Taxes Work Personal Life Issues

Who Should You Leave Your Assets To? That may seem like a funny question to many people, yet many of us have a tough time trying to decide. Some like us just want to leave whatever we have equally to our kids. No favoritism and certainly not to create any more sadness than there already will be when we pass on. Some people prefer to divide their assets among their children based on perceived need. This happens a lot if one child has been very successful while the other has not. Still other folks say, my kids are adults they are on their own and I am going to spend my money and enjoy myself as much as possible. Another group would like to leave their assets to charity and just a little bit to their children. What is your plan? You should have a plan regardless of what your feelings are on this subject.

What is the right answer? Well, it seems to vary for just about everyone. We will discuss some of the pro’s and con’s of various strategies.

Divide Equally Among Our Children

This is the plan that I personally favor. I love my children and want them to know that we loved them both equally. So whatever assets are left when I pass along, I have decided to have the assets divided equally. My children should feel like they were treated equally and that they were both valued equally by their parents.

I am going to enjoy myself as much as possible so I will spend some of my estate before I pass along. In a way this approach overlaps a bit with one of the strategies below. Although I will spend some of my estate and I am not going to avoid travel etc so I can leave a large estate, I fully plan to have an estate that I will leave to my kids.

Divide Assets Based on Need

We have seen situations, were one child was deemed to be more in need of help than others. In this case the parent decided to leave a larger portion of the estate to that child at the expense of the other children. A great deal of pain was caused in the situations we are familiar with and the last thing we want to do is cause more pain.

One child may have a great job, all of the toys, the house the car etc, while the other has not been as fortunate. There are many reasons for this difference and we will not go into these differences here, we will just accept the notion that some kids just do better than others.

Although you are helping the child that is more in need, you are hurting the other children. You make them feel less in many ways and not as loved as much as the other child. This is a terrible thing to do in our opinion. One of the questions you need to ask yourself when you make these types of decisions, is how will the new found assets be managed by both kids. The child that is more in need is their for a reason. Perhaps they made some bad decisions through their life. Take these sorts of things into account.

Spend Your Savings

Another group of people feel they have worked hard throughout their lives and deserve to now reap the results of their savings during retirement. Spend all of their savings and enjoy life to the fullest. Well you can do this, but we think it is a nice legacy to leave something to your kids.

It is hard to know just how much you will need, because let’s face it we do not know how long we will live. You might spend all of your estate and then have to live destitute for the remainder of your life. That certainly is no fun. There is fine line between spending your estate, enjoying life and living comfortably. We think that it is better to save some money for your later years even if that means some will go to your kids or other family members.

Give to Charities

If you are wealthy , have no heirs or just want to leave your estate to a charity, choose carefully. There are many excellent charities who really do some good work and help people. Unfortunately there are lots that pay themselves well first and then if there is money left over they then put this towards the charity they were set up to help.

No Plan?

Not having a plan is probably the worst situation. If you do not have a plan, you probably do not have a will which means the government steps in and divides your assets amongst your relatives after they take their management fee’s. You can avoid all of this expense by having a simple will that says divide your assets among your heirs equally. It is pretty simple and you do not even need to name the heirs, just say your wife and kids if you have either.

Your Estate Plan – Summary

In recent posts we have been talking about financial investing and preparing for retirement. All of these investment planning ideas are great, especially the 10 % investment plan approach and diversification.  However every one of us needs to step back and look at the big picture and consider our estate plan and what that really means.

Estate planning takes into account your needs while you are alive, your estate needs and also your family’s needs after you are gone. Each of these areas is important to your financial health, to your personal health and of course the health and welfare of your family. Not having an estate plan leaves everyone exposed and possibly experiencing much more personal heart ache and even financial hardship than is needed and necessary.

Without careful planning, without having a will for example, your estate could end up in the courts for months and the only people who get money from your estate are the lawyers and the government. Your family stands to lose a great deal of money to the legal people and the government may even take more taxes than they should because of bad decisions.  Meanwhile your family is waiting to receive funds that they may need to live on while the courts fight it out and the lawyers collect their fees. One of the first requirements of an estate plan is to prepare a will and consider the following areas carefully in your plan.

Distribution of Assets

One of the first decisions you will need to think about is who your executor will be. This person or persons will have responsibility for following your instructions with regards to how your assets will be distributed. Note an executor cannot change the will, they must follow the instructions in the will both in who the assets go to, when they are distributed and also finalizing and closing all loans, mortgages and taxes that may still be outstanding. They will also sell assets if needed to pay for these outstanding debts. You can have one executor or several. Obviously it is easier to handle if there is one executor, however for family political reasons or for reasons of financial control you may want to have more than one executor to manage your estate plan.

Who Receives the Assets and When

In order for your executor to do his or her job you must decide and place in your will the direction regarding who your assets will be distributed to and when they will be distributed. Note that your executor will need to ensure that all debts such as loans, mortgages and especially taxes are paid prior to all of the assets being distributed. This can sometimes be a frustrating issue for many people who are expecting asset distribution. As an executor you have responsibility to close your tax file with the government and ensure all taxes have been paid. It is much easier to pay the final taxes from assets that have not been distributed than it is to ask for funds to be returned from your heirs. Your will should be very clear about this element as part of your overall estate plan.

Who will take Care of your Children?

If you have young children and even those who are adults who may still be in school should be considered in your estate plan. One of the things every parent wants to do for their children is provide the best opportunities they can for their kids. Having an estate plan which lays out who will take care of the kids and who will look after their finances is an extremely important part of the estate plan. Leaving it to someone else or worse the government is one of the worst things you can do. Build this aspect into your estate plan so that your family is well looked after.

Who will Manage Your Trust Accounts?

You may already have trust accounts, or you may want to set up trust accounts for your young children. Whenever you do this, you will need someone to manage these accounts. Trust accounts are useful in situations where the beneficiary of the trust account is too young or unable to manage their own affairs. You can place the proceeds of your estate in the trust account and then have a professional manager manage the trust account on their behalf. This is an excellent way of managing the affairs of for your children and beneficiaries who are too young to manage their own.

Who will Make Financial and Medical Decisions if you are incapacitated?

The last area of your estate planning takes a look at what happens if you are in an accident or have a health issue that prevents you from managing your own affairs. Your estate plan creates what is called a living will, which designates a person who you trust, to manage all of your affairs while you are still alive and unable to manage your own affairs. Not only will they manage your estate as part of a living will, they will also have the responsibility to make decisions concerning your health and treatment that you receive while you are incapacitated. The executor of your living will should be selected with care. They will make decisions on your overall health and well-being, while incapacitated.

One last point. If you decide that you want to contest a will that has been prepared and meets all of the legal requirements, remember that the lawyers involved will charge a significant fee. Before you go to court, ask yourself if the fees that the lawyers will collect are worth what you may eventually receive assuming you win the case in court.  It is often said that inn legal contests, only the lawyers ever win. Make sure that your estate plan and will are well thought out and beyond reproach to avoid any future legal action which could jeopardize the estate that you want your heirs to inherit.

Whether you have a large estate or a small estate there are many issues that you should be thinking about if you want your estate handled in a manner that meets with your approval and also that your family is looked after. Depending on the complexity and the size of your estate you may need the services of various professionals. These include a lawyer, a financial adviser, an accountant, and insurance agent or a trust officer.

The building blocks to a proper estate plan include: Will, Trust, Life Insurance, Power of Attorney for Property, Power of Attorney for Personal Care, Living will, Organ Donor Card, Funeral Arrangements, Business Succession Plan, Tax Planning. We will cover each briefly in this post and expand on each in later posts. We have briefly refereed to some of these issues in past posts as well.

Will – The core document of your estate plan outlines the executor who will administer your estate and distributes all of the assets according to your directions and pays your taxes and closes up all of your accounts. If there are children involved, they will make arrangements for their guardians. The will is the most important part or your plan and usually requires the services of a lawyer to ensure that everything is considered and properly laid out as per your instructions.

Trust - a trust is set up in situations were you do not want the assets immediately distributed to the beneficiaries  after your death. You may also set up a trust to manage assets on behalf of minors or other people who cannot manage the assets themselves.  The services of a lawyer to set up the legal trust and a trust officer may be required to manage the trust following your guidelines.

Life Insurance - is often forgotten about until it is too late. Purchase life insurance while you are young and healthy. Once you have some sort of health issue, it may be too late to purchase health insurance. The life insurance companies may turn you down. Life insurance can provide for your family after you are gone and also pay off debt that you might have accumulated so that your family does not have to deal with it.

Power of Attorney for Property - there are two powers of attorney, one for property and one for personal care. The power of attorney provides for a trusted person to mange your assets when you are still alive and are unable to look after them yourself. Choose someone your trust and know that they will do an excellent job for you. There job ends when a person passes away. At that point the executor will take over these duties unless the will makes other provisions.

Power of Attorney for Personal Care -This power of attorney provides for a trusted person to make decisions about your personal care in a situation were you are unable to do so. Their role also ends upon death of the person they are responsible for. It is important to select someone you trust and to also indicate what your direction is in terms of how much care you want to receive.

Living Will - The living will sets our the direction to your power of attorneys for personal care and for property . The main focus is on personal care to ensure that you have communicated your wishes in terms of the amount of care to be given if you are very sick , continuing life support and cannot recover. It also provides for someone to also manage your assets while you recover or are unable to make decisions yourself.

Organ Donor Card - is an official statement about how you wish your organs to be treated upon death and whether they can be used to help other people who are badly in need of donor organs. You should discuss this with your family and your doctor since they should know ahead of time and the appropriate steps can be taken.

Funeral Arrangements - are often complex and difficult in a stressful and emotional situation. Making your funeral arrangements ahead of time and communicating your wishes can be a big help to those whose responsibility it will be to make those arrangements.  It can also be all about how you wish to be remembered.

Business Succession Plan - lays out what will happen to the business that you own in part or in whole. Selling a business or passing it along to your heirs is governed by a complex set of laws which can be greatly simplified if there is a well understood business plan in place and understood by the necessary parties.

Tax Planning - to minimize both probate taxes and income taxes in Canada and estate taxes in other countries should be managed carefully to minimize the taxes your estate will eventually pay. These taxes will be paid out of the assets of your estate and it is important that executors do not distribute all of the asserts are distributed until the taxes are all understood and paid.