Why You Need a Will and The Basics of Estate Planning

A few personal finance bloggers contacted me to contribute to their group writing project about wills and estate planning. I’ve written about wills before with it being a must have item if you care at all about where your assets go upon passing. However, I’m going to be honest with you, procrastination has gotten the better of me, and it’s only now that I’m looking into getting a will. Better late than never right?

The Will

Here are some of the reasons why you need a will:

  • Know where the money is going. Without a will, the government decides how your assets will be divided. If you have children, some provinces will allocate a fixed portion to the spouse and the rest to the children. For me, with young children, I would want to make sure that my wife has control of the assets.
  • Tax Deferral. A will organizes where large assets go to maximize tax deferral without confusion. Essentially, transfer taxable assets to the surviving spouse to delay taxation as long as possible. More on this below.
  • Know where the dependent kids are going. If both spouses were to pass away with surviving dependent children without a will, the courts decide who the primary caregivers would be.
  • Be Organized. A will is simply a plan and helps reduce chaos especially if the one that passes is the family chief financial officer.

Basics of Estate Planning

You’ve worked hard for your money, pay taxes on the money you’ve earned, why not minimize taxation upon your death? Here are some of the very basics of estate planning to reduce “death” tax:

  • Get a Will. As mentioned above, there are too many benefits of getting a will to ignore. Planning a will properly will also reduce taxation.
  • Real Estate. Assets can be transferred to a spouse tax free, but there is a tax hit once the money moves between generations. Make sure that large assets like real estate are under “joint tenancy” or else the property (besides principle residence) will face capital gains even if the property isn’t sold!
  • The Family Cottage. If you are fortunate enough to have a family cottage for you and your kids, it probably has a lot of sentimental value. However, upon the owner of the cottage passing, there will be what’s called “deemed disposition” which means that it’s considered sold and tax owed. Joint tenancy of the property when purchasing will defer those taxes until both spouses have passed.
  • Investment Accounts. As you may know, RRSP’s can be assigned a beneficiary. The beneficiary should be your spouse as it will ensure that the account will transfer to your spouse tax free. Otherwise, the account will go to the estate where probate fees along with income taxes will have to be paid before distribution to family members.
  • Power of Attorney. In the case of incapacity, a power of attorney should be assigned to take care of essential business.

Here are some articles written by personal finance blogger colleagues about wills and estate planning:

  • Four Pillars tells us about “my last will and testament“.
  • Thicken My Wallet wrote about “Top 5 myths about wills“.
  • The Financial Blogger has “6 common mistakes on a will“.
  • Canadian Capitalist came up with “A guide to getting your will done through a lawyer“.
  • Where Does All My Money Go provides some “Benefits of a professional executor“.

Sources:

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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NYCer
10 years ago

Is there an article suggesting the best way to get a legal will? Are lawyer ones the best? I heard some will kits aren’t so great. Others I have heard your own handwriting is best.

Thoughts or sources?

Valencia
13 years ago

You provided here rather useful information. As a rule most of us prefer not to think about our passing away not to bring disaster upon ourselves. That is why we try to postpone estate planning and making a will in every possible way. Though if we won’t it may lead to unfortunate consequences.
It is very important to plan our estate in proper way and in proper time because an estate plan gives us much greater control over who will inherit our assets after our death. There are many cases when our relatives, no matter how remote, may have priority in inheritance ahead of the state. And they may not be our choice of heirs. We should think of it carefully.

Cannon_fodder
13 years ago

FP,

My lawyer recommended (or perhaps I read) two criteria for the executor (in addition to the obvious). One was that they should be relatively local because the process can take quite some time (several days to even weeks depending on the estate).

The second is that the executor ideally would be younger so that you minimizes the chance that they predecease you or perhaps become physically or mentally incapacitated.

I wish there was a way to force people to deal with this issue as soon as their situation dictates. My sister and her husband (early 40’s) have two children, a house and a business – they are only now getting around to sorting this out. I really laid into her when I found out.

I consider this as being an irresponsible parent if you don’t take steps to help ensure the children are taken care of in case of a tragedy.

Charissa
13 years ago

What about a Living Revocable Trust? I’m surprised this wasn’t mentioned at all. A living trust can be a blueprint of your wishes, bypass probate for real estate, therefor saving your beneficiaries lawyer fees. A will also does not cover you if you become incapacitated. They are more expensive to set up in the beginning, though, generally. Just something to think about or look into to see if its right for you.

David V
13 years ago

I am not an estate lawyer, but I remember in the Bar Admission course learning that MGL is correct in Ontario and the 90 day rule does apply, but my instructor suggested that unless someone makes a fuss, it will usually continue.

Imagine if a parent gave guardianship to a third party rather than the other parent. I think that’s the reason that courts don’t automatically grant long-term guardianship.

Four Pillars
13 years ago

FT – it’s a tough call – you want to get someone you trust and has the ability to do the job (location might be part of this). It would be interesting to hear from someone who has actually performed the executor service – maybe location isn’t all that critical?

I’m not sure what people do if they get moved around for work – it’s not realistic to keep naming a new executor every few years – especially if they don’t know anyone in the new location.

Four Pillars
13 years ago

Our #1 choice for guardians just moved to Singapore – our lawyer said that was fine.

He did say however that the executor and poa should be in Ontario – I don’t remember if this was an absolute requirement or just a common sense thing.
The poa needs to be available to make quick medical decisions so the closer they are to you, the better. The executor also has to do a lot of work so they can do a better job if they don’t have to get on a plane everytime they need to see someone.

MoneyGrubbingLawyer
13 years ago

FT, it’s definitely the case in NL and I’m fairly certain it is also the case in Ontario. I suspect other provinces would have similar laws in place.

I would stress again that it is rare for a court to interfere, but the guardian appointed does need to be approved by the court. If you suspect that your family (or an ex, for example) might cause trouble with custody issues, it is important to try to work things out while you can.