Estate planning is not a single, simple task. It can include a wide range of options and actions that you must implement to accomplish your goals. We will highlight some of the key options available to you and then prioritize the actions that you will need to take to develop your estate plan.
What Are the Typical Goals of Estate Planning?
- Estate planning should aim to ensure that the estate is distributed according to the wishes of the owner: to whom, when, and how much.
- Ensure that the estate is large enough to provide benefits in the event of a death (to provide the family’s desired levels of financial security).
- Plan to maximize your desired after-tax income and lifestyle while living in order to achieve your goals and meet your objectives of growing the value of the estate assets.
Many people equate “estate planning” with “tax planning,” but this is incorrect. Tax planning typically involves calculating the amount of taxes owing on your estate, whereas estate planning includes tax planning as well as a number of additional tasks. We have reviewed many estate plans over the years, and there appears to be a fixation with trying to avoid probate fees at all cost. The tactics implemented to avoid the probate fees (of, say, 1.5%), will sometimes trigger the payment of much higher income taxes. Sometimes it is easier just to pay the probate fees.
Do I Really Need Estate Planning?
The simple answer is yes. Any person who has income, investments, and owns real property needs estate planning. You need to ensure that if you have assets and you want those assets to transfer to the next generation, that you transfer those assets in the most tax-efficient way and at the appropriate time. For example, if there is a housing recession at the time of your passing, and the family home needs to be sold, then you might want to provide some flexibility in the wording of your plan to the executor on when to actually sell the family home.
One of the major issues facing the executor is usually the lack of liquidity inside of the estate. If you own a number of real estate holdings, where will the money come from to pay any taxes that are due at death? What happens if the real estate market is down or the economy is about to enter a recession? Will there be buyers to purchase the real estate at fair market value or will they try to take advantage of the situation? A solid estate plan should provide the necessary liquidity and available options to the executor to enable them to deal with these issues. Life insurance is a key component of any successful estate plan. If planned properly, the proceeds from the life insurance policy avoid probate and are typically made available to the beneficiaries 10 to 12 days after the proof of the death certificate has been validated.
Your Estate Planning Team
Your certified financial planner, who is also your insurance advisor in most cases, plays a key role in helping to develop your estate plan. We usually refer to ourselves as the “quarterback” of the team and we work in partnership with both your accountant and your lawyer. We all work for you, the client. Accountants and lawyers will have access to information and technical expertise which your financial planner may or may not be aware of. However, accountants and lawyers will often only have a general idea of how much and what type of insurance might best fit into the plan.
There are many different trusts, some of which may be beneficial to you and play an important role in your estate planning. Your certified financial planner can give you an idea as to which trusts would be an important addition to your planning.
Legacy Planning vs. Estate Planning
As stated above, estate planning is all about putting a written plan in place to maximize your estate value, to minimize the taxes that are paid upon your passing, to provide for the orderly transition of your assets to your beneficiaries, and to make sure that any dependents are taken care of.
Legacy planning takes estate planning to the next stage by facilitating an open dialogue with the next generation, thereby improving communications within your family. This will help to ensure that your intentions are carried out and that any concerns that arise are dealt with immediately.
For example, the act of leaving the family cottage to the next generation, if not planned out properly, can cause a family to be torn apart. Not only do you need to plan for how to pay any taxes owing on the transfer of the cottage, but you must also put a written plan in place to deal with annual property taxes, regular maintenance such as the cutting of the grass or the replacement of a roof or dock, and guidelines for the scheduled use of the cottage. If you want the family cottage to continue on as part of a family legacy, then you need to put a separate written plan in place.
An estate plan can be very simple in nature or it can be very complex. Prior to sitting down with a professional to help you with the creation of your estate plan, you need to spend some time to establish your goals for the estate plan. Next, you need to determine when you want your beneficiaries to receive the assets – either while you are alive, through an inter vivos gift, or, upon your passing, through a testamentary trust. Then, you need to choose who you want as your executor, and then you need to secure their acceptance as the executor of your estate. Following that, you will need to estimate the amount of taxes due upon your passing and then make a decision on whether or not you want to neutralize this tax by implementing a permanent life insurance policy. Finally, you need to open up the lines of communication and ask your financial planner to facilitate a family estate planning meeting. As you continue down your path towards the development of your written estate plan, you need to make sure you schedule periodic reviews with your financial planner, to make sure that the estate plan remains up to date.
About the About
Rick Goldring, BA, CFP, CLU, CHFC is president & CEO of Goldring Financial Leadership Inc. Prior to serving as mayor of Burlington, ON from 2010 to 2018., Rick had a long and successful career in financial services. Rick is qualified as a Certified Financial Planner and a Chartered Life Underwriter. Rick served as President of the Hamilton, Ont. Chapter of Advocis, The Financial Advisors Association of Canada.
John Moakler, BMath, CFP, CLU, CSC is a best-selling author, and president and senior executive financial planner at Moakler Wealth Management Inc. After graduating from the University of Waterloo with a Bachelor of Mathematics and Computer Science, he spent 18 years in the high-tech industry. In the course of a business transaction, he became dissatisfied with the financial advice he was receiving. So, he set out to become a financial planner himself. Visit theprosperousdentist.com.