Methods of Transferring Your Estate
While the Will represents the most common means of estate asset
transfer, there are four methods that can be considered when creating
your estate plan. Using these alternative methods, however, must always
occur in conjunction with a valid Will. Without a Will, the dissolution
of your estate will be complicated by provincial intestacy rules
(i.e. dying without a Will).
Method 1: Wills (Probatable Assets)
Your Will represents the most fundamental element in your estate
plan. It is also essential to ensuring your wishes are carried out
with minimum expense and delay.
A Will is a legal document signed by you and normally witnessed
by two individuals whom are present at the signing. The Will can be
revised at any time in the future to reflect changes in your financial
or personal situation.
The instructions outlined in your Will only take effect upon your
death and are in no way binding upon you during your lifetime.
While the other methods of estate transfer should be considered,
the Will is a necessary document in all circumstances as it serves
two basic purposes:
- To ensure that your property will be distributed to your
beneficiaries according to your wishes
- To appoint an executor (called a liquidator in Quebec), who
is the individual or corporation who will act on your behalf and
carry out your wishes
In addition to the above two items, a Will typically includes
the following:
- An outline of the administrative powers of the executor,
liquidator(s) and trustee
- An indication of how you want your estate to be managed
and distributed
- Naming of a guardian for your minor children (referred to
as a tutor in Quebec)
- Instructions to minimize income taxes, if possible
- Specific instructions for the distribution of your personal
effects as well as your wishes regarding burial
Your beneficiaries can be any person or entity (i.e. a charity) that
you wish to name. In many provinces, however, there are restrictions
provided under provincial family law preventing you from excluding from
the estate persons such as your spouse, children or anyone to whom you
may be providing ongoing support.
Types of Wills
There are two types of Wills that can be created, with a third option
in the province of Quebec.
- Formal Will
A formal Will is usually a typed document signed by you in the presence
of at least two witnesses. These witnesses cannot be your beneficiaries
or their spouses. Formal Wills are normally created by a lawyer or notary
and written in "legalese" to ensure that your Will achieves
your stated objectives.
- Holograph Will
A holograph Will is written entirely in your own handwriting and is signed
by you. It is not necessary to have a witness to your signature. Most
provinces recognize this type of Will as being valid, but use of a
holograph Will is not recommended due to potential pitfalls such as
ambiguous language or illegible writing.
- Notarial Will
This is only an option for residents of Quebec. A notarial Will is
created by a notary and normally signed in the presence of only a
single witness. The original copy of the Will is kept by the notary.
How Often Should Your Will Be Reviewed?
In some situations, an out-of-date Will can be worse than no Will at
all. You should review your Will at least every two to three years to
ensure that it continues to accurately reflect your wishes. More frequent
review may be necessary as significant changes in your financial or
personal situation occur (i.e. birth of a child).
Also, your Will should be revised if you move to another province,
if there are changes in legislation, you marry or divorce, or if
an executor/trustee or significant beneficiary dies.
Testamentary Trusts
In addition to a direct or outright distribution of estate assets
to beneficiaries, assets can be left to a testamentary trust for the
benefit of your beneficiaries. A testamentary trust only takes effect
at death. The creation of the trust is documented within the text of
the Will.
A testamentary trust allows you to pass specific assets to beneficiaries
without allowing them to gain control of the assets. The assets held in
the trust are invested and managed by the trustee of the trust with income
and capital distributed to the beneficiaries in accordance with your wishes
as stated in the Will.
Often, the trustee is also the executor/liquidator of the estate
although you may wish to consider a separate person to act in this capacity.
Method 2: Non-Probatable Assets (Joint Ownership)
One of the simplest forms of transferring assets from your estate is
through the registration of assets in joint ownership.
There are two ways of owning property with one or more persons. One
is Joint Tenancy With Right Of Survivorship (JTWROS) and the other is
Tenancy-In-Common.
Joint Tenancy with Right of Survivorship (Joint Tenancy)
Note: Quebec residents cannot use a Joint Tenancy
with Right Of Survivorship (JTWROS) agreement since an automatic right of
survivorship does not exist under Quebec law.
This form of ownership allows two or more people to own an asset
together. All persons listed as joint tenants share ownership and control
of the asset, and upon the death of one of the persons (i.e. a tenant),
the ownership automatically passes to the surviving tenant(s). By
passing directly to the surviving tenant(s), the asset does not form part
of the estate and thus is not subject to provincial probate taxes.
While this method of ownership can be effective in avoiding probate
administration costs, there are a number of complications that may result
from its use. The following list outlines some of the potential problems
of using Joint Tenancy:
- Each joint tenant has an equal, undivided interest in the whole
property
- Property that is held in Joint Tenancy by a bankrupt tenant is
severed on bankruptcy. The severing of the tenancy makes the arrangement
a Tenancy-In-Common arrangement with the other tenants. (For more
information, please see Tenancy-in-Common below)
- Changing ownership of an asset may have tax implications
- Changing ownership to joint tenancy may expose the jointly held
asset to family law or creditor claims
- The use of Joint Tenancy ownership may ultimately cause property to
end up in the ownership of persons other than those who the deceased
would like to see receive the property
- Joint tenancy may, in some instances, be severed by legislation
(i.e. joint ownership of matrimonial home with a person other than
your spouse in Ontario)
- The deceased cannot control the disposition of the jointly-held
property once they are gone. The property passes to the surviving joint
tenant(s) regardless of the provisions in the deceased tenant's Will.
Hence, it is important that the other joint tenant(s) added in Joint
Tenancy are also the intended beneficiaries. Otherwise the asset will pass
to an unintended heir upon death
Tenancy-In-Common
A Tenancy-In-Common is another form of co-ownership. It is the
ownership of an asset by two or more individuals together, but without
the right of survivorship that is found in a Joint Tenancy. Unlike a
Joint Tenancy agreement, co-owners in a Tenancy-In-Common arrangement can
own equal or unequal interests in an asset. Thus, on the death of one of
the co-owners, his or her interest will not pass to the surviving owner,
but will pass according to the Will of the deceased. If the deceased did
not have a Will then the provincial intestacy laws would dictate
the distribution regime.
Unlike Joint Tenancy, the assets held under a Tenancy-In-Common
agreement will be subject to probate taxes because the assets would
have passed through the estate of the deceased tenant.
Method 3: Gifting Assets Before Death
Without question the easiest method of transferring assets is to gift
them to your heirs prior to death. Gifting is frequently used without
the motivation of its estate planning merits, but simply to assist
children and family members with activities such as a home purchase
or business financing.
Gifting of assets can have potential tax benefits if the asset is
given to a registered charity or if the asset was income-producing,
resulting in less taxable income. Be careful when gifting income-producing
assets such as stocks or bonds. Your altruistic act may trigger an unexpected
tax liability for you. Generally, gifting an asset to an individual (other
than a spouse) is treated as a sale (at fair market value) thus triggering
any unrecognized capital gain on the asset. Also, the income attribution
rules will be applied if the gift is to your spouse or a minor child. Under
this rule, the income earned on gifts to either of these persons will still
be taxable in your hands (except for capital gains received by a minor
child).
Another drawback to gifting is that you relinquish all control over
the asset, which may not be an acceptable outcome. Finally, while gifting
assets represents a simple method of transferring the estate as well as
reducing probate taxes, like most things, it should be done in moderation.
Before a gift is made you should ensure that by making the gift you do not
jeopardize your own lifestyle. This is best evaluated within a comprehensive
financial plan.
It is also possible to gift assets on your deathbed by using an enduring
power of attorney or mandate.
Method 4: Living/Family Trusts
The use of a trust in estate planning represents a slightly more
complex method of estate transfer. The essence of a trust is that it is
a relationship rather than a separate legal entity. This confusion
arises from the fact that the Income Tax Act treats a trust as a
taxpayer, requiring it to file a separate tax return annually.
However, this relationship is between the trustee, who holds legal
ownership of the trust asset for the benefit of the beneficiaries, and the
beneficiaries who are entitled to the use and enjoyment of the asset.
In Quebec, the concept of the trust is slightly different. A trust
is created when a "settlor" transfers legal title to a "
patrimony" and then names a "trustee," who manages the
property for the benefit of a "beneficiary." Unlike the common law
jurisdictions that permit ownership to be split between the trustee and the
beneficiary, under civil law in Quebec the ownership resides in only one
person. Nevertheless, the operation of this trust in Quebec is very similar
to trusts in the rest of Canada.
In simple terms, a trust provides an intermediary between yourself and
your intended heirs. By using a trust you can transfer ownership of an asset
out of your hands, allowing your heirs to benefit from the asset and at the
same time allowing you to retain control.
There are two types of trusts:
- An inter vivos trust (living trust) is a relationship that is
created during an individual's lifetime
- A testamentary trust is created on and as a consequence of the
death of an individual. Testamentary trusts are discussed in more
detail above, under Method 1: Wills (Probatable Assets)
A living trust can be structured to provide the person gifting the
assets (i.e. the settlor) with significant control and flexibility over
the timing and amount of assets distributed to the trust's beneficiaries
(your heirs). Control of the trust assets by the settlor is derived from the
trust indenture (document), not from controlling the assets directly.
Note that all income retained in a living trust is taxed at the top
marginal tax rate.
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