Leaving a Legacy

What are you going to leave to the next generation? Here are some things to keep in mind.

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“A lot of clients get confused and think that taxation at the time of death is tied to probate planning.”

Whether you’re 25 or 55, having a will is an essential part of financial planning. But as you get older, you might start thinking about the legacy you want to leave your children. Questions like “Is there enough money for my kids?” “What will happen to the family cottage?” and “Do I have enough insurance?” start coming to mind. We spoke to Christine Van Cauwenberghe, Investors Group’s Assistant Vice-President, Tax & Estate Planning, for her expert advice on passing your assets down to the next generation.

Christine Van Cauwenberghe
B.Comm (Hons), LL.B, CFP, is Assistant Vice-President, Tax & Estate Planning, with Investors Group

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    Tally your taxes

    “The first thing you need to do is assess which properties you own,” says Van Cauwenberghe, who suggests making a balance sheet listing any real estate, non-registered investments and registered investments such as RRSPs or RRIFs. “Then you need to do a tax analysis to figure out how much your estate is going to be worth on an after-tax basis,” she says. That’s because when the assets in your estate are transferred to your children, the taxman comes calling. Your RRSPs and RRIFs will be deregistered and the taxes will have to be paid on your terminal-year tax return. The same goes for any capital gains that have been accumulated on properties (other than your principal residence) or other investments.

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    Forget probate fees

    “A lot of clients get confused and think that taxation at the time of death is tied to probate planning,” says Van Cauwenberghe, referring to the process of reducing the amount of money that is distributed through your will, which will be subject to probate fees. “Probate fees are a minor consideration. They are less than one percent in most provinces [there are only three provinces with probate fees in excess of 1 percent]. Attempting to reduce probate fees generally won’t reduce income taxes and, in fact, may accelerate the payment of income taxes.”

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    Talk about real estate

    While most people stipulate in their will that their estate should be divided equally among their children, there are some things, such as real estate, that can’t be easily split down the middle. “If you own a series of apartment blocks and the transfer of those apartment blocks is going to trigger some capital gains, it’s possible that the children will be fine with selling a couple of those apartments to pay the taxes and then divide the rest,” says Van Cauwenberghe.

    But where things get more complicated is when the property holds some emotional value, such as a family cottage. If only one of your children wants the cottage after your death, Van Cauwenberghe doesn’t advise bequeathing the cottage specifically to that person, as people can change their minds over the years. But it is important to make sure there’s enough money in the estate for one child to buy the others out.

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    Top up with insurance

    Insurance planning is typically done at the end of the estate-planning process, says Van Cauwenberghe. Once you’ve figured out how much your estate is worth after taking income taxes into account, it’s time to step back and look at the number. Is it enough? Will your children be able to pay off your debts? Is there anything to leave to charitable causes? And, importantly, is there money for one of your children to buy the others out, in the case of a cottage or family business? “Insurance can be used to equalize an estate,” says Van Cauwenberghe.

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    Place trust in trusts

    Trusts are used when you don’t want your children to receive the assets in your estate outright. This could be because they are minors, or because you don’t feel they will be able to manage a large sum of money all at once. Your money will be placed in trust and distributed to your children based on your stipulations.

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