The process of dealing with death is often misunderstood and sometimes complicated. It varies by jurisdiction and by circumstance, and can be simple or costly depending on how things are left behind. The reality is that it’s always best to have a Will properly drafted to cover any potentially unknown factors that may leave a big legal mess for those people you’ve left behind. Either way, someone will be left dealing with your affairs.
The following is a brief list of some of the most common questions surrounding the estate administration process. While it’s a short and non-exhaustive list, we hope that the answers will shed some light on just how valuable having your Will drafted can be.
What Is My “Estate”?
Generally speaking, when you pass away, the things that you leave behind (including assets and debts) form your “estate”. Things that are held jointly with another party, and that enjoy the right-of-survivorship, will automatically be owned by the remaining owners upon death. They will be excluded from the Estate, and therefore excluded from the terms of the Will or to the succession laws of distribution.
Registered accounts and life insurance policies with named benficiaries, will also fall outside of the estate and will be paid directly to the beneficiary named. If the estate is a named beneficiary, then the funds from these accounts or policies will be made payable to the estate and governed by the laws of distribution.
Who Deals With Your Stuff?
If you have a Will, it will specify who the executor is. This is the person who is legally entitled to deal with your belongings and to wind up your affairs. They will be responsible for your funeral arrangements, communicating with beneficiaries, filing tax returns, maintaining the assets safe and secure until everything is distributed, and much more. They will also have the power to sell your assets and will be in charge of making payments to beneficiaries.
If you don’t have a Will, the law will specify who is entitled to share in all the things you leave behind. All of these people will need to consent to the appointment of an administrator.
Things can get complicated when there are minors, persons under care of a guardian or attorney, family members outside the country or if everyone just doesn’t get along. In these cases there are often delays and sometimes even the need to obtain a court order to have someone appointed. It is not uncommon to see an estate deplete its assets simply to have the appropriate person(s) appointed, or to manage the complications left when no Will was drafted.
How do my things get distributed?
Your assets will generally be distributed under the terms of a Will. If you do not have a Will, the government has drafted a formula for who is entitled to your assets, and in what shares. These are defined in the Succession Law Reform Act (Ontario), or in the comparable law of another jurisdiction. While most people tend to think their family will simply inherit and “deal” with their belongings, it’s important to note that the distribution found under the law will not change in cases where there is no Will. There is no deviating from the formula and it can be further complicated when there are minor children. In the absence of a court order appointing an official guardian over any minor’s property, a government body will step in to take charge of the minor’s share.
Your executor or administrator will have an obligation to pay your debts prior to distributing the assets under your Will. In these cases it is often necessary to sell assets held by the estate in order to pay taxes, with the remaining funds being distributed according to the Will, or law.
Does the government get involved?
This is probably the most misunderstood aspect of estates that most people have. The reality is that the government rarely gets involved in your estate, unless you leave behind minors and dependants without a Will. With a properly drafted Will, however, it is unlikely the government will put their hands on your assets.
Leaving a Will ensures that minors are taken care of – both physically and financially, and that dependants are also looked after. The government has special bodies mandated to protect the rights of minors and the rights of people incapable of managing their financial affairs. When someone passes away without a Will and there are minors or incapable beneficiaries, the government will have a mandate to protect those that fall in these categories.
What are the extra fees?
Extra fees usually fall into two categories – taxes and legal fees. When you take the time to plan your estate there are a variety of tax planning strategies you can use to minimize taxes payable on death, and maximize what you leave behind. You also leave a clear roadmap of how your affairs will be handled and by whom.
If you die without writing a Will, you risk making the legal process of estate administration much more costly. The applications may be much more burdensome and the chances of conflict between your family members left behind often leaves decisions to be made by the court. Legal fees for sorting out the mess left behind is likely to come from your own accounts. Certainly not the kind of lasting legacy most of us want to leave behind.
Who pays my debts?
The Executor or Administrator of your estate will be responsible for handling your debts. If there are enough assets or funds left behind, these will be used to satisfy those obligations first. Once those funds are exhausted, there is no obligation on other parties to pay debts not related to them.
What taxes will be owed?
Estate Administration Tax (EAT) will be payable on the assets left in your estate if your estate needs to be probated. Probating the estate is the process of applying to the Court for a Certificate of Appointment of Estate Trustee. The Court reviews the original Will, or a court application, and verifies who the person, or people, are that are legally appointed to handle your affairs. The EAT is payable upon making the application to court. It’s not a large tax, being 1.5% of the first $50,000.00 value of your estate, and 0.5% on the remainder.
The other larger tax to take into consideration is income tax. While assets can be rolled over to a spouse on death, there will be a deemed disposition of capital assets outside of that relationship. There will also be taxes owed on registered investments, such as RRSP’s or RIF’s which are not paid to the spouse of the deceased. Tax planing for income tax implications is a large part of creating a sound and efficient estate plan.
Is There Tax On Inheritance?
In Ontario there is no tax on inheritance. One considertion to have, however, is the effect of transferring assets during one’s lifetime and the potential capital gains tax in the future. Capital assets are deemed to be transferred to a beneficiary (other than a spouse) at fair market value and this number will form the Adjusted Cost Base for calculating capital gains tax down the line. For example, if you inherit the family cottage which is worth $500,000.00 at the time of death, and at a later date the cottage is sold for $1,000,000.00 – capital gains tax would be applicable on the profit of $500,000.00 gain. Since capital gains tax is applicable on non-primary residences, in this circumstance 50% of the gain is taxable, and therefore $250,000.00 would be subject to capital gains tax at the time of the sale.
While the above is a summary of some of the key points to understanding the estate administration process, nothing will replace a discussion tailored to your particular circumstances. If you haven’t done so already, ensure you make it a point to discuss your affairs with a lawyer. At the end of the day, complicated legal circumstances are more often than not covered out of the money you leave behind. Leaving a legacy of peace is often one of the greatest gifts left behind. Call our office to get started on your estate plan today, and sleep easier knowing you’re affairs are taken care of.