Estate Planning: Don’t Make These Five Mistakes

It’s not enough to just divvy up your assets. Here are some mistakes you might make when organizing your will and estate.

It’s not easy to talk about estate planning – who wants to think about what might happen after they’re no longer here? It’s also a complicated topic that covers investments, tax and real estate, not to mention hard-to-navigate family issues. Because of all that, many people make mistakes or forget important steps when developing their estate plan and that can lead to trouble for their heirs.

So, before you create a plan, be aware of these five common estate planning pitfalls.

Going DIY

It’s easy to find an estate planning kit online, but while it might be convenient to fill out a few printed off forms, do-it-yourself estate planning can lead to disaster, says Matthew Rendely, an associate lawyer with WEL Partners in Toronto. Those who take this kind of quick, non-personalized approach often run into issues with taxes, wealth distribution to children and even family litigation.

Many people create a will or an estate plan and then never look at it again. That’s a problem.

Rendely suggests working with an estate expert who can go over your assets and wishes, and draw up a customized, comprehensive plan that leaves nothing to chance. Though an “ironclad will” isn’t possible, he says, a professional can fully assess all your finances and the needs of your heirs, and ensure you’re leaving the right assets behind.

Failing to update

Many people create a will or an estate plan and then never look at it again. That’s a problem, says Rendely. “You should revisit your will frequently, especially when there’s a change to the family structure, such as a divorce, marriage or birth of a child,” he says.

For example, if you separate from your spouse, you should make sure you update your beneficiary designations, along with your will to ensure that your documents reflect your new life situation. There are many other complicated situations, where, if the right trusts aren’t set up, or if a will isn’t updated, then family members, such as kids from a first marriage, can get inadvertently left  out.

In that case, “there will be claims made against your estate,” says Rendely.

It’s also important to review other aspects of your estate, such as powers of attorney and life insurance coverage, says Christine Van Cauwenberghe, vice-president, tax and estate planning at IG Wealth Management.

Designating beneficiaries

Designating a beneficiary, for an RRSP or an insurance policy, for example, is a common practice and should be thought through very carefully, notes Van Cauwenberghe. While indicating who you’d like to leave an asset to after you pass away can clarify who gets what, there are situations where adding a beneficiary can complicate the transfer of assets. (In Quebec, direct beneficiary designations are only effective on insurance policies).

For instance, if you choose a child as a beneficiary, the estate may end up being held by the government until they reach the age of majority, she says.

To prevent this, Van Cauwenberghe suggests designating your estate as the beneficiary of the plan and establishing a trust in your will to ensure your estate is paid out in stages to your children, such as at ages 18, 25 and 30, rather than having the government pay out a lump sum at age 18 or 19 (depending on the province).

Not taking taxes into account

One of the biggest mistakes people make is not considering how income taxes can impact the amount that gets passed down. In most cases, people will have to pay some taxes, whether it’s on RRSP or RRIF assets. “The full amount of your RRSPs are taxable at the time of death unless they are transferred on a tax-deferred basis to a spouse,” warns Van Cauwenberghe.

Unrealized capital gains can also be triggered at the time of death on assets other than a house, which either qualifies for the principal residence exemption or will be rolled over to a spouse. If you don’t think about tax, your kids may have to sell the family cottage or use more of your estate than they expected to pay the Canada Revenue Agency (CRA).

Many experts suggest using life insurance to help cover any estate-related taxes. Sit down with an advisor to see how much money you might need to pay the CRA, and then buy a corresponding amount of insurance. When you pass away, your children will get the proceeds from the policy and can use it to pay the taxman, explains Van Cauwenberghe.

Failing to share plans

Too many people keep their estate plans to themselves and that can be a problem, says Rendely. When your family knows what’s going to happen, they’ll be better prepared to deal with what they may or may not inherit. As well, if they understand the nuances of your wishes, they’ll be more likely to follow through with them. “Be transparent,” suggests Rendely. “Make people aware of your intentions.”