To many individuals estate planning simply means the passing along of assets to heirs. In a larger context, however, estate planning can be thought of as every investment decision made by an investor in order to save tax dollars and to add to capital. This capital subsequently becomes the object of preservation through prudent planning. It is recommended that one involve their financial advisor, accountant, and lawyer in the estate planning process in order to ensure that all issues and circumstances are addressed and attained.

Estate planning and financial planning have much common:

• both are based on the attainment of objectives,
• both provide for changes in circumstances,
• both are often concerned with the minimization of income taxes, and
• both are subject to regular review and updates.

1) The identification of heirs is a major objective of most estate plans.

This process includes not only choosing who will benefit under the will, but who will benefit during the lifetime of the individual. For example, an individual may decide to help their children to pay for their education, purchase a business, or make some other major personal purchase. Many people are prepared to split income with one or more dependents while they are still alive. Conversely, charities often benefit because individuals who have no heirs make gifts to them. A major estate planning decision, which is often difficult, is the identification of specific individuals or organizations that will be left particular assets.

2) Minimizing income taxes

The minimization of income taxes can be viewed from two perspectives:

• while alive, or
• at death.

While an individual is alive there are a variety of techniques which will either defer tax or shift income so that annual income taxes will be lower. Tax deferral means that income taxes must be paid at some stage and arrangements must be made so that funds will be available to pay the taxes when they are due.

At the time of death, the minimization of income taxes may come about by leaving specified assets to certain groups of taxpayers. The risk with this strategy is that it may be contrary to the individual's real wishes. Income tax may be deferred by using spousal rollover's of RRSPs or RRIFs. Otherwise, RRSPs and RRIFs are deemed to have been received upon death and must be included in the final tax return. An individual may have up to 4 separate Canadian income tax returns filed on their behalf after their death and these tax returns must be filed within 6 months of the date of death. Additionally, there may be more tax returns required if the individual had property or residency in another country.

3) Minimizing costs

Some estate plans and estate planning techniques can be virtually cost free and are very easy to administer while, at the other extreme, some plans can be very expensive to implement and to operate. For example, owning property in joint tenancy will ensure that the surviving tenant will automatically take ownership of the property upon the death of the first tenant. Although there may be other reasons that a joint tenancy might be inappropriate, this method is easy to implement. The design and implementation of a formal trust, on the other hand, can be relatively more expensive to implement and the ongoing income tax requirements will necessitate additional administration costs.

4) Retirement savings vehicles

Particular care should be given to insurance planning specifically with respect to the individual's and the survivor's rights under various government pension plans, registered pension plans, registered retirement savings plans (RRSPs), and registered retirement income funds (RRIFs).

5) Liquidity

One of the unique features of the Income Tax Act is its reference to what is known as a deemed realization or disposition at death. At death, there will very often be demands upon cash in an individual's estate to pay taxes, to repay debts, pay for funeral expenses, or to make cash legacies. Many individuals are asset rich and cash poor, and cash demands are an unpleasant reality.

If income taxes are minimized by using tax-free rollover's and there is little or no deemed realization, for example when everything rolls to the spouse, all that has been accomplished is the deferral of income tax until the spouse's death.

6) Spouses

Generally speaking, the wills of both spouses should be reviewed together to ensure that they operate in tandem to achieve the overall estate planning objectives.

1) The Will

Financial advisors recommend that the details of a Will be discussed with family members, in advance, to prevent or to reduce future arguments and discontent. Without a Will, the identification of heirs cannot take place and provincial law determines how to divide the estate. When an individual dies without a Will, they are said to have died intestate. This may result in an apportionment that is not the individual's preference and in distributions that make poor tax and business sense.

A Will is used to:

• appoint an executor and/or possible alternative executor(s) for the estate
• nominate guardian's for minor children or other dependents
• instruct on the distribution of personal effects
• make specific bequests
• give the executor the power to administer the estate
• establish testamentary trusts, and
• guide the executor on funeral arrangements.

The executor's duties generally are to:

• locate the last Will and interpret it
• arrange the funeral
• prepare an inventory of assets and liabilities
• apply for and obtain the letters of probate, in all provinces except Quebec
• guide the estate through the probate process
• safeguard the assets of the estate
• settle all claims, debts, and expenses of the estate
• prepare and file tax returns
• obtain a clearance certificate from Revenue Canada
• keep account of assets, revenues, and expenses
• distribute assets to the beneficiaries, and
• ensure that the deceased's wishes are being met through the entire estate settlement process.

In short, the executor must ensure that all terms of the Will are met and that the estate is properly settled.

Basic clauses typically found in a Will include:

• Identification and revocation. In this clause the testator identifies himself and revokes all previously drawn wills.
• Executor appointment. This clause identifies the executor or co-executor and may waive the requirement for the appointed executor to post a bond. It is in this clause that the compensation for the executor is outlined.
• Payments of debt. This clause lists the sources that are to be used for the retirement of outstanding debt as well as the funeral expense and any administration costs to the estate.
• Payment of taxes. This clause provides for the payment of income taxes and the sources that are to be used for the payment of these income taxes.
• Specific bequests. This clause is used to distribute specific property to named beneficiaries.
• Residue of the estate. This clause provides for the disposition of the balance of the estate after specific bequests have been distributed.
• Trusts. This clause provides for the establishment of testamentary trusts.
• Powers clause. This clause grants powers to the executor so that the executor can manage the estate. Specific powers may include the ability of the executor to borrow money on behalf of the estate, invest or reinvest assets, sell property on behalf of the estate without having to apply to the probate court for the required permission. A mutual fund clause allows the executor to delegate the investment responsibility to a professional money manager; this power is required since the executor and trustees of the estate cannot delegate their responsibilities.
• Appoint guardian's. This clause names the guardians who will care for the testator's minor or dependent children.
• Attestation. This clause appears at the end of the Will and acknowledges that the testator knew that he was drawing up a Will with which to distribute his estate.
• Signatures. The Will is signed by the testator as well as the independent witnesses to the signature.

2) Insurance

Insurance is important in an estate plan for two major reasons. It provides liquid funds when they are needed at the time of death. Secondly, insurance policy death benefits are not taxable. However, there are different tax consequences that flow from the manner in which policies are held, who pays the premiums, and the type of policy.

3) Gifting

Certain types of gifts may be made without tax consequences or in circumstances under which tax may be deferred indefinitely. Other gifts may result in immediate tax consequences under which the Income Tax Act's income attribution rules or the deemed capital gains rules apply. It is recommended that a professional advisor be contacted before a gift is bestowed to ensure that the funds flow without triggering unforeseen income taxes.

4) Power of attorney (POA)

A power of attorney is essential for any individual who is concerned about losing control of their affairs and who wishes to minimize the expense and inconvenience of the courts supervision.

This document is important when an individual wishes to see a financial, retirement, or estate plan carried out due to reasons including illnesses, poor mobility, or vacations. POAs can even be used in the unfortunate event of incapacity.

There are two basic types of POAs; one provides authority for financial decisions and the other authorizes parties to make decisions about another's personal care.

5) Trusts

Essentially, trusts assign future control of financial assets. A trust, which is established while an individual is alive, is called an inter-vivos trust. A trust, which is established in a Will, is known as a testamentary trust.

There are three parties to a trust:

• the settlor is the party that establishes the trust,
• the trustee is the party that takes title to and administers the trust property, and
• the beneficiary who may receive capital and or income from the trust.

The establishment and monitoring of formal trusts can be a complicated and time consuming activity and it is therefore recommended that appropriate professionals such as lawyers and accountants be consulted as part of this process. This will ensure that an individual's legal and tax circumstances are adequately considered and appropriately dealt with.

Assets designated to specific beneficiaries (named individuals rather than the estate) on life insurance policies, registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), annuities, and registered pension plans (RPPs) are paid or transferred directly to the beneficiary from the plan, thereby bypassing probate.

2) Income and capital shifting

Income splitting is an established technique designed to shift funds that would otherwise be taxable, to another party for three basic reasons:

• lowering of current income tax,
• maximizing deductions and credits, or
• independent funding and the ability to prove the source of funds for income tax reporting purposes.

The income attribution rules prevent the shifting of income to certain individuals who are in a lower tax bracket. In addition, the income attribution rules usually operate where there is a transfer of property for the benefit of a spouse or a non-arms length minor, and occasionally where the transaction is with another non-arms length adult. Generally speaking, the income attribution rules attribute income taxes back to the transferor, or the donor, and the result is to disallow income splitting. However, specific exceptions should be reviewed with the individual's tax advisor before each income transfer to ensure that it is handled in the most appropriate fashion.

Capital splitting is a technique, such as an estate freeze, to build up an estate for beneficiaries. It is a long-term arrangement under which substantial assets will be built up in the name of the beneficiaries. The major benefit of capital splitting arises on death since the assets owned by the beneficiaries of the split will not have any deemed realization for income tax purposes, when the individual dies.

3) Tax deferral

The basic reason that tax deferral is an attractive option in estate planning can be summed up by saying that a dollar of tax paid this year is more expensive than a dollar of tax paid in the future. In other words, the time value of money must be considered. An example of a tax-deferral mechanism is a spousal rollover at the time of death.