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The Seven Deadly Sins of Estate Planning

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The Seven Deadly Sins of Estate Planning

  1. 1. The Seven Deadly Sins of Estate Planning Douglas Hancock Daigle & Hancock Professional Corporation 51 Village Centre Place Mississauga, Ontario L4Z 1V9 (905)273-3339 www.daiglehancock.com
  2. 2. The Raymond Soroka Breakfast Series
  3. 3. GREED “ Having lost all sensitivity, they have given themselves over to sensuality so as to indulge every kind of impurity, with a continual lust for more” (Ephesians 4:19)
  4. 4. GREED <ul><li>Definition: Excessive or reprehensible acquisitiveness. </li></ul><ul><li>Joint Tenancy with Rights of Survivorship </li></ul><ul><ul><li>Automatically passes to surviving tenant and outside the estate </li></ul></ul><ul><ul><li>Joint tenant does not have to be a spouse, it can be anyone, even a child. </li></ul></ul>
  5. 5. GREED <ul><li>Intent </li></ul><ul><ul><li>Clear intent to create joint tenancy </li></ul></ul><ul><ul><ul><li>Beneficial owner </li></ul></ul></ul><ul><ul><li>Clear intent to not sever joint tenancy </li></ul></ul><ul><ul><li>“ Examine dealings with estate over years leading up to death” </li></ul></ul><ul><ul><ul><li>Pecore v. Pecore , 2004 CanLII 5047 (ON S.C.) </li></ul></ul></ul><ul><li>Tax Implications </li></ul><ul><ul><li>Spouse = Joint Tenant </li></ul></ul><ul><ul><ul><li>No tax implications because of spousal rollover </li></ul></ul></ul><ul><ul><li>Child = Joint Tenant </li></ul></ul><ul><ul><ul><li>May trigger tax liability because essentially disposing a portion of the property at FMV. If asset appreciated in value, then pay taxes. </li></ul></ul></ul>
  6. 6. GREED <ul><li>Thelma Goes to the Cottage </li></ul><ul><ul><li>You bought a cottage in 1985 for $50,000, which is now worth $400,000. You decide to add your daughter, Thelma, as joint tenant.Upon your death, Thelma receives the cottage without probating the cottage since she is the survivor. </li></ul></ul><ul><ul><li>Penny wise. Pound foolish. </li></ul></ul>
  7. 7. GREED <ul><li>You thought by adding Thelma as the joint tenant on the cottage, you would avoid paying probate fees and the system would lose! </li></ul><ul><li>However, with Joint Tenancy you: </li></ul><ul><ul><li>lose complete control over the property; </li></ul></ul><ul><ul><li>need Thelma’s consent to sell the property; </li></ul></ul><ul><ul><li>If Thelma already owns a house, then the cottage could be considered an investment property and Thelma may have to pay income tax on profits earned </li></ul></ul>
  8. 8. WRATH “ A gentle answer turns away wrath, but a harsh word stirs up anger” (Proverbs 15:1)
  9. 9. WRATH <ul><li>Definition: Strong vengeful anger or indignation </li></ul><ul><li>Support Obligations </li></ul><ul><ul><li>The Estate assumes support obligations </li></ul></ul><ul><ul><ul><li>Part V of the Succession Law Reform Act </li></ul></ul></ul><ul><ul><li>Prudent Testator will address support obligations </li></ul></ul>
  10. 10. WRATH <ul><li>Spousal Election </li></ul><ul><ul><li>Testator leaves the spouse less than what is stipulated in the Family Law Act </li></ul></ul><ul><ul><ul><li>Section 6(1) Spouse’s Will “ When a spouse dies leaving a will, the surviving spouse shall elect to take under the will or to receive the entitlement under Section 5 ” </li></ul></ul></ul><ul><ul><ul><li>Section 5(2) Death of spouse “ When a spouse dies, if the net family property of the deceased spouse exceeds the net family property of the surviving spouse, the surviving spouse is entitled to one-half the difference between them .” </li></ul></ul></ul>
  11. 11. WRATH <ul><li>To Elect or Not to Elect </li></ul><ul><ul><li>Andre’s Will leaves Lisa, his wife, property and assets valued at $150,000. The net family property calculation at death indicates that Andre held $450,000 of the net family property and Lisa held $50,000. Under the FLA , Lisa is entitled to half the net family profit ($450,000 - $50,000)/2 = $200,000. Since Andre’s Will leaves Lisa $150,000, Lisa would be better off making the election to receive equalization payment of $200,000. </li></ul></ul>
  12. 12. WRATH <ul><li>Old wife not replaced by new wife </li></ul><ul><ul><li>RRSP </li></ul></ul><ul><ul><li>Life insurance </li></ul></ul>
  13. 13. LAZINESS “ The way of the sluggard is blocked with thorns, but the path of the upright is a highway” (Proverbs 15:19)
  14. 14. LAZINESS <ul><li>Definition: disinclined to activity or exertion; not energetic or vigorous </li></ul><ul><li>Failure to Plan – No Will </li></ul><ul><ul><li>Succession Law Reform Act – Part II </li></ul></ul><ul><ul><ul><li>Deceased next of kin </li></ul></ul></ul><ul><ul><ul><ul><li>Wife only – entire estate </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Wife and child(ren) – wife receives preferential share and the remainder is split with the child(ren) </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Preferential share = $200,000 </li></ul></ul></ul></ul></ul><ul><ul><ul><li>If no next of kin, Estate reverts to Government </li></ul></ul></ul><ul><ul><li>Minor Children </li></ul></ul><ul><ul><ul><li>Who gets custody? </li></ul></ul></ul>
  15. 15. LAZINESS <ul><li>Failure to Plan – Poor Estate Planning </li></ul><ul><ul><li>Avoid Probate Fees </li></ul></ul><ul><ul><ul><li>To the extent possible, plan your estate so that assets pass outside the Will </li></ul></ul></ul><ul><ul><li>Spousal Trust </li></ul></ul><ul><ul><ul><li>A trust account that you set up for your spouse to defer tax. All income must be paid to your spouse and no one else can have use of the money, even by way of loan, during his or her lifetime. No tax due until your spouse gifts or sells the assets, or dies. </li></ul></ul></ul><ul><ul><li>Minor Children </li></ul></ul><ul><ul><ul><li>Trust </li></ul></ul></ul>
  16. 16. LAZINESS <ul><li>Failure to change beneficiary on life insurance policy </li></ul><ul><ul><li>In general, a divorce does not automatically &quot;defeat a spouse’s rights as a designated beneficiary in a policy on the other spouse’s life.&quot; This means that even after a divorce, the former spouse who is the designated beneficiary retains the rights to the payment. Therefore, the owner must change the beneficiary. </li></ul></ul>
  17. 17. ENVY “ Therefore, rid yourselves of all malice and all deceit, hypocrisy, envy, and slander of every kind. Like newborn babies, crave pure spiritual milk, so that by it you may grow up in your salvation.” (1 Peter 2:1-2)
  18. 18. ENVY <ul><li>Definition: painful or resentful awareness of an advantage enjoyed by another joined with a desire to possess the same advantage. </li></ul><ul><li>Treat children equally </li></ul><ul><ul><li>Equally does NOT = Fairly </li></ul></ul>
  19. 19. ENVY <ul><li>Example: A Foolish Fond Old Man </li></ul><ul><ul><li>John of JCorp had three daughters, only one of whom, Ally, had what it takes to run the family business. Although he knew he should leave the business to Ally, he didn’t have the heart to exclude his other two daughters, so he told his daughters he was leaving control of the business to all three jointly. Ally, disgusted with his decision, joined a competing business, CCorp. The other two daughters let their rivalry take over and managed to force each other out of JCorp. When John died, his business died with him. </li></ul></ul>
  20. 20. ENVY <ul><li>Questions to consider when bestowing the family business </li></ul><ul><ul><li>Sell it or Keep it? </li></ul></ul><ul><ul><ul><li>If Keep it, who gets it? </li></ul></ul></ul><ul><ul><ul><ul><li>What if more than one interested child? </li></ul></ul></ul></ul><ul><li>Why does it matter? </li></ul><ul><ul><li>Will challenged </li></ul></ul><ul><ul><li>Relationships disturbed </li></ul></ul>
  21. 21. ENVY <ul><li>Possible Solutions </li></ul><ul><ul><li>You may have other property, money or life insurance to compensate the other children for the value of the family business </li></ul></ul><ul><ul><li>You may gift only part of the value of the business and require chosen successor to buy the rest of the business. The purchase money to be divided among remaining children. </li></ul></ul><ul><ul><li>Ownership to all children with clear understanding only one of the children will operate the business. </li></ul></ul>
  22. 22. PRIDE “ Pride goes before destruction, a haughty spirit before a fall” (Proverbs 16:18)
  23. 23. PRIDE <ul><li>Definition: quality or state of being proud – inordinate self esteem. </li></ul><ul><li>Don’t look a gift horse in the mouth </li></ul><ul><ul><li>Father offers both his sons a pre-death gift to help in the purchase of their respective homes. </li></ul></ul><ul><ul><li>The elder son refuses the gift due to his pride, but the younger son accepts the gift. </li></ul></ul><ul><ul><li>Upon the death of the Father, the Estate is divided equally between the two sons. </li></ul></ul><ul><ul><li>So what’s the problem? </li></ul></ul>
  24. 24. PRIDE <ul><li>The younger son received the pre-death gift + ½ of the estate. </li></ul><ul><li>The elder son only received ½ of the estate. </li></ul>
  25. 25. GLUTTONY “ for drunkards and gluttons become poor, and drowsiness clothes them in rags” (Proverbs 23:21)
  26. 26. GLUTTONY <ul><li>Definition: excess in eating and drinking. </li></ul><ul><li>Undue Complexity </li></ul><ul><ul><li>Control assets after giving away </li></ul></ul><ul><ul><ul><li>When you give money away, you can’t keep it in your account or mattress or safety deposit box </li></ul></ul></ul><ul><ul><ul><li>When you give real property, you can’t live or visit, without the permission of the recipient </li></ul></ul></ul><ul><ul><ul><li>Must actually transfer property and/or legal ownership </li></ul></ul></ul>
  27. 27. GLUTTONY <ul><li>Can’t Speak from the Grave </li></ul><ul><ul><li>Trusts can no longer defer deemed disposition until the death of the last preferred Beneficiary, which could be generations later </li></ul></ul><ul><ul><li>Trusts are required to report a deemed disposition of assets at FMV, 21 years after creation. </li></ul></ul>
  28. 28. LUST “ But I tell you that anyone who looks at a woman lustfully has already committed adultery with her in his heart” (Matthew 5:28)
  29. 29. LUST <ul><li>Definition: to have an intense desire or need </li></ul><ul><li>The Wandering Eye </li></ul><ul><ul><li>Billionaire Leo, a former football player, was engaged to marry society-lady Julia. Shortly before his wedding, he met social activist Betty and fell in love with her. He bankrolled her cause of saving the environment and made a Will leaving her his entire estate. However, he felt obliged to marry Julia. Shortly after the wedding he drowned in the bathtub. His last thoughts were of Betty and how she would make much better use of his money than Julia. </li></ul></ul><ul><ul><li>Who gets Leo’s estate? </li></ul></ul>
  30. 30. LUST <ul><li>The story continues… </li></ul><ul><ul><li>Julia, after scooping Leo’s estate, gave Betty Leo’s favorite musical instrument. Betty started dating a football player and forgot Leo. </li></ul></ul><ul><li>Marriage REVOKES a Will </li></ul><ul><ul><li>Unless the Will contemplates marriage. </li></ul></ul>
  31. 31. LUST <ul><li>RATS! </li></ul><ul><ul><li>Nina and Jamie were madly in love and soon married. They signed mutual Wills leaving everything to each other. Soon, Jamie began to drive Nina crazy and she finally kicked him out. Nina found Mark and decided to dedicate her life to Mark and advocacy for the mentally disabled. Nina, many years later, died due to a rat bite. </li></ul></ul><ul><ul><li>Who receives the Nina’s estate? </li></ul></ul>
  32. 32. LUST <ul><li>The story continues… </li></ul><ul><ul><li>Unfortunately, Nina never changed her Will and her entire estate went to Jamie rather than to Mark. Mark would have used the money from her estate to build a drop-in center for adults with Down syndrome, but Jamie spent it on games and a video library. </li></ul></ul><ul><li>Separation does not revoke the Will. </li></ul><ul><li>Divorce will revoke certain Will provisions related to your ex-spouse if the Will was signed before the divorce. </li></ul>
  33. 33. QUESTIONS?

Editor's Notes

  • Joint Tenancy – Testators will enter into joint tenancies so as to avoid the probate process related to property.
  • INTENT Beneficial owner – argument can be made that transfer to joint tenancy only to avoid probate fees upon death. Pecore v. Pecore : Aging father has joint account with his eldest adult daughter based on accounting advice provided by his financial advisor. The father was the only one to make deposits into the account. At the time of his death, the account had a value of approximately $1 million. He was closest to his eldest daughter and was estranged from one of the other two children. The court held that the presumption of advancement applied and that the evidence showed the father intended to give his eldest daughter beneficial interest when establishing joint ownership. It is the onus of the surviving tenant to prove the transferor intended to gift the right of survivorship. Evidence the court will look at in considering intent of transferor: contemporaneous evidence – best evidence subsequent to transfer – must be relevant bank documents control and use of funds in account – not determinative granting power of attorney – court’s discretion to consider tax treatment of joint accounts – court’s discretion to consider TAX IMPLICATIONS While entering into joint tenancy may avoid probate fees, there is the possibility of creating tax liabilities when entering into a joint tenant relationship with a child.
  • Probate fees in Ontario are called Estate Administration Tax
  • Part V of the SLRA addresses support for dependant spouse, child – If the deceased did not provide support for dependants, the dependants can apply to for support order from the Estate, even if deceased did not have a Will.
  • Boilerplate provision under Family Law Act: “In the event my spouse shall elect under section 6 of the Family Law Act , R.S.O. 1990, c. F-3, as amended or replace, or any similar legislation in other provinces, then they shall be deemed to have predeceased me for the purposes of this Will.” Spouse’s will 6.   (1)   When a spouse dies leaving a will, the surviving spouse shall elect to take under the will or to receive the entitlement under section 5. R.S.O. 1990, c. F.3, s. 6 (1). Ontario law states that the surviving spouse has the legal right to elect to receive inheritance under the Will, or if left less than 50% of the net family profit, the surviving spouse can apply to the courts within 6 months to receive equalization payment based on the property held by the deceased the day before death.
  • Preferential share = $200,000.00 One child – split the remainder of the estate equally btw spouse and child 2+ children – split the remainder of the estate 1/3 to spouse and divide 2/3 btw the children Minor children Custody  If joint custody, surviving parent. If custodial parent dies, then fight may break out between new parent (if any), surviving non-custodial parent, or other family members. If no one assumes custody of the child, the province has custody of the child.
  • If minor children receive assets directly rather than set up in a trust, then the provincial government will manage according to the rules set out in provincial legislation until the child comes of age.
  • The testator can have a declaration in the Will declaring a different Beneficiary for the life insurance policy, but it is best to make sure the policy is updated with the new designation.
  • When the estate is divided according to the Will, try to treat the children equally depending on the life circumstances. On an uneven distribution, the children may accept the parents’ reasoning, but on a purely emotional level they view a smaller legacy as less love.
  • What if more than one child is interested in the family business? What if only one of the interested children actually has the skills to run the family business?
  • Gift = unconditionally transferring ownership and control of your property to another person. Cannot “ungift” a gift
  • Before the eye wanders, keep these two points in mind.
  • If you name your ex-spouse as executor, the appointment will be cancelled. If there is no alternative executor, then someone will have to apply to the court to be made administrator of your estate. If you named your ex-spouse as beneficiary, the assets will go to the alternative beneficiary. If there is no alternative beneficiary, the assets will go to the residue. If the residue was to go to your ex-spouse and there is no alternative beneficiary for the residue, the residue will be distributed as if you died without a Will.
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