There are many misconceptions and fallacies regarding estate planning. This article will help you recognize and avoid the most typical estate planning mistakes families make, saving your family thousands of dollars in unneeded taxes and probate expenses.
Mistake #1: Not Knowing How Your Assets Will Be Distributed
Many individuals believe that their wills are enough to determine how their possessions will be distributed once they pass on. Yet, today, asset division passes outside of wills or trusts since people maintain much of their money in retirement plan accounts or life insurance.
Wills and trusts manage your real estate and some assets, but other assets, such as life insurance and RRSPs, are not generally subject to probate and cannot be affected by a will or trust.
For instance, Don selected his brother as the beneficiary of his retirement plan and life insurance while still single. Later in life, Don married. Don amended his will after his marriage to give everything to his wife. However, because Don never altered the beneficiaries on his retirement account or life insurance, most of his assets fell to his brother rather than his wife when he died.
When substantial life changes occur, evaluate your beneficiary designations for life insurance policies and retirement programs to ensure that they still reflect your present position and estate planning goals.
Mistake #2: Including Children on Title to Your House
Your children become co-owners of the property when you place your house (or any other asset) in co-ownership with them. This leads to some issues.
First, according to the Canada Revenue Agency, putting your house in joint occupancy with your children is a taxable gift. If the value of the interest given to each child exceeds $13,000, you must submit a gift tax return for the year you made the transfer.
Second, if your child gets sued, divorced, or has a tax lien against them, you may discover that you no longer own the house with your child, but with their creditors. Creditors can foreclose on your home to get at your child’s fractional share.
Finally, you may only use your main residence capital gains exclusion ($250,000 for individuals and up to $500,000 for married couples) on your fractional portion of the home when you sell it. Each of your children might face a sizable long-term capital gains tax payment that could have been avoided entirely if the house had remained named in your revocable trust’s name.
Mistake #3: Failure to Take into Account Who Pays Estate Taxes
For example, John stated in his will that his house would belong to his long-time companion and the rest of his wealth would go to his children. However, he and his attorney never discussed who would pay the estate taxes. His trust stated (as do many trusts) that taxes and expenditures would be paid from the “residuary estate,” or what’s left after particular distributions.
As a result, when John dies, the estate taxes will be paid entirely from assets that transfer under his trust’s residuary clause and hence from his children’s inheritance.
Mistake #4: Attempting To “Do It Yourself”
Using another sample, John and Mary did not want to employ an attorney to write their estate plan, so they purchased a living trust kit and designated themselves or the survivor as trustee. They opted to tweak the language of the Family Trust that authorized payments to the living spouse for “health, education, and support” by including the terms “comfort and welfare” to match their unique situation. This addition appeared to be innocuous enough to them.
However, local tax regulations state that the additions will result in the Family Trust being included in the survivor’s taxable estate, which is precisely what they were seeking to avoid.
Even if your estate is small, it represents a significant sum of money to your spouse and children. Make sure your estate plan and revisions are correctly written by a skilled wills and estates lawyer.
One of the best things you can do for your family and loved ones is to create an estate plan. But don’t let your good intentions be squandered by committing wills and estates mistakes. Make sure to receive the proper support from experienced lawyers.
Dreyer and Associates Family Lawyers is committed to preserving the best interests of families across the Fraser Valley and the Lower Mainland. We have diverse experience across family law, wills and estates, and residential conveyancing. Contact us today!