How can I make sure my child who has a disability is provided for when I die?

Posted on By admin
young person on motorized wheelchair

There are several options to consider when planning to provide for a child with a disability after death. These options include Henson trusts (a form of discretionary trust), Qualified Disability Trusts, Registered Disability Savings Plans, Lifetime Benefit Trusts, and Preferred Beneficiary Elections.

What is a Henson trust?

A Henson trust is a trust designed to benefit persons who are receiving or may become entitled to receive disability benefits from the government. The purpose of a Henson trust is to protect assets of a beneficiary while preserving the right to collect government benefits. Henson trusts are sometimes also called “absolute discretionary trusts”.

Henson trusts are often set up in a parent’s will (i.e., as a testamentary trust), but can also be set up during the lifetime of the parent. Testamentary trusts may be eligible for more favourable tax treatment if the trust also qualifies as a Qualified Disability Trust (see below).

How does a Henson trust work?

The key to a Henson trust is that the trustee has “absolute discretion” to decide whether, and in what amount, to provide assistance to the beneficiary using the assets of the trust. Because the trustee has this “absolute discretion,” in most provinces the assets are not considered to be vested in the beneficiary and cannot be used as a basis for the denial of government benefits that are calculated based upon the assets of the beneficiary.

Where does a Henson trust work?

Henson or Henson-style trusts are available in Ontario, British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island, Saskatchewan, the Yukon, Alberta and Québec. Outside of Ontario, these trusts are typically called “discretionary trusts”.

What is a “Qualified Disability Trust”?

Henson trusts may qualify for lower tax rates if they satisfy the “Qualified Disability Trusts” (QDT) criteria as defined in the Income Tax Act. To qualify as a QDT, the following criteria must be satisfied:

  • The trust must be a testamentary trust (i.e. made by a Will)
  • The trust must be resident in Canada for the trust year
  • The trust and beneficiary must have made a joint election for the trust to be a QDT
  • The beneficiary must be approved for the Disability Tax Credit
  • The trust must be the only QDT for that beneficiary

The limitation of one QDT per beneficiary means that if both the parents and the grandparents want to set up a Henson trust, only one of the trusts could qualify as a QDT. Further, eligibility for the Disability Tax Credit requires certification by a medical professional that the beneficiary has a severe and prolonged physical or mental impairment.

Choosing a trustee

It is important to keep in mind that a trustee position may continue for an extended period of time after the death of the person creating the trust. Further, because a properly drafted Henson trust grants absolute discretion to the trustee, the trustee will be closely involved and have broad discretion in determining when and how much to provide for the child with a disability. It is therefore important to select a trustee who is trustworthy and who understands the needs of the child.

What is a Registered Disability Savings Plan?

A Registered Disability Savings Plan (RDSP) is a savings plan intended to help save for the long-term benefit of a person who is eligible for the Disability Tax Credit. RDSPs provide access to grants and bonds on a means-tested basis for beneficiaries up to the age of 49. To be eligible as the beneficiary of an RDSP, an individual must:

  • Be eligible for the Disability Tax Credit;
  • Have a valid social insurance number;
  • Be a resident in Canada at the time that the plan is created; and
  • Be under the age of 60 (an application must be made before the end of the calendar year in which the individual turns 59)

There is a lifetime contribution limit of $200,000 to an RDSP, and contributions are allowed until the end of the year in which the beneficiary turns 59. The holder of the RDSP opens and manages the RDSP. Contributions to the RDSP can be made by anyone but must be authorized by the holder. The parent of a child with a disability can open an RDSP for the child if they are under the age of majority and may continue on as the holder of the plan after the child reaches the age of majority. If the child is over the age of majority and contractually competent at the time of opening the RDSP, the child must be the plan holder.

What is a Lifetime Benefit Trust?

A Lifetime Benefit Trust (LBT) is a trust created to eliminate tax where an RRSP or RRIF is left to a dependent child with a mental infirmity. An LBT may be structured as a Henson Trust. If a parent intends to leave an RRSP or RRIF to a child with a disability, it may be beneficial to set up an LBT. Please speak with a TEP if you think an LBT may be in the best interests of your child.

Preferred Beneficiary Election

Income of a trust is generally taxed in the trust or taxed in the hands of one or more beneficiaries who have received the income. The Preferred Beneficiary Election allows income to be taxed in the hands of one of the beneficiaries without any payment actually being made.

One potential benefit of making the election is that it may be possible obtain a lower tax rate on income of the trust. Additionally, if the amount is not actually paid to the beneficiary, this allocation may not be counted as income for the purposes of provincial disability payments, thereby protecting and preserving the right of a disabled beneficiary to collect government benefits.

If an individual is eligible for the Disability Tax Credit, they are generally also eligible for the Preferred Beneficiary Election. Since only one QDT can be created per individual, if the parents and grandparents both want to set up trusts benefitting that individual, it may be advantageous to make the preferred beneficiary election for trusts other than the QDT.

For further information or assistance in estate planning to benefit a child with a disability, please consult a TEP.

What are my duties as executor?

Posted on By admin
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In the unfortunate event of death, the executor(s) named by a Will (liquidator in Quebec, see below) is charged with carrying out the final wishes of a deceased testator and administering the estate. The estate is, in general terms, all the money and property left behind by the testator. The executor(s) will be required to pool all the remaining assets of the deceased, pay any debts or taxes, and distribute the remainder in accordance with the Will.

Executor(s) have an obligation to administer the estate in a timely manner. Although there is no stated time period during which a trust must be administered, the common law presumes that an estate takes approximately one year to administer properly. This is known as the “Executor’s Year”. After the Executor’s Year, in some cases beneficiaries may be permitted to seek payment.

I have been named in a Will as an executor. Do I have to accept?

A person appointed by Will may decline to be an executor. However, if an appointee is considering declining the appointment, it is imperative for them not to begin administering the estate. Once an individual begins to act as an executor, a court order may be required in order for them to resign.

What should I do next?

If a potential executor has not been named by Will as estate trustee, they will need to obtain a Grant of Administration or a Certificate of Appointment. If an executor is explicitly named by Will or has obtained a court order permitting them to administer the estate, they should begin by identifying anyone familiar with the business and private affairs of the deceased such as lawyers, accountants, business partners, etc.

A named executor can begin making funeral arrangements. The Will may outline funeral instructions or pre-paid plans. If the Will contains no requests, it is prudent to involve family members in decision-making, since they will likely have thoughts about the deceased’s funeral wishes, and may have wishes of their own.

If the estate is sizeable or complex, an advisor may be engaged to draft and review the probate paperwork. The ultimate responsibility for review and signing of probate paperwork lies with the executor, but the use of an advisor can simplify and expedite the process. The cost of any legal fees and taxes are deducted from the estate once the legal work is complete. A TEP can act as an advisor or assist in engaging, instructing, and comparing specialists.

Satisfying debts and obligations of the deceased

One of the key responsibilities of an executor is to ensure that any outstanding debts or obligations of a deceased are settled, including any outstanding tax obligations. People familiar with the deceased may provide some guidance on known debts. However, in order to give notice to any other potential creditors, a notice should be posted in a local newspaper and (if appropriate in the province) in the provincial gazette. The notice must provide the deceased’s name and a request for any potential creditors to come forward.

How do I obtain a death certificate?

A proof of death certificate can be obtained from the funeral home. This document should be registered with the Vital Statistics Agency in the province in which the deceased resided. This Agency can provide an official death certificate. A proof of death certificate will be sufficient for most purposes in some provinces.

What if there is not enough money in the estate to cover funeral expenses?

The executor may apply to the deceased’s municipality for funding to assist with funeral expenses. Arrangements should not be made until eligibility for assistance has been determined.

Notifying beneficiaries named in the Will

Executors are legally required to notify all beneficiaries named in the Will. If the executor applies for probate, courts will require proof that beneficiaries have been notified.

Valuation of the estate

An executor is required to establish the value of the deceased’s estate for the purposes of filing the terminal year tax return of the deceased, calculating capital gains taxes, and determining probate fees/estate administration tax to be paid on the value of the estate. A TEP can help with the process of estate valuation.

Do I have ongoing obligations? How long does this take?

The length of time required to administer an estate depends on, among other factors, the complexity of the estate, size of the estate, and number of beneficiaries named in the Will. With a standard estate, it is assumed that the bulk of the process will take approximately a year. Tax matters will generally take longer, especially if a Clearance Certificate is requested from the Canada Revenue Agency. As part of the distribution of the estate, the executor may need or wish to present a formal “passing of accounts”. This process involves the presentation of written accounts to a Court and items of controversy may be challenged by one or more beneficiaries.

Do I get paid as executor?

The Will may or may not explicitly provide for executors to be compensated. If the Will is silent on the matter, the appointee may still be compensated for acting as an executor. This would either require approval from all of the beneficiaries, or an order from the Court as part of a passing of accounts. A Court can order that any compensation taken by an executor without approval be repaid.

What is a liquidator?

In the province of Québec, a liquidator plays a similar role to an executor in other provinces. Liquidators are responsible for distributing the succession of the deceased. This role has slightly different obligations than the requirements for an executor in other provinces. For example, in Québec, there is a legal duty to not only notify the beneficiaries in the Will, but also to notify anyone who would inherit if the person died intestate.

For further information or assistance in carrying out your duties as an executor, please consult a TEP.

What is capital gains tax?

Posted on By Joanna Pegum
man thoughtful by sea

The sale or gift of an asset that is capital property which has increased (or decreased) in value while it was held by an individual will attract capital gains tax (or a capital loss) on disposition. The gain or loss is the difference between any proceeds received (or deemed received) on disposition and the purchase price (less any costs associated with the disposition). The deemed proceeds for a gift is equal to the property’s fair value at that time.

How are capital gains taxed?

Only 50% of all capital gains (or losses) are taxable (deductible) in Canada. This 50% is added (or deducted, in the case of a loss, against any capital gains) to personal income and taxed at an individual’s marginal income tax rate.

What is exempt from capital gains tax?

Capital gains are not generally taxed (and capital losses are not available) on the following items in Canada:

  • The principal residence of an individual
  • Transactions in tax-sheltered plans such as Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSP’s) and Registered Retirement Income Funds (RRIF’s)

What is a lifetime capital gains exemption and am I eligible?

A lifetime capital gains exemption may apply to the gains on dispositions of farm or fishing property, as well as shares of a qualified small business corporation. There are lifetime limits to the exemption which are calculated by individual.

For further information, or assistance with tax planning, please contact a TEP.

Who should be executor of my Will?

Posted on By admin
couple

One of the most important decisions to make when preparing a Will is choosing an executor (referred to in Quebec as a liquidator and in Ontario as an Estate Trustee), i.e., the person charged with administering an estate and carrying out the final requests of a deceased individual. Appointing the right executor ensures a quick and accurate distribution of an estate, while minimizing animosity among beneficiaries.

Duties of an executor

The duties of an executor are plentiful and include the following.

Immediately After Death

  • Determine whether deceased left a Will
  • Make funeral arrangements
  • Open a bank account for the estate
  • Notify beneficiaries of their interest in the estate
  • Cancel health insurance, driver’s license, credit cards
  • Pay outstanding debts and taxes of the deceased
  • Secure estate assets (ensure proper insurance)

Interim Matters

  • Prepare an inventory of assets including real estate, bank accounts, life insurance, investments, and personal property
  • Arrange for valuation of assets
  • Assess the rights of the surviving spouse (if any) under provincial law
  • Assess the rights of any dependents who were financially dependent on the deceased
  • Pay any outstanding debts and taxes of the deceased

Final Matters

  • File a final T-1 personal tax return and an T-3 trust tax return for the estate
  • Obtain a clearance certificate from Canada Revenue Agency
  • Arrange for transfer of real property
  • Dispose or distribute personal effects in accordance with the Will
  • Distribute the remainder of the estate as indicated in the Will
  • Close estate account

Who can be an executor?

Generally, anyone over the age of 18 who is mentally competent can act as the executor of a Will. The person named as an executor may also be a beneficiary of the Will. When choosing an executor:

  1. Consider naming more than one executor

Multiple individuals (or co-executors) may be appointed to share the burden of administering an estate. One pitfall of this approach is that naming multiple individuals can make decision-making more difficult. If the Will is silent about decision-making, then unanimous consent will be required. However, this may still be the correct approach, and a Will can always provide for a tie-breaker if executors disagree on a decision.

  1. Name a back-up executor

It is important to appoint an alternate executor or executors in the event that the primary executor is unable or unwilling to fulfil their role. Accordingly, Wills should list both primary and alternate executors in order of preference.

  1. Consider the residency of your executor(s)

In addition to the practical difficulties of overseas estate administration, naming an executor who resides in a foreign jurisdiction will cause complications for post-death estate planning. For example, naming a foreign executor could change the tax residency of the estate or prevent the executor from being entitled to make trading decisions on certain investment accounts. There may also be bonding requirements for a foreign executor.

  1. Consider naming an estate professional as an executor

Generally, people appoint family members or close friends to be the executor(s) of their Wills. However, in situations where there is a complex estate, or acrimony among beneficiaries, dependents or family members, it may be appropriate to consider appointing an estate professional as an executor. Estate professionals who provide these services include trust companies, lawyers, and accountants.

Who should I choose as executor of my Will?

The executor is tasked with the responsibility of administering an estate in accordance with a Will. The executor should be someone who:

  • The testator trusts to administer their affairs in accordance with their wishes;
  • Lives within reasonable proximity of the testator so that it is easier to deal with the deceased’s family and assets;
  • Has a degree of knowledge pertaining to the complexities involved in the testators tax filings, investments and financial decision-making;
  • Is driven and able to get things done promptly; and
  • Is likely to survive the testator’s death.

These responsibilities should be assigned to someone who is aware that the duties of an executor are both time-consuming and stressful. In some provinces, once an individual begins the process of dealing with estate assets, they are legally bound to see the administration of the estate to its end, unless relieved of their duties by a court order.

How do I appoint an executor?

The best practice is to first have a discussion with a chosen executor prior to naming them in a Will. If they are amenable to the role, they may be appointed as executor in the Will. Their contact information should be included in the Will, or given to a trusted advisor who holds the Will and will contact the executor.

For additional information or assistance with appointing an executor of your Will, please consult a TEP.

I don’t believe it! Common excuses for not making a will

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Making a will is important for various reasons. Not only does executing a Will ensure that assets are distributed according to the testator’s wishes, it also saves family members the energy and expense associated with Court and filing an application to enable the administration of your estate. Despite the importance of making a Will, many people put it off for various reasons. This article is designed to provide you with some of the most common, misguided excuses for not executing a Will.

  1. I don’t need a will because my partner will get everything.

 A common misconception is that a romantic partner will automatically inherit all property left by the deceased, but this is not always the case. Without being legally married – even in cases of long-term cohabitation – surviving partners may, in fact, receive nothing if the other partner passes away. In addition, even married couples cannot count on automatic inheritance of all property left by the deceased. In the absence of a Will, the laws of intestacy determine the division of an estate.

  1. Making a will is too expensive.

 Individuals are often put off by the purported cost of making a will. This fails to take into account the fact that dying without a valid will(intestate) may cost the family and loved ones of the deceased much more in the long run. Moreover, simple wills are often not expensive and can be bundled with Powers of Attorney in order to reduce overall costs.  Focus on the value of having a valid will versus the cost.

  1. I don’t have the time.

 Making a will does not have to be time consuming. Compare it to the time it takes for commute to work or drive to the cottage. Creating a will brings peace of mind, encourages appropriate estate planning, and ultimately spares family and loved ones much more time after your death.

  1. I don’t have much to leave.

 Making a will  is a good idea for anyone, no matter how large or small their estate. A will serves several purposes in addition to determining the division of an individual’s assets. For example, any individual with minor children needs to ensure that their will appoints a guardian who is responsible for their care. It also enables one to appoint the person who is able to make decisions on behalf of the estate, and to deal with government agencies, banks, and other third parties.

Moreover, as an individual gets older, the value of their assets and real property is likely to increase. A will can ensure that the increased assets are distributed appropriately in the case of untimely death.

  1. I’m too young, I don’t need to make a will.

For adults, there is no age too young to create a will. People are rarely given time to plan for accidents and illnesses. Life can happen when you least expect it. A will brings the peace of mind of knowing that children will be cared for, assets will be distributed appropriately, or even that spouses will not have to sell the family home due to an untimely death.

Making a will is important for several reasons. Not only does executing a will ensure that assets are distributed according to the testator’s wishes, it also saves family members the energy and expense associated with to Court and filing an application to enable the administration of your estate.

Despite the importance of making a will, many people put it off for various reasons. This article is designed to provide you with some of the most common, misguided excuses for not executing a will.

1. I don’t need a will because my partner will get everything.

A common misconception is that a romantic partner will automatically inherit all property left by the deceased, but this is not always the case. Without being legally married – even in cases of long-term cohabitation – surviving partners may, in fact, receive nothing if the other partner passes away. In addition, even married couples cannot count on automatic inheritance of all property left by the deceased. In the absence of a will, the laws of intestacy determine the division of an estate.

2. Making a will is too expensive.

Individuals are often put off by the purported cost of making a will. This fails to take into account the fact that dying without a valid will (intestate) may cost the family and loved ones of the deceased much more in the long run. Moreover, simple wills are often not expensive and can be bundled with Powers of Attorney in order to reduce overall costs.  Focus on the value of having a valid will versus the cost.

3. I don’t have the time.

Making a will does not have to be time consuming, compare it to the time it takes for commute to work or drive to the cottage. Creating a will brings peace of mind, encourages appropriate estate planning, and ultimately spares family and loved ones much more time after your death.

4. I don’t have much to leave.

Making a will is a good idea for anyone, no matter how large or small their estate. A will serves several purposes in addition to determining the division of an individual’s assets. For example, any individual with minor children needs to ensure that their will appoints a guardian who is responsible for their care. It also allows appoints the person who is able to make decisions on behalf of the estate, and to deal with government agencies, banks, and other third parties.

Moreover, as an individual gets older, the value of their assets and real property is likely to increase. A will can ensure that the increased assets are distributed appropriately in the case of untimely death.

5. I’m too young, I don’t need to make a will.

For adults, there is no age too young to create a will. People are rarely given time to plan for accidents and illnesses. Life can happen when you least expect it. A willbrings the peace of mind of knowing that children will be cared for, assets will be distributed appropriately, or even that spouses will not have to sell the family home due to an untimely death.

For additional information, or advice in drafting a will, please consult a TEP.

The risks of not making a will

Posted on By admin
worried woman

Making a will can seem like an unpleasant or dreary task to be put off indefinitely. However, there are serious implications for the loved ones of someone who dies intestate (without a will). This article highlights some of the consequences associated with not preparing a will.

1. Your estate will be distributed under the rules of intestacy

A person who dies without a will is considered to have died “intestate”. Legally speaking, an intestate person has left no instructions as to how they wish for their assets to be divided and distributed on their death. In such circumstances, provincial legislation governs how property will be distributed amongst surviving relatives. Typically, these rules indicate that if a married person dies, an initial lump sum amount will be left to their spouse, plus a portion of the residue of the estate (the amount depends on whether there are any children of the deceased). If there are children, the residue is divided proportionately between any children and the surviving spouse. Where there are no children or spouse, the estate generally goes to the next of kin.

2. There is no opportunity to appoint guardians for minor children

One of the most important aspects of a will is appointing a guardian to look after minor child in the event of an untimely death. In the event all of the legal guardians of a child pass away without leaving wills, a Court Order will be required to select a guardian for the child. In the absence of such an order, the applicable provincial government would become involved.

3. There is no named executor

An executor is typically named when a person prepares their will. An executor is someone who is trusted to administer the estate according to the deceased’s wishes. However, if there is no will, there is also no appointment of an executor. As such, someone must apply and be appointed to act as administrator of the estate, which may result in delay, expense and frustration for family, friends and loved ones.

Other potential implications of not creating a will include:

  • Stepchildren and, in some jurisdictions, unmarried partners will likely be discounted from the estate;
  • Families may face additional administrative burdens which add to suffering at an already difficult time;
  • Familial disputes may arise; and
  • Expensive legal action may be required to resolve complications.

There are many risks associated with not preparing a will. As such, it is crucial that everyone prepare a will, preferably with the assistance of an experienced professional who can ensure that it is done properly.

For further information or assistance with drafting a will, please consult a TEP.