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Are You Making Your Estate More Complicated By Trying To Make It Less Complicated?
Author: 
Philippe Richer
September 22, 2022
Headshot of Philippe Richer, principal lawyer

I’m always at a loss when I see estate situations that could have easily been avoided had the deceased simply consulted with a lawyer and prepared a simple, robust will.

But for reasons that escape me, some people create situations that lead to severe complications or worse, unintended consequences for the surviving children or beneficiaries.

Cheryl, my business partner and spouse, wrote in the last article published on the TLR site about the effects of adding adult children to bank accounts and property titles. 

Unintended Consequences

Perhaps people believe they’re simplifying their estate. Whatever their motivation, they’re creating risks of unintended consequences. If a parent adds a child to the title of a house and that child separates from their spouse, the ownership of the house may end up being shared with the ex-spouse rather than the children.

I’ve concluded that people take risks like this because they only consider what’s likely to occur based on their current circumstances. In the example above, a parent adds a child to the title because they believe it will simplify the transfer of the asset when the parent dies. The child is in a happy marriage, what could possibly go wrong?

The parent didn't consider the possibility that the child’s marriage may turn for the worst. It’s simply not imaginable. However, we know that 50 per cent of all marriages fail. The likelihood of that marriage failing is quite high. This is a significant risk.

Simple Robust Wills

Or perhaps people think lawyers are too expensive and that dealing with assets through a will and testament is overly complicated.

We’ve been working hard to dispel that notion. We prefer simple, robust documents that stand the test of time. Rather than adding specific children to specific assets, we advocate making your wishes known by preparing a simple will. Simple, robust wills give the executors flexibility in dealing with the assets.

For example, they can liquidate everything and distribute the money. If one child wants the cottage, they can transfer the cottage to that child as part of their estate. If that child’s share isn’t enough to cover the fair market value of the cottage, the executor can transfer that child’s share to them and the child receiving the cottage would buy the value exceeding their share, which would then be distributed to the other siblings. This way everyone gets equal value. It doesn’t matter what the value is, in the sense that everyone gets an equal share.

If the child who wants the cottage is added to the title at a time when the cottage is worth $250,000, that may seem fair at the time. I’ve had clients who wanted to give the cottage to one child and the RRSPs to the other. At the time of our meeting, they were about equal in value.

Unintended Consequences Revisited

However, real estate prices fluctuate. At the time of your passing, the cottage may be worth $500,000, while your savings in RRSP or RRIF may have decreased either through market activity or because you used up your savings. You could end up with a very uneven distribution creating a mess with the kids. Imagine how your children will feel if one of the siblings inherits all the value.

Taxes

On top of that, you must consider the tax consequences. When the last parent dies, the Income Tax Act of Canada imposes a deemed disposition – meaning that for tax purposes, the deceased is deemed to have divested or sold all their assets at fair market value. The estate is responsible for paying those taxes.

Funds in registered accounts, like RRSP or RRIF accounts, are deemed to have been cashed and are taken into the deceased’s income. So, if the deceased still had $250,000 in RRIF, they will have to add that sum to their last income tax return as income. The estate will owe a lot of taxes.

This occurs even if a beneficiary was named. So, the beneficiary may receive the full $250,000, but the estate must pay the taxes. If the only asset left in the estate is the cottage, the child who was supposed to receive the cottage will have to sell it to pay for the taxes. This result is unfair.

While there are limited circumstances where adding a child to assets is beneficial, this is the exception, not the rule.

Make A Will

Preparing estate planning documents such as last wills and power of attorney documents requires that you commit to facing your eventual death. This can be difficult, we understand that. It also costs money. For a couple preparing all their documents, the costs will likely exceed $1,000. Going on a last-minute Cuba trip may be more appealing.

However, poor preparation can cost your children significantly more in both monetary terms and damaged relationships. There’s nothing like a dispute over an estate to inflame sibling tensions. Your reluctance to deal with your estate may result in damaging your children’s relationship. As a parent, I find this inexcusable.

If you find my tone belligerent, that’s alright. You don’t have to see me to prepare your will. But for the love of your children, see a lawyer – any lawyer – and put in place simple, clear instructions and share those with your kids. This alone can be your legacy.

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