Today, let's discuss the concept of "flow analysis". In the context of estate planning, we are asking the question: Where does my property go when I pass away? Sometimes the destination may not be what you expect or want. I see that most frequently with beneficiary designations done badly.
Jointly owned property has with it the concept of a right of survivorship. A surviving joint owner (in the case of 2 people on title) will be the sole owner of the property on the death of the other owner.
A proper estate plan means a flow analysis has been completed.
It's not that hard to do. The cost of not doing it could be significant in terms of tax paid verses saved, who is controlling the property in question and, more importantly, your wishes not being carried out.
In meetings with clients, I often use the analogy of buckets.
Think of a regular bucket with a handle, the kind you may have in your utility closet or garage. For most persons, there are two buckets (for more complicated estates, there might be more than two, but for purposes of this discussion let’s consider a more typical scenario). One would be "inside" the estate and the other is "outside".
Let's use the example of planning for Mom's estate (let's call her Mary; she is widowed) and Mary has 3 adult children, one of which has a long-term disability. Let's call that person Johnny. He is 35 and lives with his mother in the home he grew up in.
Johnny will require a trust which will be for his lifetime. He can't just receive a larger amount of money because his disability prevents him from being able to understand finances or make appropriate decisions about investing the funds or when and how to use money from the trust. Johnny's disability is not so severe that he can't function (with supports) in the community. He goes out with friends and has a part-time job that he gets to on local transit. But Mary is concerned that he would be vulnerable regarding his funds. He has a big heart and will give money to anyone who asks.
Mary has designated her RRSP to go to Johnny. She heard there may be some tax benefits in doing this. She has her main checking and savings account in the name of her daughter who helps her with financial decisions (the bank told her this would makes things easier).
Mary wants her estate divided equally between her 3 children. In her Will she has a lifetime trust for Johnny (sometimes referred to as a "Henson Trust"). Then, Johnny's two siblings get their share of the estate as an outright gift (that is, no trust).
Let's do a "flow analysis" for Mary.
The first question is "what is INSIDE the estate"? Well, that would be her house (which is in her name alone). The next question is "what is OUTSIDE the estate"? That would be the bank accounts and the RRSP.
What we can conclude is that the estate won't be divided equally as Mary intends. On Mary's death, the RRSP goes to Johnny directly and will not be part of his trust. This is due to the beneficiary designation in the RRSP. It does not matter what Mary's will said; the designation will govern. On top of that, the accountant advises that the RRSP will go to Johnny but the tax arising from the deemed disposition on Mary's death will be paid from the estate.
Note that Johnny is living in the house and wants to stay there. But there are no other assets in the estate to pay the tax. There is discussion about putting a line of credit on the house to pay the taxes.
The bank accounts will go to Mary's daughter who is listed as a joint owner on the accounts with the bank. On the assumption the bank will treat the accounts as a true joint account, the end result is that they go to the daughter as the surviving joint owner. Now, maybe the daughter shares these accounts with her siblings...but maybe she does not. She hints that this was Mom's way of paying her back for all the time spent helping Mom over the years and Mom intended her to have these accounts and not share them. She recalls that being discussed with the banker. She does not think this money should be used to pay for the funeral or the tax from the RRSP.
So, the recommendations to Mary would be to change the beneficiary designation to "the estate" so there is money to pay for the taxes and the funeral. What is left over can be divided equally and Johnny's share will form part of his Henson Trust. This will ensure he also stays on government supports (AISH).
A further option would be to take Mary's daughter off the accounts and grant her a Power of Attorney to help manage the finances. This would allow the money to be controlled by the executor and distributed in accordance with her last Will, which is the preferred result. If Mary wishes not to change the banking arrangement, the daughter and her could put the understanding in writing that the daughter will use those funds as estate assets and distribute in accordance with the terms of Mary's last will. In other words, the daughter confirms that the funds are not hers alone. Mary could consider compensating her daughter for time spent or, alternatively, leave an appropriate gift to that daughter in her Will.
With some simple planning, an unintended result can be avoided with some simple planning steps. As well, the threat of the litigation and the costs together with the delays of going to court can be avoided (with the attendant rift between the kids). Johnny can be assured a secure financial future and his government supports would continue. But this all requires Mary to do the fact finding of how her bank accounts are set up and what the beneficiary designations state.
Check your beneficiary designations for RRSP/RIFs, Tax Free Savings Accounts and life insurance policies so you have the facts to complete the flow analysis to ensure your property flows where it is supposed to on your death.