Estate planning is an essential element of financial management. A proper estate plan will ensure that your property, finances, and personal wishes are handled in a way that provides for your loved ones while minimizing taxes, legal disputes, and administrative delays.
This guide will provide an overview of key estate planning strategies to help you navigate this critical process.
1: Will, Power of Attorney, and Representation Agreement
A valid will is the foundation of an estate plan. A will specifies how your estate should be divided and can include instructions on guardianship for minor children, distribution of specific assets, and charitable donations. If you die without a will (intestate), your estate will be distributed according to BC’s intestacy laws, which may not align with your wishes.
The will should name an executor. The executor is responsible for administering your estate according to the terms of your will. In BC, the executor’s duties include: Collecting and valuing assets, paying off debts and taxes, distributing the estate to beneficiaries.
Estate planning is not just about what happens after your death. It also covers situations where you are alive but unable to manage your own affairs. In Canada, two key documents help ensure your wishes are followed if you become incapacitated:
Power of Attorney: Appoints a trusted individual to manage your financial affairs if you become incapacitated.
Representation Agreement: A legal document that allows someone to make healthcare and personal care decisions on your behalf.
Having these documents in place provides peace of mind and helps prevent costly and emotionally difficult legal battles over who should manage your affairs.
BC’s family law can also impact estate planning, particularly when it comes to spousal and child inheritance rights. Under BC’s Wills, Estates, and Succession Act (WESA), if you are married (or in a common-law relationship for two years), your spouse is entitled to a share of your estate, even if not specifically mentioned in your will. Children can also challenge a will if they believe they were not adequately provided for. This happened in BC just last month, where a court overruled a “biased will” that left $2.9M for the son, and only $170,000 for the daughter.
To avoid disputes, ensure that your estate plan reflects current family dynamics and that your intentions are clearly outlined. A professionally drafted will can reduce the likelihood of challenges from disgruntled family members.
2: BC Probate – What you need to know and basic ways to avoid it.
Probate is the legal process of validating a will and granting the executor the authority to administer the estate. In BC, probate fees are based on the value of your estate:
- $0 for the first $25,000 of estate value.
- 0.6% on the value of the estate between $25,000 and $50,000.
- 1.4% on the portion of the estate over $50,000.
For example, for an estate valued at $500,000, the probate fee would be approximately $6,650. To minimize probate fees, you can employ strategies such as:
Joint Ownership: Holding assets jointly with a spouse or child ensures that assets pass directly to the survivor, bypassing probate. However, be cautious when using joint ownership, as it may expose your assets to the debts and liabilities of the joint owner.
Designating Beneficiaries: Naming beneficiaries on assets such as RRSPs, TFSAs, and life insurance policies can allow those assets to transfer outside of probate.
Downsizing or Gifting: A simple and effective way of lowering probate fees or taxes, consider gifting your property or downsizing before death. Generally, by the time you reach your 80s, you start to get a sense of whether you will outlive your savings or not. By holding on to your investments / assets, you incur any ongoing investment income and pay tax on that income. You’re also exposing that asset to a potential 1.4% probate fee, and a potentially higher tax bracket in the year of death. Instead, consider gifting a small portion of your investments / assets to a loved one who may benefit more from it (paying down debt, maximizing tax-shelters).
While there is no gift tax in Canada, gifting can trigger capital gains taxes, so professional advice is recommended.
3: Minimizing Taxes in BC
Canada does not impose an estate or inheritance tax, but taxes on capital gains apply when assets are deemed to be disposed of upon death. The following strategies can help minimize taxes on your estate in BC:
Spousal Rollover: Assets transferred to a surviving spouse are exempt from capital gains taxes, deferring taxation until the spouse sells or disposes of the assets.
Charitable Donations: Charitable gifts made through your will can reduce the taxes owed by your estate by providing a charitable tax credit.
Estate Freeze: An estate freeze can be an effective tool to lock in the current value of your assets, with any future appreciation attributed to your beneficiaries. This strategy is particularly useful for business owners who want to pass on their business to the next generation while limiting tax liabilities.
Real Estate: Given the high property values in cities like Vancouver, real estate often forms a significant portion of an estate in BC. If the property is your principal residence, it may be exempt from capital gains tax under the principal residence exemption (PRE), significantly reducing your estate’s tax burden.
However, the PRE only applies to your primary residence. If you have a secondary property such as a rental property, cottage, recreational property, etc, any appreciation on that property from the time you purchased it will be taxable and subject to probate upon your passing.
Conclusion: Seek Professional Guidance
Given the complexity of BC’s legal and tax landscape, working with an estate planning lawyer, financial planner, or accountant is crucial. They can help you create a plan that not only meets your goals but also protects your loved ones from unnecessary taxes, probate fees, and disputes. Professionals can also keep you informed about updates to laws and regulations that may affect your estate.