate plan without the need of expensive lawyers. It takes only 20 minutes to create a legal will from your home and is approved by lawyers in your province.
Start for free and get peace of mind, knowing your estate plan is legally secure.