Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
By Sarah Bull, Partner & Portfolio Manager at KJ Harrison Investors
It’s that time of year when we look around our house and want to get it in order. Maybe there’s an old sofa you’ve been wanting to replace, or that worn bit of carpet in the living room just has to go. After all, spring is a time for starting fresh and starting right. And that should apply not just around your home, but in your financial life as well.
Like estate planning, for instance. Of all our financial affairs, planning for when we are not around is probably the most tempting one to put off for another day. But it is also one of the most important. I often recommend to my clients that they set aside a day or two every spring to do a “clean-up” of their estate planning documents and make sure they accurately reflect their goals.
So where do you start this “spring cleaning” exercise? There are three essential estate planning documents that should be reviewed and, as necessary, revised every year.
This annual review provides an opportunity to consider whether your estate will be passed along in the most efficient manner.
The first is your will. Sadly, most Canadians don’t have one, but they should – if you are among those who have been putting off creating a will, now is a good time to rectify that. But assuming you do have a will, spring is the perfect time to review it and make sure it accurately reflects what you will leave and how you will leave it.
Have you acquired new assets over the past year? Has your marital status changed? Are the beneficiaries in your will still appropriate? If you have young
children, does your will designate the right guardians for them? Are there new grandchildren (or great-grandchildren) to consider in your legacy planning? Do you have different philanthropic priorities than you did last year? Any substantive changes should be incorporated into your will.
This annual review also provides an opportunity to consider whether your estate will be passed along in the most efficient manner. In particular, trust structures can be powerful tools in estate planning because they can reduce the tax burden on your beneficiaries upon your death. They can also be especially useful in certain special situations. For instance, if you have a child who is living with a disability, a trust may allow them to continue to avail themselves of government benefits programs (like the Ontario Disability Support Program), which can provide not only income support but also healthcare and drugs coverage. A good estate lawyer can assist you in assessing whether trusts are appropriate in your situation.
Effective estate planning, however, is not just a matter of deciding how to divvy up your assets after you die. It also involves ensuring that you will be taken care of – financially and physically – if you are no longer able to look after yourself. Accordingly, your estate plan should include documents that designate individuals to whom you would grant authority to look after you and your money if you are incapacitated. These documents outline your wishes regarding “power of attorney for property” and “power of attorney for care.” The first appoints individuals to make decisions regarding your assets, including your money; the second appoints those who will make decisions regarding your health.
Your annual review should include making sure – first and foremost – that it includes these documents. If it doesn’t, then upon your death or if you are incapacitated, a court may ultimately decide who will look after you and your assets. If you have already designated powers of attorney, make sure your choices are still relevant and up to date. Then, I would recommend you go further and consider how effective your choices are.
There are a few best practices to consider as you do this:
- Remember that your power-of-attorney designations do not have to be fair – they just need to be effective. That might sound insensitive, but if you have five children, granting all of them power of attorney will probably not be the most effective way to ensure good decisions are made (or made promptly).
- In my experience, dividing power of attorney among three individuals is often a good practice. That way, there is always a tie-breaker vote in case of disagreement.
- It often helps if one of the three designees is an independent, trusted advisor rather than a family member. That person’s “outside” perspective can help lead to better decision-making.
- Geography matters. If you have “global kids,” a child who lives thousands of miles away might find it difficult to efficiently and effectively act on your behalf. When it comes to your money and your health, proximity can make a big difference.
Also, consider the impact of your decisions on those to whom you’re giving power of attorney. People who are designated with power of attorney for property are often compensated financially for their efforts, while those with power of attorney for care are usually not. That’s despite the fact that the people responsible for looking after their elderly parents often put in the most work, both physically and emotionally. On top of that – and I realize this is anecdotal – I’ve noticed that men are often given power of attorney for property, while the burden of power of attorney for care often falls to women. There is certainly no rational reason for this, at least not one I can see. So when you are reviewing your estate documents, think about whether your power-of-attorney designations are fair.
Once you have done all this work on your estate plan, there is one last important step: communicate your decisions. If you have designated power of attorney to someone, let them know you have done so. If you have decided not to grant one of your children power of attorney, then sit down with them and tell them why. If some of your beneficiaries are treated differently than others in your will, then have a conversation about your reasons and how they will be impacted. These can be difficult conversations, of course, but having them now can save you and your loved ones a lot of time, trouble and emotional distress down the road.
Following all the steps I’ve outlined here might sound like a lot of work, but it really does not need to be. And when your estate documents are up to date and clearly communicated, you can rest assured that you and your loved ones will be looked after according to your wishes. Like a good spring cleaning, a little bit of extra effort put into your estate planning now can pay big dividends in the future.
For more information, contact us.