Most people don’t want to think about their own death – let alone talk about it. This unwillingness to contemplate their own mortality means many Canadians lack the knowledge to engage in effective estate planning, a new study suggests.
The RBC survey of 1,501 Canadians, conducted in the last week of March, showed a general lack of awareness about wills and estate planning. For example, 61 per cent don’t feel knowledgeable about things such as probate – the legal process of validating a will in court and distributing assets – while 57 per cent were not aware that estate taxes could be reduced through insurance policy benefits.
This is striking, given that the vast majority of Canadians want to avoid unnecessary estate fees and minimize out-of-pocket settlement costs. “But they don’t know the products that can help to accomplish this,” said Selene Soo, director of wealth products for RBC Insurance.
Estate planning helps manage and distribute assets after death, including who receives your property, when and how it will be transferred. “It’s about sitting down and structuring your finances in such a way that you minimize taxes and fees,” Ms. Soo said.
Doing this requires assessing which financial products can help maximize what your loved ones receive and minimize tax burdens, including probate fees – a tax levied by the government on a deceased person’s will, which can be as high as 1.5 per cent in Ontario and as low as 0.05 per cent in Alberta.
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RBC’s poll showed that more than half of Canadians aren’t aware that estate taxes can be reduced with the help of insurance policy benefits, which offer a way for inheritances to bypass probate. “Insurance is paid out completely tax-free,” said Christine Van Cauwenberghe, a certified financial planner at IG Wealth Management. “So permanent life insurance is generally the best way to maximize the after-tax value of your estate.”
Another investment solution that can help maximize inheritance is a segregated fund – although only 25 per cent of Canadians have a solid understanding of what it actually is, according to the study.
Segregated funds resemble mutual funds but let you guarantee a large portion – usually at least 75 per cent – of the principal invested, so there’s more protection for investors. “But the main thing is that segregated funds don’t form part of your will, so they bypass probate entirely,” Ms. Soo said, meaning there are fewer fees to pay. “These savings can amount to upwards of 10 per cent of the value of an estate.”
“Let’s say I put $100,000 in a regular non-registered account and it earns 10 per cent and I pass away. That whole $110,000 goes straight to the estate,” said Melanie Johannink, a financial planner at Sun Life. “Now it’s a probatable asset – it has to go through tax.”
“[If] I put $100,000 in a segregated fund, I make 10 per cent, I pass away, the $110,000 goes straight to the beneficiary, bypassing probate,” she explained.
The downside of segregated funds is the hefty fees. “They’re quite expensive – in many cases, you pay more if you hold them for three or four years, especially in a jurisdiction like Manitoba or Alberta with effectively no probate fees,” Ms. Van Cauwenberghe said. “It’s a niche product, but for business owners who are concerned about creditor protection for their non-registered portfolio, it can definitely help protect your estate.”
With a segregated fund, there are also significant time savings. “It’s really fast – once we receive notification of death and everything is in order, we pay out to the named beneficiary and they will receive that inheritance within days,” Ms. Soo said.
“You can think how much money you’re gonna earn over the next 25 years and be very efficient with how you’re going to be taxed,” Ms. Johannink said. “I try to attract the young to get term insurance – it’s cheap and cheerful and you get it for next to nothing, but what you’ve done is you’ve protected your insurability for later on. It’s just good planning.”