Estate Planning is About Expressing Your Values

Show me your budget, and I’ll show you what you value ~ Joe Biden, U.S. president

As humans, we really like having distinct and separate categories in our lives. Over there? That’s where we keep all of our work-related stuff. To the left of that is where we keep our romantic relationships. A little to the right is where we place our children, and maybe our extended families. If we’re lucky, we have a spot in our mental catalogues for deep friendships and personal pursuits like hobbies and education.

The truth is, to operate well, these areas of importance must actually be integrated. While they are, in some ways, separate things, they are in one much more important way, related. That important way? They’re all the places where YOU show up.

Your finances, and the decisions you make around them, are obviously part of that total integration. This is despite the fact that many of us like to avoid thinking about them, or perhaps carve off one day a month to think about them so that the rest of the month can be free to concentrate on other things.

Managed well, the finances can tell the story of your values, and support your life, well spent. Managed poorly, they can shine a light on pockets of unhappiness. You can probably guess that we’d like to help you live in that first option.

That’s why we’ve spent all of 2021 writing about how your values might show up in your finances, and how your finances can be used to express your values. We’ve discussed some well-known values like safety and security, family, education, freedom, and community. How can you express these values in your finances? We’ve discussed some financial concepts like cash flow, retirement planning, and investing. How can you use these concepts to express your personal values?

This month, we want to talk to you about… (dun dun dun!)… estate planning.

What Is Estate Planning?

Estate planning is the process of thinking through and putting strategies in place for the outcomes you hope to achieve after you pass away. As we’ve said before, it might be one of the most loving things you can do for your friends and family.

It’s one of the easiest parts of your overall financial planning to fully ignore. Honestly, who wants to spend a bunch of time and money contemplating something you don’t want to happen?

It’s enough of a societal problem that governments worldwide have laws in place to provide you with an estate plan if you haven’t made one. That’s right – you’ve got an estate plan whether you’ve put the time into it or not.

You might not like how it shakes out. Unfortunately, by the time anyone has to deal with it, it’ll be too late to do anything about it.

Estate Planning is… for Everybody

You may not have a spouse, children or others who are financially dependent on you.

You might not have a lot of stuff, or you might think – as many do, “My financial situation is just not that complicated.” (By the way, when we hear this we consider it a bright red flag that tells us that your financial situation is very complicated – you just don’t think so because you, personally, are familiar with it.)

The thing is that the world around you is complicated. There’s all kinds of stuff about your finances and your estate that you may not have considered, especially if you’ve never had to be an executor.

If you don’t have a Will which allows you to appoint an executor, who gets to be in charge? Someone has to be, you know. By leaving that to the Powers That Be, the people you care about have to go through an enormous amount of paperwork and bureaucracy in order to do super simple things like shut off your cell phone and sell your car. We’ve talked to enough people in this situation to know that this is, truly, one of the meanest things to do to someone who cares about you – especially when they’re grieving.

If you don’t have a Will and appoint a guardian, who takes care of your children? Again, someone has to. If you leave it up to the local authorities, your children may not end up with the lives you want for them.

Finally, if you do have some stuff, recognize that your stuff doesn’t automagically transfer from you to your spouse unless you’ve put some very specific mechanisms in place. Your spouse doesn’t have legal rights to information or access to your bank accounts when you die (they didn’t when you were alive so the same rules apply).

Placing your estate plan on the backburner can be costly – in taxes, fees, legal and accounting costs – and incredibly frustrating for the people you leave behind. Show a little love by making this hard time easier for them. If one of your values is family, this is a truly impressive place for you to demonstrate it.

Estate Planning is … more than a Will

Legally, the thing known as your “estate” is the stuff that passes through your Will. However, there’s a whole lot of other stuff that doesn’t pass through your Will, but does get distributed in other ways when you pass away.

Joint Ownership (with Rights of Survivorship)

If you own something jointly (with rights of survivorship rather than tenants-in-common) with someone who happens to be alive longer than you, the ownership transfers to them when you pass away. It’s pretty simple. If that person is your spouse, then there won’t be any income taxes unless your spouse decides that now is a good time to pay at least some of those off. If the thing you own doesn’t attract income taxes, like your principal residence, there won’t be any income taxes there either.

If the person is not your spouse, and the asset is not exempt, then yes, there is very likely to be income tax to pay.

Beneficiary Designations, Successor Owner, Successor Subscriber

You can name “special people” in relation to certain types of accounts. Those special people get to receive the funds directly from those accounts – in the case of a beneficiary designation – or become the new owners of those accounts – in the case of successor owner or subscriber – when you pass away. All the action happens at the financial institution. As with those joint assets, if the recipient is your spouse or the asset is exempt from tax, there’s no cost associated.

If the recipient is not your spouse, and the asset is not exempt, then there’s a significant likelihood that income tax is payable.

Estate Planning is … more than Tax & Probate Fee Planning

However, there is a lot of tax and probate fee planning. If one of your values is to leave as little of your estate as possible to the various government agencies who are keenly interested in slicing off a piece, estate planning is for you.

Unlike our neighbour to the south, we don’t have such a thing as “estate taxes”. This doesn’t mean that there aren’t taxes, just that this specific brand of tax isn’t running about, reducing the size of Canadian estates.

Instead, income taxes are doing the same thing, but in a different way.

In your last year of life, on what is known as your “terminal income tax return”, your assets are treated as though they were all sold for fair market value the day that you died. This means that:

• Any RRSP/RRIF value, if not rolled over to a surviving spouse, is taxable as income.
• Any unrealized capital gains (on your cottage, secondary property, those Apple shares you’ve held since 1992) are now, suddenly, realized.

For many people, this means that your income tax bracket is now the highest one in your province, which in some provinces exceeds 50% of that income. When we recognize this early enough, and are engaged in lifetime financial planning, this often encourages us to aim to deplete RRSP/RRIF accounts as much as possible during our lives, and look to other kinds of accounts – like TFSAs – to provide estate value.

If you’re lucky enough to have a lot of unrealized capital gains on top of that, you may decide to start realizing those during your life, and spending these. You might use these as gifts to the people in your life, and enjoy watching them improve their own lifestyles while you’re still around. You might not be in a situation where lifetime gifts make sense, and then you might decide the best thing we can do is try to offset income taxes with life insurance, trust planning, and other strategies designed around your specific estate.

Probate fees, while annoying, are generally a smaller, slightly less painful bite on your estate. Probate fees are charged on those assets that transition through your Will. If you live in a low or no probate fee province or territory, like Alberta, Manitoba, or Nunavut, planning around this is likely not particularly valuable. If you live in a “sliding scale” probate fee province like B.C. or Ontario, where a percentage of the value of your estate is payable as probate fees, suddenly planning can be a very big deal. In those cases, we look to joint ownership, beneficiary and successor owner designations, trusts, and, where possible, even a secondary Will for specific assets in order to reduce that cost, leaving as much as possible for your heirs.

Estate Planning is … About Expressing Your Values

When you’re thinking about your own values (and we know you are, subconsciously, all the time), do any of these apply to you?

• Taking care of your children.
• Taking care of your spouse.
• Supporting your extended family and friends – and pets!
• Taking care of your community.
• Leaving behind fond memories and supporting the people you love in the ways that work for them.
• Minimizing frustration for people you care about, who will already be struggling with the loss of you. 
• Maximizing opportunities for those you care about.

The way your estate is planned often ends up being the last thing people remember about you. We’ve heard people say things like:

“My parents made it so easy for me. It was all ready to go, and I could just concentrate on processing my grief.’
“Everything was a mess. It was so stressful, and I haven’t spoken to my brother in years because of how badly it went.”

Your legacy is not only in the gifts and bequests you leave behind. It is – potentially even more deeply – in the level of stress and pain that is contributed or alleviated by the planning you’ve done. How do you want to be remembered?