It is important to note that not all assets are governed by a Will. All assets in joint tenancy, with some exceptions, will pass outside of the estate and so will not be governed by your Will. Also, designated assets (i.e., assets in which you assign a beneficiary or beneficiaries), are not a part of your estate. A third option is trust planning, in which a trust is set up to deal with your assets.
This article provides a brief overview of these three estate planning options for asset distribution that you should consider in addition to a Will when planning your estate.
A common estate planning tool is to hold assets in or transfer assets into, joint tenancy. This means that on the passing of one of the joint tenants, those assets are deemed to pass automatically to the surviving joint tenant. Joint tenancy planning is a great idea, subject to specific situations as described below. The advantages of holding assets as joint tenants include the avoidance of the expense and inconvenience of probate on the passing of the first to die. In the event that one joint tenant passes away, the beneficial and legal interest will automatically transfer to the joint tenant, who will therefore avoid probate fees as the property interest passes outside of the Will. For this reason, joint tenancy is often used to hold property between spouses.
However, moving certain assets such as a specific property or bank account into joint tenancy with children or non-spouses is not without complications. While the law presumes that assets held in joint tenancy between spouses will automatically pass entirely to the surviving spouse on the first to pass away, assets held jointly with an adult child or other non-spouse are presumed not to pass automatically to the surviving joint tenant unless there is a “Joint Tenancy Agreement” signed which confirms that the parent intends for the asset to beneficially pass to the adult child on the parent’s death. This was confirmed by the Supreme Court of Canada in Pecore v. Pecore 2007 SCC 17.
Another potential issue with having assets held jointly with a child in that any creditors of that child may claim an interest in the assets once their name is registered on title. Typically Joint Tenancy Agreements will attempt to confirm that the adult child has no beneficial interest in the assets until the parent has actually passed away to try to prevent the child’s creditors from claiming against the assets.
Designated assets include life insurance, benefit plan designations, and investment accounts such as RRSPs and TFSAs. Designated assets can be useful tools to allow a parent to leave assets to their children outside their estate where they will not be subject to wills variation claims of a spouse or affected by the surviving spouse amending his or her Will. Since the proceeds of designated assets will not form part of the estate, they also will not attract probate fees. Life insurance proceeds or benefits payable to a designated beneficiary or to a trustee are also not subject to claims of the deceased’s creditors.
Life insurance and benefit plan designations also allow a parent, through the use of trusts, to provide for his or her surviving spouse during the spouse’s lifetime and give what remains of the insurance proceeds or benefit plan proceeds to their children on the death of the surviving spouse.
Trusts are very common as an estate planning tool. Two common types of trusts are alter-ego trusts and joint spousal trusts (which are available only to those aged 65 or older). An alter ego trust is where the person who transfers the assets into the trust is also entitled to receive all income and capital of the trust during their lifetime. A joint spousal or joint partner trust is where both spouses are the only ones entitled to receive the income or capital of the trust. This continues until the death of the surviving spouse.
Trusts are considered separate legal entities and so assets in an alter-ego or joint partner trust do not form part of a person’s estate so no probate fees are payable and they are not subject to wills variation claims. They are also sheltered from income tax at the time of transfer to the trust. However, setting up the trusts can be complicated and expensive and require both an experienced accountant and lawyer, which increases estate planning costs.
Another advantage of using a trust in certain situations is that the assets held in the trust do not necessarily automatically go to the surviving spouse (this will of course depend on the terms of the particular trust), and so those assets are not then at the risk of being distributed by the surviving spouse in his or her discretion simply by later changing their Will.
The use of any of these options should be done with legal advice and, in more complicated situations, with an accountant to determine which estate planning options are best. We at Baker Newby have decades of experience in estate planning matters and would be happy to advise you on the most effective and efficient plan for your particular estate.