If COVID-19’s rapid spread has you wondering how your assets might be divided if you were to die, then it’s time to start thinking about writing a will and, depending on the size of your nest egg, setting up an estate plan.
Dying intestate, or without a will, means the government of the province in which you reside will decide how your assets are divided. Some 50% to 60% of adult Canadians have no will, several surveys done in the past five years show.
More affluent Canadians should be considering an estate plan, which allows them to have more control of asset division after death, and serves to protect against financial abuse, says Paul Fensom, Director of Scotiatrust Estate & Trust Services. Fensom says the numbers around abuse are worrisome and points to a 2017 national survey, Into the Light, funded by Employment and Social Development Canada and five provinces that found 2.6% of Canadians over the age of 55 suffer financial abuse from someone they trust, with more than a third of the abusers being an adult child or grandchild.
Those numbers can only increase with Baby Boomers, some now in their mid-70s, expected to live longer than their parents. A 2016 survey from Statistics Canada predicts nearly 2.7 million people, or 5.7% of the population, will be 85 and older in 2051.
In a recent conversation, Fensom discussed the importance of estate planning and what it entails.
Q: What is an estate plan and who should be considering one?
Fensom: Most people think of an estate plan as their will, but it’s more than that. It also includes consideration of a power of attorney for property, a power of attorney for personal care and potentially a trust. Statistics generally show that 50% of Canadians have an estate plan. If you dive a bit deeper into those statistics, you’ll find the majority of seniors do have a will in place. The point that is quite often missed is people — particularly seniors — should be reviewing their estate plans and the circumstances of their wealth transfer changes, whether it’s that the amount of their assets changes, or beneficiary circumstances change. For example, are any of the beneficiaries located in other jurisdictions? It's important to revisit estate plans every three to five years.
Q: How does an estate plan complement a will?
Fensom: The will is a key component of an estate plan. It provides the instructions as to how ones’ wealth is to be distributed and who will be responsible to carry out those instructions, known as the executor. However, the gap can occur in the event of incapacity. Approximately a third of individuals who have a will do not have a power of attorney. This is a key reason why a person might need a comprehensive estate plan. Some estate plans will also recommend setting up an alter-ego trust, which in simple terms is a replacement for a will and power of attorney.
Q: Can you tell us a bit more about alter ego trusts?
Fensom: Given the circumstances of COVID-19, some people are now looking more closely at alter ego trusts. These trusts, which are established while you're living, are often considered a replacement for a will and power of attorney for properties. If you’re over the age of 65 you can set up an alter ego trust on a tax-free rollover basis.
How it works is you appoint yourself trustee while you’re alive and capable and have a successor-trustee provision in your agreement. The trust establishes that the individual who sets up the trust would be the sole beneficiary of it until passing, at which point the provisions in the trust would dictate who would be the beneficiary of the capital on the wealth transfer.
There are a few advantages. One is you avoid probate fees, which in most provinces are about 1.5%, as well as the time needed to probate a will, which in this current COVID-environment could take up to six months. Another is, alter ego trusts are more private. A will once it is probated could be found in the public domain, whereas an alter ego trust agreement would always be private.
The disadvantages are the cost to set up the alter ego trust, and there might be some other tax issues vis-a-vis the lack of spousal rollover, but there's also something called a joint partner trust that could address that concern.
Q: How do testamentary trusts fit into a plan?
Fensom: A testamentary trust requires the trustee to hold and manage the assets in it and provide the benefits generated by those assets to the named beneficiaries at a specific time. People often set these up for disabled, spendthrift or minor beneficiaries or where there’s a significant wealth transfer or complex assets that require professional management. For example, it's not uncommon for someone who has a trust to say, “I wish to give half of it to my children when they reach the age of 25 and the other half when they attain the age of 30.” That has the advantage of giving people a chance to learn and if a mistake is made then all is not lost because there will be a balance of the inheritance paid at a later date.
Another reason for a trust is to leave money to a charity. For example, if an individual is supporting a multi year charitable project then payments rules can be set to allow payments to continue provided predetermined thresholds are being met.
Trusts are also used where there are significant or complicated assets that require a professional trustee or because the beneficiaries are simply not inclined in financial matters. For example, owners of a private company understand the significant amount of compliance work required to maintain a company in good standing and a professional trustee is equipped to handle the administrative details.
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