Trusts are incredibly useful if you want to put limits on how much money inheritors can access. They’re especially common for inheritances paid out to children who may not have the life experiences to know how to spend money wisely
Estate planning can be an incredibly complex affair. First, you need to determine how much of your wealth will be spent in your lifetime, and how much will be given to others afterwards. Then, you have to determine who the wealth will go to – charities, family, and friends are all wonderful options. You’ll also want to use the right investment vehicles to reduce the tax burden on your estate.
Estate planning when you have a blended family further complicates an already complex situation. You might not want to dwell on circumstances in which family members fight over your estate, but it’s important to do, if for no other reason than to avoid that conflict. You’ll want to be clear about your intentions with your family members – the clearer you are, the less room there is for misunderstandings and conflict.
The advice here is centered on estate planning in Canada. You should keep in mind that estate planning vehicles vary widely from country to country, so many of the tools presented may be unavailable to you if you’re outside of Canada. What’s more, this article was written in May, 2020; things may have changed if you’re reading this in the future (hello from the past, future reader). Estate planning is also heavily contingent upon your specific financial situation; it’s always a good idea to talk to your legal team and financial planning team to ensure you’re getting the most out of your investments.
A final thought before we get into the meat of things; it’s almost always a good idea to have a third party acting as an executor or trustee. As a neutral party, they won’t fall prey to emotional pressure or other problems that may come up during the distribution of the estate.
Registered Retirement Savings Plans (RRSPs) are, of course, designed to help you sustain your lifestyle through retirement. When you’ve contributed a fair amount to your RRSPs over the years, and you have other investment vehicles providing you with income, you may have enough left over to give to family members as a part of your estate.
RRSPs can be given to children and spouses, so it’s a simple matter of determining who would benefit the most from the RRSP as a source of income. The rules differ somewhat in Quebec, where RRSPs can only be given to the estate. Speak with a financial planner to determine who would benefit the most from your RRSP.
In the simplest of arrangements, your home will simply go to your spouse when you pass. Though in many families this arrangement is well and good, you may decide that you want your children to receive some of the value of the home. Fortunately, there’s a good way of going about this.
Instead of simply bequeathing your home to your spouse, you can use a tenancy-in-common agreement. In this agreement, the home’s value is partitioned between the two spouses – generally, at 50% each. You might stipulate that upon your death, your part of the home’s value is put into a trust. You might further establish a trust that, from your estate, provides your spouse with funds to help with the upkeep of the home.
Once your spouse sells the home, the trust you’ve established can distribute your portion of the home’s value as you see fit – to charity, to your children, to your spouse, or anywhere else you might like. The value of the home could also be held in all kinds of different trusts, some of which allow the recipients to access profits, but not the principle.
When it comes to reducing the tax burden your beneficiaries might see when leaving them assets from your estate, life insurance is one of the most important tools at your disposal. Life insurance isn’t taxed in most cases. You should, however, be very careful, as life insurance is one of the most non-liquid investments you can acquire. After all, you’ll never benefit from your own life insurance payout. Paradigm Insurance, a wealth management company in Canada, recommends using high value life insurance policies as an estate planning tool only if you already have a number of relatively liquid assets.
Another advantage of life insurance can be found in its flexibility; exactly who is paid out, and the way it’s paid out, is largely up to you. You can name contingent beneficiaries who are only paid if the primary beneficiary is deceased before the policy pays out. You can name multiple beneficiaries as well.
There are too many different types of trust to list here, and all of them come with their own rules. Trusts are incredibly useful if you want to put limits on how much money inheritors can access. They’re especially common for inheritances paid out to children who may not have the life experiences to know how to spend money wisely. Speak with a financial advisor and your legal team about the types of trusts that are available.