What should you consider when planning your estate? You may wish to to protect your loved ones, reduce taxes payable upon your death, prevent conflicts... The good news is that wealth transfer is a step-by-step process, and you don't have to do it all by yourself. Here's all the information you need to gain a clear understanding.
Take stock
Start by drawing up a complete inventory of your assets. That includes your home, investments (RRSPs, RRIFs, TFSAs, Fonds shares), bank accounts, vehicles, valuables, and pension plans. Don't forget your debts: mortgage, personal loans, credit cards, etc.
Then, gather all your important documents in one place:
- Investment statements
- Insurance policies
- Property titles
- Marriage certificate or common law relationship documents
This will make things much easier for your heirs when the time comes. Remember as well to make a note of important passwords and key contacts (notary, financial advisor, etc.).
While this step may take some time, it will provide everyone with a clear picture.
Formulate an estate strategy
Once you've taken stock, ask yourself, "What do I want to accomplish?" Would you like to reduce your debts before your death? Grow your investments for your heirs? Minimize taxes to leave your loved ones as much as possible?
Surrounding yourself with suitably qualified people becomes essential at this point.
A financial planning specialist can help you optimize your tax strategies and maximize what you leave to loved ones. A notary can make sure your wishes are respected and that your legal documents are in order. Consult the Institute of Financial Planning directory or the Chambre des notaires du Québec website to find resources in your area.
There are several different ways to optimize your estate. Let's explore a few of them.
01Understand how taxes impact your estate
Taxation plays a major role in estate planning. At the time of your death, the government considers all your assets as sold at their current value. This can generate significant capital gains tax.
For example, if you bought a cottage for $100,000 and it's now worth $300,000, your estate will have to pay taxes on the $200,000 gain. Planning ahead is crucial to limiting this tax and maximizing what your loved ones will receive.
A financial planning specialist can help you implement tax-efficient strategies to reduce this bill.
02Take advantage of spousal rollover
For couples, spousal rollover can be an effective way to defer tax liability.
a) Residence and investments
Your home, investments, and other assets can be left to the person you live with without immediately incurring capital gains tax. Tax will be payable only on the sale of these assets or the death of this person.
b) RRSP or RRIF
It gets even better with your RRSP or RRIF: These amounts can be transferred tax-free directly to your life partner's RRSP. Your spouse will only pay tax when the money is withdrawn. Do you have a financially dependent child or grandchild? You can also leave your RRSP to this person and convert it into an annuity until they reach the age of majority.
c) TFSA
A TFSA can be transferred tax-free without affecting your life partner's contribution limit. Only interest accrued between your death and the date of transfer must be declared as income.
Note:
If you hold Fonds shares or FlexiFonds products, your estate can request their redemption by completing a form. The value of your investment will then be added to your total assets on your final income tax return.
03Consider life insurance
Life insurance is an often underestimated tool in estate planning. However, the policy proceeds paid to your beneficiaries could help your estate cover the cost of taxes payable on death, funeral expenses, and debts.
This is particularly useful if you have substantial assets but little liquidity. It means your heirs won't have to sell the family home in a hurry, for instance, to pay taxes.
04Give to loved ones during your lifetime
Why wait until you're gone to help the people you love? There are several advantages to giving during your lifetime.
First, you'll enjoy seeing your loved ones benefit from your generosity. Second, per Éducaloi, this strategy can reduce your total asset value before death, thus lowering your tax bill. Indeed, keeping everything until the end increases your asset value, putting you at risk of being taxed at a higher level when you die.
Of course, be sure to keep enough money to maintain your quality of life and grow your funds during retirement.
05Donate to an organization
Would you like to leave a different sort of legacy? Bequeathing a portion of your estate to an organization close to your heart can be very rewarding.
In addition to supporting a cause that's important to you, this gesture could entitle you to a tax credit (link in French) that can be applied to your final tax return, reducing the tax bill charged to your heirs.
In addition to money, you can also give stocks, bonds, and other securities, as long as they are not held in a registered account (RRSP, RRIF, TFSA).
Donating securities : Doubly advantageous
Donating shares and certain other securities to a registered charity is tax-efficient.
- The donation receipt will reflect your securities' market value (their worth at the time of donation), thus maximizing your tax credit.
- Capital gains earned since purchasing the securities are not taxed.
Prepare your will, mandate, and beneficiaries
We can't stress this enough: Having a notarized will is essential. While it may cost a few hundred dollars today, it can save thousands of dollars in legal fees and potential family conflicts later.
Without a will, the law will decide how to distribute your assets, and it may not be how you'd hoped. According to Éducaloi, notarized wills don't have to be probated in court, which speeds up the process and reduces costs for heirs.
Take this opportunity to prepare a protection mandate as well (also known as a mandate in case of incapacity). This document designates who will take care of you and manage your affairs should you no longer be able to do so.
Don't forget to designate beneficiaries for your life insurance and registered plans (RRSPs, RRIFs, TFSAs), if applicable. These sums are paid directly to beneficiaries without going through the estate, which speeds up the process and can reduce costs.
Advance medical directives are also important. They indicate your wishes regarding end-of-life care. Consider organ donation and let your loved ones know what you've decided.
Plan your legacy with My Game Plan
Our financial planning tool, My Game Plan, can show you how much you'll be able to leave to loved ones. Adjust your savings and withdrawal strategies according to your goals and get personalized recommendations to maximize your legacy.
Adjust your plan over time
Life changes, and your estate plan should change with it. With every important event in your life, take some time to review your strategies.
Have you received an inheritance? Has your financial situation changed? Have you been through a separation or divorce? Has a new grandchild joined the family? All these events may require adjustments.
Reviewing your plan every three to five years is recommended, even if no major events have occurred. As tax laws evolve, so will your personal situation.
Personalized estate plan
Preparing your estate means ensuring that the fruits of your labour will fully benefit loved ones in accordance with your wishes, while sparing them unnecessary hassle and expense. It's never too early to get started. Whether you're in your forties or already retired, every action you take today will make life easier for your loved ones tomorrow. Because beyond assets, there is also everything you choose to pass on—to people who matter to you and to future generations.
