Estate Planning Knowledge Gap Threatens Canadians’ Financial Legacy

The Canadian Estate Planning Conundrum: Misconceptions and Lack of Knowledge

A recent IPSOS survey has revealed a concerning trend among Canadians, where a lack of understanding about estate planning fundamentals is putting the inheritance they wish to leave for their loved ones at risk. The issue is most prevalent among those aged 55 and older but affects Canadians across all age groups. The financial futures of beneficiaries are left uncertain, as the inheritance meant to provide for them may be jeopardized by this knowledge gap.

Although similar studies have been conducted worldwide, the Canadian perspective offers a unique insight into the challenges faced by the country’s citizens. The survey’s findings point to a pressing need for increased awareness and education in the realm of estate planning. By addressing this knowledge gap, Canadians will be better equipped to create comprehensive estate plans that protect their assets and provide for their beneficiaries.

As the global conversation around estate planning evolves, the Canadian experience underscores the importance of understanding the fundamentals in order to secure the financial well-being of loved ones. With the potential consequences of inadequate estate planning becoming increasingly evident, it is crucial that Canadians take proactive measures to educate themselves and seek professional guidance in order to preserve their financial legacies.

Estate Planning: Bridging the Knowledge Gap

The findings of the survey suggest that there is a lack of planning and prioritization among Canadians when it comes to preparing their estate. This not only jeopardizes the value of the inheritance but also places potential hardship on beneficiaries. Many Canadians don’t have a clear understanding of what happens to their money after they die, revealing a lack of knowledge about important aspects of wills and estate planning.

In particular, the survey found that:

• 61% don’t feel knowledgeable about or have never heard of the probate process
• 62% don’t know that having a will does not prevent an estate from being taxed after death
• 57% aren’t aware that estate taxes may be reduced by insurance policy benefits

This awareness gap makes it more difficult for Canadians to set up their estate advantageously through financial products and services that can help to leave the legacy they intended.

The Importance of Open Conversations and Professional Advice

Adding to the lack of knowledge is that Canadians aren’t having open conversations about their preferences for what happens with their assets at the end of their lives. A significant number of those aged 55+ are not talking openly about their long-term wishes and how they want their estate plan to be executed.

In fact, many Canadians are hesitant to discuss their financial affairs with loved ones, fearing that it will cause infighting. Furthermore, a considerable portion of Canadians report that their spouse/partner or financial planner is not familiar with their estate plan, despite the knowledge and advice these individuals could provide.

57% aren’t aware that estate taxes may be reduced by insurance policy benefits

In Canada, there is no specific “estate tax” as such, but there are various taxes that can impact the value of an estate upon an individual’s death. It is important to understand these taxes and explore strategies to minimize their impact on the estate, including the use of insurance policy benefits.

1. Income tax: Upon death, the deceased is considered to have disposed of all their capital property at fair market value, which may result in capital gains or losses. The final income tax return must include any income earned during the year of death, as well as any taxable capital gains. The tax return is filed by the executor or administrator of the estate.

2. Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs): The full value of the deceased’s RRSPs and RRIFs is included in their income for the year of death, unless they had a qualifying spouse or financially dependent child, in which case the amounts can be transferred tax-free to the spouse or child’s registered plan.

3. Tax on certain assets: Some assets, such as Tax-Free Savings Accounts (TFSAs) and the principal residence, can be transferred to beneficiaries without triggering tax implications. However, other assets, like investments or rental properties, may be subject to capital gains tax upon the deemed disposition at death.

Reducing estate taxes through insurance policy benefits

Life insurance policy benefits can play a crucial role in minimizing the tax impact on an estate, as the proceeds are generally received tax-free by the named beneficiaries. Here are some ways insurance policy benefits can help reduce estate taxes:

1. Provide liquidity: Life insurance proceeds can provide the necessary funds to cover the deceased’s final income tax bill, capital gains tax, and other expenses, such as funeral costs or legal fees, without the need to liquidate estate assets at an inopportune time.
2. Bypass probate: If a beneficiary is designated in the life insurance policy, the proceeds will typically bypass the probate process and be paid directly to the beneficiary, avoiding probate fees and potential delays in accessing the funds.
3. Fund tax liabilities for RRSPs/RRIFs: Life insurance can be used to offset the tax liability arising from the inclusion of RRSPs and RRIFs in the deceased’s final income. By having a sufficient insurance policy in place, the beneficiaries can receive the full value of these registered plans without being burdened by the associated taxes.
4. Estate equalization: In situations where some assets are difficult to divide equitably among beneficiaries, life insurance proceeds can be used to ensure each beneficiary receives a fair share of the estate’s value. For example, if one child inherits a family business, the other children could receive an equivalent amount from the life insurance policy.

To effectively reduce estate taxes using insurance policy benefits, it’s essential to work with a knowledgeable insurance professional who can help determine the appropriate type and amount of coverage based on your individual circumstances and estate planning goals.

The Benefits of Proper Estate Planning

Having an estate plan in place allows individuals to protect what’s most important to them and better manage their family’s financial future. Open conversations about estate planning reflect positively on Canadians’ feelings and confidence regarding retirement and leaving a legacy. Among those who have open conversations about their estate, a higher percentage feel they will leave loved ones financially secure and are confident in their ability to pass on a legacy.

Estate planning can be a complex process, but with the right approach and professional guidance, you can maximize your wealth and ensure a smooth transfer of assets to your loved ones. Here are some best practices to consider when estate planning:

1. Start early and update regularly: Begin the estate planning process as soon as possible, and review and update your plan regularly, especially during significant life events such as marriage, divorce, birth of children, or changes in financial status.
2. Consult professionals: Engage the expertise of financial planners, estate planning attorneys, tax advisors, and insurance professionals who can provide guidance and recommendations tailored to your specific needs and circumstances.
3. Create a comprehensive will: A well-drafted will is essential to ensure that your assets are distributed according to your wishes. Make sure to name an executor you trust, designate guardians for minor children, and specify any desired charitable contributions.
4. Consider a trust: Establishing a trust can help you control how your assets are managed and distributed, reduce estate taxes, and potentially avoid probate. Trusts can also provide protection against creditors and enable you to support beneficiaries with special needs.
5. Evaluate tax implications: Work with a tax advisor to understand the potential tax consequences of your estate plan, and explore strategies to minimize taxes on your estate, such as gifting assets or setting up a charitable remainder trust.
6. Maximize insurance benefits: Life insurance can be a valuable tool in estate planning, as it can provide liquidity to cover estate taxes, debts, or other expenses, and also help reduce the taxable estate. Consult an insurance professional to determine the right type and amount of coverage for your situation.
7. Designate beneficiaries and review periodically: Clearly name your beneficiaries for assets such as retirement accounts, insurance policies, and other investments, ensuring they bypass probate and are transferred directly to the intended recipients. Review and update beneficiary designations as needed.
8. Establish a power of attorney: Designate a trusted individual to manage your financial affairs in the event you become incapacitated. A durable power of attorney ensures your financial matters are handled according to your wishes, even if you are unable to make decisions yourself.
9. Create a healthcare directive: A healthcare directive, or living will, outlines your preferences for medical treatment in case you are unable to communicate your wishes. This can help avoid potential disagreements among family members and ensure your desired care is provided.
10. Communicate your wishes: Engage in open conversations with your loved ones, explaining your estate plan, your intentions, and any specific wishes you have for the distribution of your assets. This can help prevent misunderstandings and potential conflicts among beneficiaries.

By following these best practices and working closely with professionals, you can create a comprehensive estate plan that maximizes your wealth, protects your assets, and ensures a smooth transfer of inheritance to your loved ones.

Navigating the Probate Process in Canada: Key Steps and Considerations

The probate process in Canada is a legal procedure that validates a deceased person’s will and confirms the appointment of an executor (or an administrator, if there is no will). It ensures that the estate is distributed according to the deceased’s wishes and in compliance with the law. While probate laws and regulations may vary slightly between provinces, the general process is similar across the country. Here’s an overview of the probate process in Canada:

1. Locate the will: The first step in the probate process is locating the deceased’s will, which typically names the executor responsible for administering the estate. If there is no will, a family member or another interested party may apply to the court to be appointed as the estate administrator.

2. Apply for probate: The executor or administrator needs to apply for a Grant of Probate (for a will) or a Grant of Administration (if there is no will) at the appropriate probate court in the deceased’s province of residence. The application typically includes the following documents:

• The original will (if applicable)
• A completed probate application form
• A sworn affidavit by the executor or administrator detailing the deceased’s assets and liabilities
• Proof of the deceased’s death, such as a death certificate

3. Pay probate fees: Probate fees, also known as estate administration taxes, are calculated based on the total value of the deceased’s estate. These fees vary by province and are paid when submitting the application for probate.

4. Notify beneficiaries and creditors: Once the court has granted probate, the executor or administrator is responsible for notifying the beneficiaries named in the will (or legal heirs, if there is no will) and any known creditors of the deceased. Creditors generally have a specified period of time to submit claims against the estate for any outstanding debts.

5. Settle debts and taxes: The executor or administrator must use the estate’s assets to pay off any outstanding debts, including funeral expenses, taxes, and any valid creditor claims. This may involve liquidating some assets, such as selling real estate or other property.

6. Distribute the estate: After all debts and taxes have been settled, the executor or administrator can proceed with distributing the remaining estate assets to the beneficiaries according to the terms of the will (or in accordance with provincial law, if there is no will). This may include transferring titles to property, distributing personal possessions, and distributing funds from bank accounts or investments.

7. Close the estate: Once all assets have been distributed and all necessary paperwork has been filed, the executor or administrator can apply to the court to close the estate.

The probate process in Canada can be time-consuming and complex, and it may take several months or even years to complete, depending on the size and complexity of the estate. It is essential for the executor or administrator to be organized, keep accurate records, and seek professional guidance from a lawyer or accountant when needed.

Conclusion: Addressing the Estate Planning Knowledge Gap

The Canadian perspective on estate planning highlights the need for increased awareness and education on this critical aspect of financial planning. Addressing the knowledge gap will not only benefit those planning their estates but also help protect the financial well-being of their beneficiaries.

These are some of the findings of an Ipsos poll conducted between March 21 to 24, 2023. For this survey, a sample of 1,501 Canadians aged 18+ was interviewed online. This total sample included a boost sample of those aged 55+. Quotas and weighting were employed to ensure that the sample’s composition reflects that of the Canadian population according to census information. The precision of online polls is measured using a credibility interval. In this case, the results are considered accurate to within ± 2.9 percentage points, 19 times out of 20, of what the results would have been had all Canadians been surveyed. The credibility interval will be wider for subsets of the population.