Components to Consider in Effective Will Preparation

Creating a comprehensive and effective will is an essential step in ensuring that your assets are distributed according to your wishes and that your loved ones are taken care of after your passing. Surprisingly, over 57% of Canadians don’t have a will, which can lead to significant complications and stress for their families.  This article explores several components of will preparation, highlighting the importance of selecting trustworthy executors and guardians, understanding the benefits of secondary wills and hotchpot clauses, and considering the implications of joint tenancy and testamentary trusts.

Executor and Backup Executor 

The role of executor is often considered one of the most important designations in will preparation. This individual oversees estate administration, ensuring assets are distributed according to the deceased’s wishes. Given the complexity of estate matters, it’s crucial that the executor is not only trustworthy but also comfortable and knowledgeable in navigating such affairs. It’s advisable for the executor to reside in the same province to streamline the process and avoid potential issues. If an executor resides outside of Canada, it might trigger tax implications that complicate estate administration. 

Guardians and Trustees for Minor Children 

Choosing a guardian or trustee for minor children demands the same level of trustworthiness and readiness for responsibility as selecting an executor. Establishing a trust for beneficiaries under 18 (or older, depending on the province) is a common practice. Extending the age limit to 25 or beyond can prevent young and potentially financially inexperienced individuals from accessing large sums prematurely.

Secondary/Corporate Will 

In certain provinces like British Columbia and Ontario, creating a secondary or corporate will can circumvent probate for corporate assets, potentially saving up to 1.5% of the estate’s value in probate fees. 

Hotchpot Clauses 

When assets are gifted to beneficiaries during the donor’s lifetime, a hotchpot clause can ensure equitable distribution by including these gifts when calculating the remaining proceeds to be divided among all beneficiaries. 

Joint Tenancy with Right of Survivorship 

In cases where a joint account holder is added with a right of survivorship, it’s wise to clarify the intentions in the will. For instance, if a parent adds a child as a joint account holder intending for the child to inherit the account, this should be explicitly stated in the will. This action may itself be a taxable event. Without clear instructions, the default assumption might be that the joint account holder is holding the account in a bare trust for eventual distribution to the beneficiaries listed in the will, which can also have tax implications.

Testamentary Trusts 

In situations involving multiple marriages and blended families, a testamentary trust can be invaluable. This type of trust, which is created upon the death of an individual, allows the surviving spouse to utilize specific assets during their lifetime. Ultimately, these assets will pass to the original owner’s beneficiaries after the spouse's death. This arrangement ensures that the surviving spouse is provided for while preserving the inheritance for the intended beneficiaries.

Survival Clause

A survival clause, typically lasting 30 days, prevents the need for probate if a couple passes away in rapid succession, such as in a car accident. This clause ensures that the estate is not subjected to probate proceedings multiple times. 

Potential Uneven Taxation 

When determining which assets to distribute to beneficiaries, attention should be paid to the eventual taxation of various assets and whether the overall outcome aligns with intentions. For instance, consider a scenario where a client with two children has $500K in registered assets and a primary residence valued at $500K. If the client decides to assign the RRSP to one child and the house along with the remainder of the estate to the other child through the will, careful planning is paramount. Otherwise, this arrangement could result in one child inheriting the $500K from RRSP while leaving the estate with a substantial tax liability. 

While a well-designed will typically incorporates these points, consulting with a knowledgeable wealth advisor ensures that all relevant factors are thoroughly addressed, providing peace of mind for you and your loved ones.