Methods of Transferring Your Estate
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)
- Method 2: Non-probatable assets (joint ownership)
- Method 3: Gifting assets before death
- Method 4: Living/family trusts
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.
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.
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
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.
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.
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.