Lynne Butler is the purveyor of useful estate planning information. Her Blog “Estate Law Canada” provides good answers to questions that come up regularly and for some others that are rare. There is an extensive and searchable archive. You will benefit from her collection.
A recent one caught my attention. It deals with taxation and covers the ground for the majority of people. Taxes due when the second parent passes away.
It would be useful as a client handout and might help reduce the inevitable surprise that taxes payable by an estate engender in the previously uninformed heirs. A younger client might want to forward a copy to Mom and Dad.
In the client situation, facts, problems and opportunities are interesting. People will need to have an idea how to fix it as well as how to know about it. Offering implementable solutions is always welcomed.
A planner should help create the “irreducible minimum” for all of the demands in the estate. This means take the steps that are cost and/or cash reducing that are consistent with your preferred lifestyle, your tolerance for complexity and other life goals. Spending a two dollars to save one is not smart, even if it eliminates a tax dollar due.
Once the irreducible minimum cost is known, you can find ways to deal with it.
An adviser should address the matter of funding the liabilities that arises. In addition to taxes there are fees to myriad people. Lawyers, accountants, business and property evaluators, the courts and executors are some. These can often be 10% of an estate and should not be overlooked. There are some minimizing techniques available.
With income taxes, things like an RRSP or mutual fund can self fund the liability, but for other assets like cottages, rental properties and businesses, the liquidity must be created. Watch for promises, preferences, pledges and guarantees while estimating the needed cash.
Do not make the mistake of treating the irreducible debt, fees or taxes as problems. These are not problems, they are merely facts. The problem in an estate is finding cash to deposit so that the executors can write the necessary checks.
All estate plans need to address liquidity and the distribution plan of any estate needs to be based on what is likely to remain after costs and taxes and the liquidation of other obligations.
Be prepared. The net amount is, not infrequently, much less than people expect.
Your will gives you the necessary clue to how things will work out. Follow the logic. The form of your will shows that the executors are to find the assets, pay the liabilities, costs, and legacies like charitable donations, and then distribute the rest to the heirs. Despite the clarity, many people intuitively plan around the idea that they can distribute what they own intact. Seldom true and that rarity can, does, and will in the future, create problems.
Every estate distribution plan is multipart. 1) Discover the assets owned, 2) go through the hoops imposed by the courts, 3) liquidate the liabilities, fees and specific bequests that arise, and finally 4) distribute to heirs.
Miscalculations or inability to meet step 3 will delay and probably reduce step 4. No executor has ever complained about having more cash than they need, but many have problems with a shortfall.
Understand how liquidity will come to be. There are only four ways the executor will have that cash to meet the obligations. (Exactly four.)
Two are controlled by the deceased and two are controlled by the executor.
Controlled By The Executor
- Sell Something . Typically, time is of the essence and they will need to sell the best and keep the rest. Does “Estate Sale” imply a bargain? Then there are the costs and the time it takes to sell complex assets for full value. Estate shrink and added costs.
- Borrow tends to tie up the estate for much longer than the heirs might prefer. You will need to pledge almost the whole estate to get 25% of it as a loan. The interest will be non-deductible for taxes. Delay and some shrink.
Controlled by the Deceased
- Own liquid assets before death. This method has high tax costs and low yields while living. There is a material opportunity cost with this one. Owning liquidity is typically the most expensive way to solve the problem.
- Own life insurance, possibly second to die life insurance. When you arrange life insurance, it is merely a post-dated check with an unknown date of payment. In the estate need situation, the date is, coincidentally, the same day the executor needs the money. In almost every case, it is less costly than any of the other three alternatives. Provably so. You might want to check it out.
You can try to anticipate what is likely to occur and find good ways to deal with the deficiencies. If your estate is more than minimally complicated, then you might usefully work with your accountant or other advisers and “Test your will.” Preferably pre-mortem. It is a bit technical but in the end little more than a big arithmetic question.
Get busy. You have the information at hand and know your wishes. Your executor and your heirs will know less. Guaranteed.
Well prepared usually leads to well done.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. firstname.lastname@example.org