WHAT IS MEANT BY ESTATE?
This is the most basic of questions in estate planning, but our clients are often confused as to the meaning of the word. Unfortunately, your "estate" means different things in different contexts. Your financial planner considers your estate one thing, your lawyer another, and your accountant perhaps something else again.
Your Financial Planner
Your "estate," in the broadest sense of the word, means the assets that you own or control. Your financial planner looks at your estate in this way. Your financial planner's mandate is to figure out your income requirements in retirement, try and provide this income with the available assets (sometimes a tall order!), and maybe leave something for your heirs. For a financial planner, your estate consists of
- assets that you partially own;
- assets you hold with a right of survivorship with another person;
- assets for which you have provided beneficiaries, like RRSPs, RRIFs, pensions, and insurance; and
- trust assets of which you are the beneficiary of income or a right to housing.
In the context of estate planning for a couple, the couples' estate is often the value of the jointly held assets, both spouses' RRSPs or RRIFs, and life insurance on both their lives.
When your lawyer speaks of your estate, he or she might only be considering assets that have to be probated upon your death. Assets held with a right of survivorship, such as joint bank accounts and joint tenancies in houses, are excluded. RRSPs and life insurance are also excluded if there are named beneficiaries. If there are no named beneficiaries, then those assets fall into the estate dealt with inside the Will.
In many cases, due to joint tenancy and beneficiary designations upon the death of the first spouse, there is no "estate." If there is no estate, there are no probate fees, which are currently about 1.4% of the value of the estate being probated. Other fees such as legal fees are also minimized.
In other cases, usually in second marriages with two sets of children, you may want to have an estate so that either your children receive a bequest or there is money to establish a testamentary spousal Trust. Such a trust provides income and / or capital to a spouse for the spouse's life, and then the capital goes to the deceased's spouse's children. If you have set up a spousal trust in your Will, you can defeat the creation of the trust by joint tenancy and beneficiary designations directly to the intended income recipient.
Your Tax Advisor
If your tax advisor is involved in your estate planning, which should always be the case, he or she needs to consider the actual net worth and tax consequences of your estate. The biggest bite on somebody's death is by the tax man in the form of taxation of RRSPs, RRIFs, and capital gains on death. Your tax advisor's job is to figure out how you should hold your assets prior to your death and minimize the tax consequences of a death. The tax advisor is looking at what actually passes on to your heirs and the tax they will pay in the future.
Another aspect of your estate is planning for disability. You need to consider disability insurance as well as a power of attorney and / or representation agreement to deal with your financial affairs upon mental or physical disability.
The important thing to take away from the above discussion is that your estate must be looked at from a number of different angles. No estate plan is satisfactory unless there is a financial plan, a tax plan, and appropriate legal documentation to carry out the plan.
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