Chapter 1

What Is Estate Planning, Anyway?

IN THIS CHAPTER

Figuring out what it means to have an estate

Knowing what estate planning involves

Exploring why estate planning is essential

Looking at the tools of the estate planning trade

Understanding the right time to prepare an estate plan

Ensuring that you'll be financially covered in your lifetime. too

Taking care of your needs in case you become physically or mentally incapable

Going to the experts

Here's the good news about estate planning: You have an estate! You don't have to be a sports star or a computer maven or to have inherited old family money to have an estate or to need to do estate planning.

Now for the bad news about estate planning: It forces you to think about death - and not just in an abstract philosophical kind of way. It forces you to think about your own death. You may not enjoy the estate planning process very much, but in this chapter I explain why you should do it even though it's not a lot of fun. I'll ease you gently into estate planning. I briefly discuss the main things you need to know, and then in the following chapters I go into more detail.

Understanding What Your Estate Is

I keep talking about this estate of yours, but before you start wondering why the butler and chauffeur didn't show up for work this morning, I'd better give you a little more detail about what your estate is.

Your estate is made up of everything you own. But in legal terms, your debts - everything you owe - are also part of your estate, because what you own must be used to pay off your debts when you die. (I show you how to take stock of your estate in Chapter 2.)

The things you own are referred to in law and accounting as your assets, and the debts you owe as your liabilities.

You need to take some other things into account when you're estate planning, although they're not technically part of your estate:

• Life insurance: If you have a life insurance policy, when you die either your estate or an individual (or individuals) you name as beneficiary, whichever option you have chosen, will receive the insurance proceeds. (I tell you more about insurance in Chapter 4.)
• Pension plans: If you're a member of an employee pension plan, your spouse or a person you name as beneficiary may be entitled to receive a pension after your death or to receive a one-time payment.
• Government benefits: Your spouse and/or children may be entitled to receive either a pension or a one-time payment from the Canada Pension Plan, Old Age Security, Veterans Affairs Canada, or your provincial Workers' Compensation Board (known by various names depending on your province) after your death.

Besides being what you own and owe, your estate is also a legal being that comes into existence on your death. It has some of the same legal rights that you had when you were alive, such as the right to enter into contracts and to sue and be sued. It also has some of the duties you had, the principal one being the duty to pay income tax.

Discovering What Estate Planning Is

Estate planning is essentially two things: planning to build up cash and other property in your estate, and planning what you want to happen to that property after you die.

Estate planning isn't rocket science, but it isn't a one-step process either. To start planning your estate you need to have a clear idea about the following matters:

• What do you own and what do you owe?
• What ways can you find of owning more and owing less so that you have more to leave behind?
• Whom do you want to (or have to) provide for after you're gone, and how much do they need?
• What are the best ways of providing for them?

You're going to have to take a hard, cold look at your financial situation and your family relationships and obligations.

Estate planning is not a one-time exercise, either. Whenever a significant event - like love, marriage, babies, divorce - occurs in your life you need to review your estate plan and make any changes that seem necessary.

Figuring Out Why You Need to Do Estate Planning

Here are the main reasons why you need to plan your estate. You want to make sure that when you die,

• You have done everything in your power to see that your family has enough money to manage without you - it takes planning to set aside and invest money for your family and to make sure that you have enough insurance (see Chapter 4).
• Your property goes to the people you want to have it - if you die without a valid will, the provincial government decides who gets your property based on rules set by provincial law, and it may well not go to the people you have in mind (see Chapter 12).
• A person you choose will look after your estate - without a valid will, there will be no executor (also called estate representative, estate trustee, or liquidator, depending on your province) named by you who will have the automatic right to look after your estate; instead, someone (usually a family member) will have to apply to the court to be appointed to look after it (see Chapter 12).
• You have a say in who will look after your children - if both you and the children's other parent die, a will is the best way to let your surviving family and the courts know whom you would like to care for the children (see Chapter 8).
• Your debts can be paid with the least damage to your estate - if you make no plan for payment of your debts, there may not be enough cash available to pay them (see Chapter 13). If you leave no will, the person appointed to look after your estate will have to sell some of your property to get the necessary cash, without any guidance from you about what to sell and what to keep in order to give to a particular family member or friend.
• The capital gains taxes your estate has to pay will be as low as possible - when you die your estate is taxed as if you had sold everything you owned just before you died, and without proper tax planning the bill can be high (see Chapter 3).
• The probate fees (sometimes called an estate administration tax) payable in all provinces other than Quebec and Manitoba will be as low as possible - in almost all provinces probate fees are calculated according to how much your estate is worth; with advance planning you can reduce the value of your estate for probate purposes, and so reduce these fees (see Chapter 3).
• The future of any business you own has been looked after - you need to plan ahead, whether you want your business to carry on (who should look after it?) or whether you want it to be sold (how to get the most money for it?). (See Chapter 9.)

Here's a final, even more morbid, reason to plan your estate. As part of the process you can let your family know what you'd like done with your body. (Oddly enough, your body is not part of your estate, unlike the other things that belonged to you when you were alive, it belongs to your executor or, if you have no executor, your closest relative.) You can make your wishes known about organ donation (yes or no) and funeral arrangements (plain oak or elaborate casket, burial or cremation, flowers or donations to a favourite charity), so that your family members don't have to go through the stress of making choices they think you'd approve of, or maybe even end up fighting about.

Getting a Handle on Estate Planning Tools

When you know what your estate consists of and what you want to give to whom, you can choose some estate planning tools to help you do what you want.

These are the most commonly used estate planning tools:

• A will: A will is a written, signed, and witnessed document that states how you want your property to be given away after you die, and appoints an executor to look after your property and debts after your death. I strongly advise that you have a lawyer prepare your will. (I tell you more about wills in Chapters 12 and 13.)
• Gifts given during your lifetime: A gift is a transfer of all of your rights over a piece of property. (After you make a gift, you no longer have the right to hold on to the thing given or to sell it or to take it back from the person you gave it to or to leave it to another person in your will.) Giving a valuable gift usually has tax consequences for the giver. "Tax consequences" is a fancy way of saying "tax payments." I tell you more about gifts in Chapter 5.

• Trusts: A trust is another way to give property away during your lifetime. But instead of giving the property directly to the person you want to have the use of it (the beneficiary), you choose another person (a trustee) to hold and look after it for the use of the beneficiary. Why, you may be asking, would anyone want to do a weird thing like this? The main reason is to prevent the beneficiary from having total control of the property (for example, if the beneficiary is a child, or has a mental disability, or is hopeless about business matters; or if you want one person to have use of the property in the short term but want a...