Author: Manfred Purtzki
5 Big Estate Planning Mistakes (and How to Avoid Them)
1. Not having an updated will
One of the biggest mistakes in planning for your money and your heirs is not to have an estate plan at all. If you do not have an updated will, you are not alone. If you die without a will, your estate can be tied up for years with expensive administrators, with the estate assets eventually being distributed according to the laws of the province: mostly likely not the way you would have wished.
2. Naming the same person to serve as guardian and trustee
If you trust your sister with raising your children, it is natural you want her with the money to look after them. Actually, many people name one individual as both the guardian and trustee without much thought. The advantage of having separate people as guardian of the children and trustee is that it creates a control system. It will be tough for the guardian to waste the children’s money if they have to account for the funds to a third party.
3. Falling into the joint ownership trap
Probate fees only cover assets that are dealt with in the will. Any assets that are held in joint ownership, where the assets on death pass automatically to the survivor, are not subject to probate. Probate is often perceived as a simple transaction of registering a beneficiary as a joint owner of your assets.
However, moving an asset into joint names triggers a disposition for tax purposes. If the asset has an unrealized gain of $500,000, the transfer to joint ownership triggers a tax of 50% of that gain. In contrast, by registering your intended heir as a joint owner of your principal residence, no income tax is triggered on the registration. But if the home is sold on your death, only your half of the principal residence is covered by the exemption. The other half – while it was in joint ownership – is subject to income tax on the appreciation in value.
4. Not freezing your estate
Your shares in your medical or investment holding company are subject to tax on death. Implementing an estate freeze is an easy procedure that does not trigger any income tax. You simply convert your shares in your company to fixed value shares at the current value of the investments of, for example, $2 million. New common shares will be issued to your family members.
The estate freeze is structured so that you retain full control over your company. Any funds you withdraw from the company will be a partial redemption of the shares. If all the estate freeze shares are redeemed on death, capital gains taxes are completely avoided. The full value of the company investments will be attributed to your family members.
5. Not using the spousal trust
Transferring estate assets to your children from a prior marriage – while at the same time providing an income stream to your current spouse – is an almost impossible task unless you use a spousal trust. The spousal trust is a magic tool to accomplish this goal. The beneficiary of the trust, your current spouse, is only entitled to income and capital during her lifetime. On your spouse’s death, your estate assets will be distributed to the trustees of the trust: the children of your first marriage.
Take the time to plan what you would like to happen to your estate. Make a list of individuals that you would trust to carry out your wishes. Get control of the situation today before it’s too late – talk to an advisor.
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