Archives February 2019

Why You Need A Will

Why You Need A Will

Do you have a will?

Talking about death is something that we all look forward to, no doubt…  But the reality is that contemplating our own mortality is less about the impact that it has on ourselves, but rather the effect that it has on those around us.  Estate planning is not just for the uber-rich, but rather a critical aspect of financial planning for all Canadians.

According to a recent study by the Angus Reid Institute, 49% of Canadians surveyed either don’t have a will in place, or their will is outdated.  This number skyrockets to 85% for those in the 18-34 age bracket.  With so many Canadians leaving themselves exposed, it is probably a good idea to go over what happens if you die without a will.

NOTE: This post should not be considered legal advice.  If you have any estate planning questions, please consult with a professional to assess your individual situation.

Why You Need A Will

In Ontario, the Succession Law Reform Act governs what happens when someone passes away without a will in place, known as dying “intestate”.  In this case, your affairs will be handled in a prescribed manner.

Personal Representative

A key reason why you need a will is that you can name the executor of your estate.  The executor is responsible for the administration and distribution of your estate along with the wishes that you have expressed in your will.  When you pass away intestate, you have no executor named.  As such, your closest relative will likely be appointed as your personal representative.  In many cases, this may not be an issue.  However, in some cases, you may not want the individual named to be acting on your estate’s behalf.

The added benefit of naming an executor is that they can be adequately prepared for the responsibility.  Before appointing someone as your executor, you should have a conversation with them to ensure that they are up to the task and related responsibilities.  The role of executor tends to be time-consuming, and you should be mindful of this when naming someone to the position.

Child Care Without a Will

If you have children, it is non-negotiable that you have a will.  If you die intestate, you will have lost the opportunity to dictate who should be responsible for your children.  In this scenario, the courts will determine who is the most suitable to become your children’s guardian.

An added piece of importance is in the situation where you have a dependent child.  Without leaving instructions for their care, or setting aside specific funds, your dependent child may not receive the long-term care that you had intended.

Division of Estate Property

Your property is distributed based on the following:

1) You have a spouse, but no children

Your entire estate goes to your spouse. However, this only applies to legally married spouses. Common-law spouses are not automatically entitled to receive anything if you die intestate.

2) You have a spouse and children

Your spouse is entitled to a preferential share of your estate, up-to-the first $200,000. What remains is now referred to as the residue. If anything is left over, the residue will be divided between your spouse and your children.

3) You have children, but no spouse

The children each inherit an equal portion of your estate. If any of your children have passed away, then their share would pass on to their children (i.e. your grandchildren).

4) You have no spouse and no children

Your parents inherit your estate.

5) You have no spouse, no children, and no parents

Your brothers and sisters (or their children if a sibling has passed away) receive an equal share of your estate.

6) You also have no brothers and sisters

Your nieces and nephews each inherit an equal portion of your estate.

7) You have no nieces and nephews

All other next of kin inherit an equal portion of your estate.  The determination of next of kin is performed using the table of Consanguinity (courtesy of Wikipedia).

8) You have no living next of kin:

Your estate goes to the Ontario government.  Not who you had in mind for a charitable donation to as part of your estate plan was it?

Here is a helpful infographic on the topic.

How your property is distributed in Ontario if you die without a will

Pet Care Without a Will

Unlike your children, the courts will not make a separate determination of whom the best caregiver will be.  Pets under Ontario law are considered Property.  As such, they will be subject to the division of property rules above.

Tax Efficiency

When you pass away, your representatives must file a final income tax return on your behalf.  This return comes with very particular tax planning opportunities, which are lost when you don’t leave a will behind.

When it comes time to validate your will, it goes through a process called probate. Probate is also required for those that die without a will.  According to the Ministry of the Attorney General, the probate process exists to:

  • give a person the authority to act as the estate trustee of an estate; or
  • confirm the authority of a person named as the estate trustee in the deceased’s will
  • formally approve that the deceased’s will is their valid last will.

Part of the process involves the Estate Administration Tax (EAT), or what is more commonly referred to as the ‘Probate Tax’.  EAT is charged on your residual estate (i.e. everything that is left over after filing your final tax return).  Between your final income tax return and the EAT, significant taxes could end up being paid that could have been avoided if you do not have a legal will in place.

Funeral and Burial Arrangements

Without a legal will in place, the arrangements will be left solely up to the discretion of your personal representative.  As mentioned above, this individual will be court appointed and may not know your wishes.

So, What’s Keeping Canadians From Getting A Will?

As per the Angus Reid study, there are a few key reasons that our estates are not adequately planned for.

“Of course, 18-34-year-olds without a will are significantly more likely than other Canadians to say they are too young to worry about having one written – nearly half (46%) indicate as much. As they get older, Canadians are more likely to cite a lack of assets as the reason they do not have a will in place.”

Surprisingly, only 8% of respondents listed “not wanting to think about death” as their primary reason for not having a legal will in place.  So, it appears the morbidity of the topic is not the deterrent that we may have thought it was.

The 3rd most frequent answer provided as their deterrent was cost.  18% of respondents indicated that ‘It’s too expensive to get a will written’.  As with many industries, estate planning has seen its share of ‘disruption’.  No longer do you have to travel to a stuffy lawyer’s office and be gouged for their expertise. Not requiring a lawyer is especially true for the average Canadian whose estates are not very complicated.  This is likely the case for the 48% of respondents who thought that they were either too young or didn’t have any assets to consider.

For those with simple estates, who live in Alberta or Ontario, Novel recommends Willful as a great option to obtain a legal will in as little as 30 minutes. Their premium package includes a will as well as a power of attorney for property and a living will for $150 plus tax.  Also, we have negotiated a 10% discount with them if you use the promotional code ‘Novel10’ at checkout (read more about our affiliate policy).

The best part of using Willful’s service is that your will can be updated as many times as you would like, for free, forever!
Yes, free.
Yes, forever!

That means that there won’t be any legal costs incurred to update your estate when you move to a new home, purchase a new car, or welcome a newborn for example.  Just remember, when you do make updates to your will, all previous copies should be destroyed.

Do I Need A Lawyer To Write My Will?

No!

Similar to Willful, there are a number of options out there that can provide you with templates or documents that you can work with.  That said, you should never draft your own documents and any templates that you use should have been reviewed by a lawyer.  And rest assured, Willful has had a many lawyers aid in the drafting of their documents.

Once you have a will drafted using one of the various methods out there, you need to have the documents witnessed/signed by two parties who are not named in the will.  For example, your executor cannot serve as the witness.

Once signed, the hard copy location needs to be shared with your executor.  This will ensure that your executor can quickly access it and begin the process.  Unfortunately, at present, digital wills are not acceptable.  Hard copies with signatures must be kept as the official document for your will and power of attorneys.

That’s it.  You now have a legal will!

The Brass Tacks On Why You Need A Will

In 2019, far too many Canadians still either don’t have a will or their will is out of date.  Don’t leave your loved ones in a precarious position, by not having a will.  Not having an up to date legal will can create many complications for your estate, and your wishes may not be addressed appropriately.  Many tools are available for you to create your will and keep it up to date.

If you would like to discuss your estate planning or discuss it as part of a Fee-Only Financial Plan, please contact us to set up a consultation.

Did you find this article helpful?  Did we miss anything?  Please let us know in the comments.


RRSP Contributions should be planned to maxmize your nest egg

Beware of RRSP Season

By any chance, have you been off the grid for the last month or so?  No?  Then I am certain that you have seen an advertisement for RRSPs during that time.

This is a big season for the average bank, fund provider, asset manager and just about anyone else involved in the investment or financial services industry.

The reason that this is such an important RRSP sales time is simple.  RRSPs stay invested – for a long time.

Let’s use a simple example.  In this example, you invest $10,000 in an average mutual fund within your RRSP.  You are 30 years old when you contribute and plan to retire at the age of 65.  Let’s say this mutual fund has a 2% Management Expense Ratio (MER) and grows at a rate of 5% a year.   By the time you reach retirement, the mutual fund will have earned $10,326 in fees over that 35-year period.  $10,000 of income, from a single contribution!  In addition, you will keep your funds invested throughout your retirement as you withdraw from your RRSP as a source of income.  This example doesn’t contemplate admin fees, transaction fees, or management fees paid to your advisors.  These fees would be over and above the MER for the mutual fund.

As you can see, RRSPs are BIG business for the industry.

The problem with the sales cycle that we experience during the early part of the year is that it doesn’t contemplate the most important factor.  YOU!

Blindly contributing to your RRSP is not a winning financial strategy.  When deciding whether you should contribute to your RRSP, you should take into consideration your individual financial situation. 

Isn’t Saving For Retirement A Good Thing?

Absolutely!  Start saving.  Right now.

According to a study by BDO, nearly two-thirds of Canadians say that they don’t have much, or anything, saved for retirement.  A key statistic from the report is that 47% of millennials have no retirement savings.

Saving for retirement helps to solidify your financial future.  Of the people surveyed in the study, 75% of those who haven’t retired yet expect to work longer than their parents did. 

Saving for your retirement is critical and I encourage you to do so, but blindly contributing to an RRSP is not the only way to achieve either your retirement or your broader financial goals.

Is An RRSP Contribution Right For Me During RRSP Season?

There are several considerations to take into account when determining your tax and retirement strategy.  RRSPs are an integral component of both.  Here are a few of the key items that you should keep in mind.

  1. Am I carrying credit card debt?

Not only is it RRSP season, but it is also the time of year that we have to pay off our credit cards from the December spending spree.  Paying down high-interest credit card and other types of debt should be prioritized over contributing to your RRSP.

  1. Do I have an emergency fund?

Retirement is a long way away for some.  You need to get there first.

An often-overlooked area for most, an emergency fund is requisite to weather the ups and downs of life.  Identity theft, cracked foundations, leaky roofs, unexpected medical expenses, job loss, serious injury, elderly parents in need of care, vehicle breakdown or a surprise baby on the way.  These are just a sampling of the reasons that you should ensure that you have an adequate emergency fund at the ready.

  1. Can I lock these funds in until retirement?

An RRSP isn’t a typical savings account.  When you put money into one, the expectation is that you will keep the money there until it is time to fund your retirement.  As such, you won’t have access to the funds without penalty.  Funds that are withdrawn early experience 2 major consequences.

First, the funds withdrawn have a withholding tax applied against them.  The Federal withholding tax rate is 30% for amounts over $15,000.  This means, that if you will need access to $10,000, you need to withdraw roughly $14,285 in order to be left with the cash that you need after federal withholding tax.  When you file your tax return for the year of withdrawal, the $14,285 would be included in your income.  If you have a marginal rate below the 30%, you should receive a refund for the difference, but you have just given the government an interest-free loan for the period between your withdrawal date and when your tax refund gets paid out.

Second, you lose the RRSP contribution room forever.  Unlike a TFSA, when you make a withdrawal from an RRSP, you do not get to put the withdrawal back in.  With a TFSA, you can re-contribute the amount that you withdrew in the following year.

  1. What is my marginal tax rate, and what will my tax rate in retirement be?

This is the money maker when it comes to using RRSPs.  The best use of an RRSP is when you contribute money at a higher marginal tax rate than your planned marginal tax rate in retirement.  In a simple example, if you contribute at a 30% tax rate, but withdraw at a 35% tax rate, you will be paying more tax than you would have saved on the contribution.

That being said, the tax-deferred treatment of the investments within an RRSP can still result in a positive outcome despite the above tax rate scenario.  This will depend heavily on investment performance and the length of time the funds are invested.  Whether or not this will make sense for you will depend on several factors, however.

  1. How much tax do I have to pay this year?

One of the main benefits of an RRSP is that it reduces your tax payable in the current year.  If you contribute too much in the wrong year, you may be wasting some of the taxation magic that an RRSP contribution can provide. 

  1. How much contribution room do I have?

Unfortunately, the benefits of an RRSP are not unlimited.  You accrue 18% of your employment income as RRSP contribution room every year.  If you have a limited amount of contribution room, you may be better served by using it in a later year when your marginal tax rate is higher.

  1. Do I already have enough in my RRSP?

There is also the possibility that you don’t need to make any contributions.  If you have a workplace defined benefit pension, this may satisfy your retirement income needs by itself.  This is not a typical scenario, however.  In another scenario, if you have ample RRSP savings already, with additional contributions you could put yourself in a position where when you convert the RRSP to an RRIF you will end up in too high a tax bracket.  If this is the case, TFSA, non-registered accounts or Spousal RRSP contributions are more appropriate for your situation.

Buyer Beware: RRSP Loans

Another tactic that the financial industry likes to use is the offering of RRSP loans.

The general idea is that you take out a loan to contribute to your RRSPs, and then pay off as much of the loan as you can with your tax refund.

The major problem with this approach is that when you borrow money to invest in an RRSP, the interest that you pay on the loan is not tax deductible.  In addition, as with most loans, there is an inherent risk.  The risk here is that unforeseen events could arise, or you simply get invited to go on a great spring break trip, and you may not pay the loan off in full.  All the while, you can’t deduct the interest because it was used to fund your RRSP.  Not a winning play.

Your Bonus & RRSP Season

Another item to consider is that this also happens to be when many employee bonuses are paid out.  If your employer offers a savings program, such as a Group RRSP, then typically your employer will provide you with the option of having your bonus paid straight into your workplace RRSP plan.  In addition to the items mentioned above, there are additional considerations to keep in mind around this option.

  1. What is the timing of the bonus payment?

This is critical from an RRSP perspective.  If the bonus will not be paid until after March 1, 2019, then it won’t be eligible for your 2018 tax year filing.  If this is paid prior to March 1, and you elect to contribute it to your Group RRSP, then you would have the option to apply it to either the 2018 or 2019 tax year. 

A word of caution here – your bonus will be taxed as income in 2019.  If you contribute it and elect to use the RRSP deduction for the 2018 year, you would have to pay the income tax on it in 2019, as you wouldn’t have the deduction available following its use for 2018.  As such, this would not be a generally recommended approach. 

  1. What are the fees associated with my Group RRSP?

This is one that you will have to do some research around.  Mind you, this is research that I would recommend you perform no matter what.  Gaining an understanding of the investment products that are offered as part of your employer-based savings plans, and their fees will help piece together the overall cost of your portfolio.  While the fees associated with the products offered can vary, there may be an offsetting benefit to utilizing the savings plan, such as an employer savings match.  For example, if you contribute 5% of your savings each month into the plan, they may offer to match this 5%.  A 100% match of your money will offset the increased fees that they may offer. 

However, when it comes to your bonus, there won’t be an accompanying match on your contribution.  High fees may make this option an unattractive one.

  1. Do I need the cash from the bonus payment for another purpose?

If you do not contribute your bonus to the savings plan, this will be paid out just like your normal paycheque.  However, there will be one key difference.  When the bonus gets paid out, there will typically be a withholding tax at a fairly high marginal rate, along with CPP and EI deductions.  Similar to the early RRSP withdrawal example above, this means that some of your money may be tied up until you file your tax return in 2020, for the 2019 tax year, and get your refund.

The Brass Tacks

RRSPs are powerful financial tools. 

The financial industry is full of intimidating salespeople.

This can result in some unwise decisions being made.

In order to determine whether contributing to your RRSP is the right thing for you, there are a number of important factors to consider.  You shouldn’t simply blindly contribute to your RRSP like the salespeople would like you to.

To discuss your tax and RRSP strategy for the coming year as part of a Fee-Only Financial Plan please contact us.

Did you find this blog post helpful?  Anything else you think that we should include?

Please let us know in the comments below.