The 50 Biggest Estate Planning Mistakes...and How to Avoid Them

bonding

When there is no will and nobody named by the deceased to carry out the work of the estate, it is a little risky from the law’s perspective to simply appoint someone who has stepped forward to be charged with this important task. For this reason, in an intestate estate a bond is required to make sure that the administrator does a good job, protecting both beneficiaries and creditors of the estate. The value of the bond is usually twice the value of the estate. Posting the bond with the court requires either willing individuals with sufficient net worth to step forward and provide evidence that they have net worth to cover the bond, or the administrator must approach a bonding company to provide security paid for by an annual premium similar to a life insurance policy premium. If the administrator has a good credit rating, the cost of the premium may only be hundreds of dollars, but the difficulty, time and aggravation in applying for and obtaining it is often considerable.

The cost of the bond will depend on several factors, including the value of the estate and the kinds of assets in it. This bonding requirement in an intestate estate is in contrast with an estate where there is a will. In that situation, unless none of the executors named in the will are from the province where the deceased lived and where the estate is now resident, the posting of a bond to ensure the executor’s proper and ethical administration is not usually required. (Presumably the law takes this approach because the executor was selected by the deceased, so he or she is assumed to be a trustworthy type.)

taxes

An intestate estate does not always pay more tax than an estate governed by a will, but it can happen if you leave behind capital property that has increased in value since you acquired it. Examples of capital property are real estate other then your primary home, an investment portfolio not in a registered plan, and shares in a private business. If this type of property has increased in value, capital gains tax may be payable when you die. However, if you leave the property to your surviving spouse, your estate has an opportunity to take advantage of a capital gains tax deferral that is available under the Income Tax Act. This deferral allows you to “roll over” your capital property—gains and all—to your surviving spouse, such that the payment of tax on the gains is postponed until he or she later sells the property.

But—and here is the lost opportunity—if you die without a will, the distribution under the intestacy legislation may require that some of the estate (including the capital property) goes to the children, forfeiting the capital gains tax deferral, or rollover.

To put it another way, if the applicable intestate distribution does not entitle your surviving spouse to receive all of your capital property, the rollover provision under the Income Tax Act is not available on property going to children and—bingo!—taxes are paid at your death rather than deferred.

As tax professors like to quip, taxes deferred are taxes saved.

professional fees

If we were playing a word association game, the word we’d associate most quickly with intestacy would be uncertainty. Who knows what will happen when a person dies without a will? Even the most experienced estate lawyers in the country couldn’t give your family a quick, off-the-cuff description of what exactly will need to be done if you die without a will. “It depends,” would be the most common response.

The complexity of the situation and what needs to be done will be determined by many factors, such as:

• how you held your assets (jointly with anyone or not);

• what assets you had;

• whether you were married or in a common-law relationship, or have been married before;

• if you have children, and their ages;

• how much your estate is worth;

• how your family gets along (or not); and

• whether there is an obvious choice to be the administrator that everyone in the family agrees with

Since uncertain times are when we most need to rely on good professionals, dying without a will may very well result in significant fees paid to both a lawyer and an accountant to determine the answers to the above questions (and others) and then put together a plan of action. This will take time; one lawyer we spoke with suggested that an application for the court order in an intestacy is at least twice as long as where there is a will.

If there is also conflict in the family, all bets would be off as to (a) the time required to sort it out, and (b) the professional fees to help your loved ones do the sorting.

points to take away

• Not everyone worries about the costs in their estate (“I’ll be dead anyway!”). However, keep in mind that the extra costs in an estate where there is no will can be high.

• A bond will be required in an intestate estate, with the cost determined by the makeup and value of the estate.

• Additional tax expense can arise if the deceased would have been entitled to roll capital property over to the surviving spouse but doing so is prevented by a partial distribution to children under the intestacy provisions in the deceased’s province.

• The most uncertain and therefore most worrisome added cost in an intestate estate is the higher cost for professional advice. It is impossible to know in advance what the legal, accounting, financial planning and investment advisory fees will be to assist your family in sorting out your affairs if you die without a will.