When times were simpler, people made do with simple Wills. Now, our children and grandchildren face tremendous challenges to their financial security, the risk of marital breakdown, and government tax grabs. Relying upon simple or outdated Wills these days may be leaving a time-bomb as a legacy to our loved ones. A modern Will is an essential part of proper estate planning. Every Will should contain provisions as follows:

Family Law protection: While all of us hope that our children will remain happily married, Statistics Canada reports that for every 100 marriages there are 38 separations or divorces. This unfortunate trend is undoubtedly accelerating. Parents may not be able to protect their children from all the consequences of marital breakdown, but they can ensure that the inheritance received by a married child is protected. The Ontario Family Law Act provides that if the appropriate clause is incorporated into the parents’ Will, the inheritance of a married child is exempt from claims made by the other party upon separation or divorce. This protection extends not only to the amount of the original inheritance, but also to any increase in value during the marriage. However, only Wills made or updated since 1986 can contain this vital protection.

Executors: All Wills should appoint an executor to administer the estate after death and to carry out the terms of the Will. Serious problems may arise if the executor named is unable or unwilling to act: for example, if the executor has died, is in poor health, has become mentally incompetent, or has moved to another jurisdiction. It is very important to ensure that there is provision for a substitutionary or back-up executor in case the primary executor cannot act on your behalf. Special concerns arise if there are several children who might be executors. Your lawyer can identify these potential problems and discuss solutions.

Double probate avoidance: Tragically, common disasters can befall a family. A car accident may take the lives of both husband and wife. It is then doubly unfortunate if the death of both results in the doubling of estate administration costs. This occurs when all the legal and probate fees are paid by one spouse’s estate simply to put the assets into the other spouse’s estate (e.g. the husband’s assets go into the wife’s estate). The legal and probate costs are then duplicated when the second spouse’s estate (e.g. the wife’s estate) is administered in order to pass the assets on to the children or other heirs. A properly drawn Will can reduce or avoid this costly risk.

Guardians: If you have children under 18, it is essential that a guardian be named in the Will. The guardian will act as a substitute parent in the event that both the mother and the father have died. The age, marital status, place of residence and relationship with the children are all critical matters to be weighed in the the selection of a guardian. For many people, this is one of the most difficult decisions to be resolved in their Will planning. If you fail to provide for a guardian in the Will, you have seriously failed your minor child. If there is a tragedy resulting in the death of both parents, the child’s future will be uncertain indeed.

Trust provisions: Most Wills provide that upon the death of the parents, the estate goes to their children. They also usually provide that in the event a child has predeceased the parents, the deceased child’s share is to go to the children of that child. Although this is a good basic plan, bad results can flow from it. Consider what would happen if a child or grandchild received the inheritance at 18. He or she may well drop out of school and live off the money until it is gone. By that time, it will be very difficult for the child to go back to school to complete his or her education, and of course he or she would have acquired no job training. Accordingly, all Wills must contain prudently drawn trust provisions that ensure the money is available for legitimate educational and other needs. It must also prevent uncontrolled access by the young person before he or she has had an opportunity to learn money-management and life skills. Careful consideration needs to be given to the timing of the payment of capital, as well as income, directly into the hands of the young beneficiary. Otherwise, instead of helping, your bequest may well have the effect of hurting the child or grandchild’s future. A word of warning: many wills provide that a beneficiary must wait until 21 or some later age to inherit the capital. Unfortunately, these Wills often leave open a legal loophole that allows an 18 year old to inherit anyway. Further, even enforceable restricitions on capital may be ineffective if there is nothing in the trust provisions to prevent uncontrolled access to the income from the capital.

Powers and authorities: Wills must provide the executor with sufficient flexibility and authority to deal with whatever financial and tax concerns may arise. There must be clauses permitting borrowing by the estate, election for tax purposes, and power to sell and postpone the sale of assets to ensure that the estate can be effectively administered.

If you already have a Will, good for you. You have taken charge of your own affairs, and taken steps to ensure that your family and heirs will benefit from your estate to the greatest extent possible after your death.

However, remember that your Will is of necessity a reflection of the circumstances of your life at the time you made it. Changes to your family situation or finances and the introduction of new laws can all mean that your carefully planned Will is obsolete. If this is so, and if you do not take fresh steps to update your Will, the problems of outdated planning will not become apparent until after you have passed away. Then it is too late for you to make the corrections, and your heirs will suffer the consequences.

You can best protect your heirs against the dangers of an outdated Will by performing regular reviews of it. This does not mean that you must see your lawyer every few months to go over your Will. It does mean that you should read over your Will copy at least once a year.

We tell our clients to pick a memorable day — an anniversary or a birthday, New Year’s Eve, even April Fool’s Day — and on that day to make a point of pulling their Will copy from the drawer or file cabinet and reading it over. If you realize from the review that the person you chose as an executor is dead or ill, or if your preferred guardian is undergoing a messy divorce, or if the financial provision made for a child or grandchild is no longer sufficient, then you should contact your lawyer and discuss the need for changes. Below is our Will Review Checklist. Take the time to read it through and see if any of these conditions apply to you:

1. My Will was made before 1987.
2. I have married since I made my Will.
3. I have separated or divorced since I made my Will.
4. My spouse has died since I made my Will.
5. I have had children since I made my Will.
6. My Will provides that my children inherit at age 18 or 21.
7. My children are under 18 and no guardian is named in my Will.
8. The guardian has moved since I made my Will.
9. The guardian has separated since I made my Will.
10. The guardian in my Will is over 55.
11. The guardian in my Will is in poor health.
12. The guardian has died since I made my Will.
13. I can now think of a better guardian since I made my Will.
14. The executor has moved since I made my Will.
15. The executor is over 55 and my children are minors.
16. The executor in my Will is in poor health.
17. The executor in my Will has died.
18. My children have become adults since I made my Will.
19. I have had grandchildren since I made my Will.

If any of these situations apply to you, then your will is in need of professional review. It may still work properly, but to be certain, please see a lawyer without delay. Please note: this checklist only covers some of the common ways in which a Will can become outdated. Even if none of these conditions applies to you, your Will may still require revision.

In addition to an informal annual review, we also recommend to our clients that they see a lawyer for a formal review at least once every 5 years. We then thoroughly review their family circumstances, financial status and any new laws that affect our planning. If we do find ways to improve the Will, and if the client agrees that it is worth doing, then and only then will a bill be rendered for the actual services provided.

Remember: an outdated Will may cause more problems than having no Will at all. Reviews should be regular and inexpensive.

A few years ago a client came to see us to discuss his Will instructions. He was a widower in his seventies and over the years, through hard work, careful management and good luck, he had built up a substantial estate. He had a son and a daughter, and he wished to leave everything to them.

He was not worried about his daughter, but he did have concerns about his son. His son was in business, and like many businessmen at the time, he was being seriously challenged by the recession. The man was most distressed by the thought that after his death his son’s creditors might grab the inheritance.

We were able to recommend to him an estate planning technique called an asset protection trust. Without getting into technical details, it works like a faucet on the inheritance. The son does not get the inheritance outright, but receives as much of the income and capital as is appropriate. However, if there is a bankruptcy, then the faucet turns off and the money ceases to flow. Following the discharge from bankruptcy — when the creditors are no longer a threat — the faucet can again be turned on.

This approach was greatly reassuring to our client, and he instructed us to build this protection for his son into the will.

The fear of financial reverses provides an excellent reason to include an asset protection trust in your Will. There are also other circumstances that might cause parents to consider this technique.

One example would be a spendthrift child, or a child with a problem such as habitual gambling or alcoholism. Parents know that any capital left to these children will quickly be wasted, leaving little or nothing for the future needs of the child. This type of trust again controls the flow of money from the inheritance, ensuring that the money is used for beneficial purposes.

The technique can also be employed to assist disabled children who are entitled to governmental support. Another use is to provide valuable security for the inheritance against claims by your child’s spouse upon separation or divorce. While asset protection trust may be right for some families, it also has its drawbacks. It is somewhat complicated in its planning, and it can be difficult to ensure that the trust accomplishes its purpose. There may well be additional costs in its operation, with trustees’ compensation and trust tax returns that need to be factored into your decisions. This planning technique is not for everyone, but if you think you have a realistic need to protect your child’s inheritance either from the child him- or herself, or from attacks by others, then you should ask your lawyer about asset protection trusts. You may sleep much more soundly.

In 1986 the Ontario Family Law Act was passed. This fundamentally changed many of the legal consequences of marriage. One important aspect of the Family Law Act is the way in which it provides for equalization of family property in the event of a separation or divorce.

Very simply, the Act states that if a married couple separates, the value of the wife’s and the husband’s assets that have been acquired or increased during the marriage are totaled. If the husband’s total exceed the wife’s, then he must pay her enough so that their totals are equal.

The rationale for this is that marriage is an economic partnership. If the husband has been able to work full-time and acquire assets in his name, it is probably due to the fact that the wife has fulfilled the domestic and child-care functions. Thus, her contribution permits him to improve his financial situation, and upon the marriage breakdown, her value to the economics of the marriage should be acknowledged financially.

However, the Family Law Act also provides for exceptions to the general rule. One of the most significant of these relates to gifts or inheritances received by one of the spouses during marriage from a third party. The best example of this would be a child’s inheritance under his or her parents’ Wills. The law recognizes that parents will usually leave assets to their children upon death. This bequest is not a function of the marriage relationship, and, accordingly, on marriage breakdown the other spouse may be exempted from a claim against it on separation.

It is very important to realize that if this protection for children’s inheritances is to be provided, the Will must specifically include the proper wording. Of course, if the Will predates the 1986 passage of the Family Law Act, then it cannot contain the protection at all.

If you do inherit something from your parents, and their Wills have the proper clause to provide protection against Family Law Act claims, it is of course critical to ensure that this protection is not lost. You do not lose the protection by changing the asset itself. If you inherit cash, and invest it in a mutual fund, and later use the proceeds to purchase a cottage, even the value of this cottage years later is sheltered under the umbrella of the clause in the Wills. You do not lose the protection even if you gift the asset into your spouse’s name, or transfer it into joint ownership.

The purpose of this article is not to suggest that you refrain from sharing the benefit of an inheritance with your spouse. However, when Statistics Canada reports that for every 100 marriages there are 38 separation or divorces, it is naive to ignore the possibility of marital breakdown and the financial consequences of this under the Family Law Act. We recommend that all parents review their Wills to ensure that the proper wording is there. We also suggest that children inheriting from their parents discuss Family Law Act protection with an estate lawyer to ensure that it is not inadvertently lost.

The executor’s role:

Too often people make the mistake of putting the cart before the horse, and begin their Will planning with the end result, the beneficiaries who inherit. Of course this is important, but the best starting point for Will planning is the choice of executor.

The executor is the person you choose to administer your estate when you are gone. No matter how cleverly the rest of your Will is structured, or how generously you have provided for your beneficiaries, if your executor choice is flawed, the administration of your estate is in trouble. The funeral cannot be held, the creditors cannot be paid and the beneficiaries cannot inherit unless and until the executor does his or her job properly.

The list of executor responsibilities is long. Typically the first executor task is to arrange the funeral. Occasionally the deceased has had the foresight to provide some guidance about funeral, but usually this is not the case. Whether or not guidance is available, legally it is up to the executor to make the decisions.

After the funeral, the executor must ensure that the assets of the deceased are located and secured. This may involve changing the locks on a house, or locating investments, or notifying financial institutions of the death. This can be more difficult than it sounds. Each and every year millions of dollars default to the federal government, often because an executor did not know the asset existed.

Payment of debts is another duty. Executors are not normally responsible for the debts of the estate, but if they do not do their job properly they can be personally liable to creditors. If the assets of the estate are distributed to the beneficiaries without proper notification of creditors, the executors may have to dig into their own pockets to satisfy the debt. They can then try to get reimbursed from the beneficiaries, but this can be unlikely or impossible.

Once all the assets are located and debts paid, the executors must then distribute the estate in accordance with the Will directions. If the estate consists of just money, this is relatively simple. If the estate includes investments and real estate, then questions of valuation may arise, and complex sales procedures may be involved. Personal effects, family heirlooms, jewellery and items of sentimental or special significance are all potential time bombs for executors to defuse fairly, without appearing selfish, biased or heartless.

The executor’s job can be complicated and risky. Make sure the assistance of a lawyer and other professional advisers is obtained to avoid the many tricks and traps. The result will be a safe and satisfactory administration, to the benefit of all

Choosing your executor:

In planning your Will it is critical to choose the best possible executor to navigate the minefield of estate administration. The wrong choice will have serious consequences for your loved ones.

Most people look among their beneficiaries to select an executor. This makes sense because the beneficiaries are the ones who benefit most from a properly administered estate. The usual first choice as to executor is the spouse. He or she is most intimately familiar with the finances, and the most directly affected by the death. Normally it is recommended the spouse act alone, so as to maintain control within the same generation.

However, sometimes a spouse is unable to act because of poor health, or mental incapacity, or prior death. Accordingly it is necessary that your Will contain provisions for a backup executor. This is true even if you are relying upon a corporate executor. Trust companies do not always agree to accept the position. If so, unless an alternate choice is set out in your Will, a time consuming and relatively costly application to the Court is required to appoint a replacement.

The most frequent choice for backup is an adult child or children. This is for the same reason that the spouse was the primary choice. The children are now the most closely connected, and if beneficiaries, the ones most directly affected.

If the children are to be involved as backup executors, it is generally preferable to involve more than one child, acting together. There are several advantages to this.

Firstly, I am convinced that in most cases two (or three) heads are better than one, particularly considering the sometimes difficult decisions that must be confronted.

Secondly, the often onerous executor duties can then be shared, rather than all resting on one set of tired shoulders.

Finally, it is much less likely that family strife will arise if more than one child is involved in the decision making. If only one of three children is chosen to act as executor, it is human nature for the others to feel left out. It is only a short step from there to resentment, second guessing and trouble.

Don’t forget to ask your executor if he is she is willing to do the job. This is not only polite, but also necessary. Most will say yes, but some will have reservations. Perhaps their own health concerns hold them back, or a fear of being caught up in family disputes. The time to find out is now. If there is a problem, you can react accordingly with another selection. If you do not, following your death an unwilling executor may not do the job as well as you hoped, or may even renounce the position entirely.

A “sprinkling” trust is a method for beneficiaries to inherit that provides very significant potential benefits.  Typically your child or primary beneficiary him or herself would be the trustee, and so in full control of all of the inherited assets.  Only your primary beneficiary can decide whether the inheritance assets should be retained, or spent, or re-invested.  He or she can also decide how the income generated from the inheritance can be taxed.

Your beneficiary, his or her spouse if any, and his or her children and grandchildren are all designated as potential beneficiaries.  If the spouse was a lower rate taxpayer than your primary beneficiary, then that trustee/beneficiary may choose to “sprinkle” the trust’s income to the spouse and it have it taxed at lower marginal rates.  Or if your primary beneficiary had a child going to university, the trust could sprinkle income directly to him or her for that purpose and it would be taxed at that grandchild’s low or negligible rate of tax. 

The crucial point is that your primary beneficiary as trustee decides whether to distribute any income or capital at all; and if he or she chooses to distribute then whether it all goes to him or her personally or whether some/all goes to spouse or child for tax reduction or other purposes.

In addition to the potential tax efficiencies, the “sprinkling” trust also serves as a very effective asset protection trust.  If your beneficiary went bankrupt or had creditor problems, the trust assets would be exempt from claims. 

If a married primary beneficiary was sued for divorce, the trust assets are also exempt.  This is true even if that beneficiary chose to use inheritance money to purchase a home or cottage.  Normally by operation of the Family Law Act these would be considered to be “matrimonial homes” and so subject to claims by a divorcing in-law.  However if your beneficiary chooses to have the trust purchase the property, then the Ontario Court of Appeal has ruled that such a home or cottage does not become a matrimonial home and so is exempt from claims.

The trust asset protections and the income splitting opportunities afforded by the sprinkling trust can apply for up to 21 years after the trust is settled, whether during the lifetime of the parent or upon his or her death.

After 21 years has passed, or such earlier time as the beneficiary considers appropriate, he or she can then transfer the trust assets into his or her name personally.  NO CAPITAL GAINS TAX APPLIES at that time, even if the trust assets have increased substantially in value.

Another succession planning advantage for the beneficiary to consider as the 21 year time approaches is the opportunity to transfer some or all of the trust assets to his or her children, rather than to him or her personally.  Again no capital gains tax is triggered by choosing to benefit the grandchildren, and now the liability for further capital gains tax payment is deferred for the lifetime of those grandchildren.

Finally, if your primary beneficiary is not married, or the spouse is a higher income earner, or there are no children in need of support, and no potential exposure to creditors that might put the inheritance at risk, then the beneficiary can also choose to wind up the trust at any time, and transfer the inherited assets into his or her name personally.  There would be no cost to wind up the trust for a primary beneficiary who chose to receive his or her inheritance personally rather than in the form of a trust.