Harsh consequences for dying with no Will in Canada

Who inherits your estate in Canada if you have no will?  Not who you’d think. Your common-law spouse doesn’t automatically receive it, your former spouse might if you’re separated but not divorced, money bypasses your spouse and goes to your minor children when you’re married.  In this episode, Sara explains ‘intestate’, ‘probate’ and why it’s never too late for you to legally document your final wishes.

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough (00:01):

Yeah, I'm completely not ready. So let's do this thing. 

Sara McCullough (00:13):

When I say the two certainties in life, most of you just thought death and taxes. True. There are two things that we forget about those two certainties though. They happen together. There are taxes when you die and you can control one of them. In this episode, we're going to outline some of the ‘what ifs’ that are connected with being unprepared - not prepared - unprepared. Because that's a little more interesting. In the next 20 minutes or so we're also going to talk about what happens when you do prepare and you do make the decisions and when you are in control. I'm Sara McCullough and in this episode of Sara Makes Sense - will I, or won't I - is there really a choice? 

Sara McCullough (01:13):

Let's begin at the beginning and pin down some definitions. So what is your estate? Many of you may have an idea, but here's a definition that's gonna narrow it down. Your estate is the stuff you own and the stuff you owe when you die. It's also your responsibilities that you had in life that follow through to your estate. That's your estate. Onto probate. Most of us know and hate that word. Probates most often mistake definition is estate tax. Canada actually doesn't have an estate tax. We absolutely have a structure by which CRA gets in on our stuff or our estate when we die, but we don't have a specific estate tax. The United States does, and I think that idea partly just bled across the border. So what is probate? Well, it is a tax and it's based on the total value of your estate. 

Sara McCullough (02:16):

It's set by each individual province, so there's actually variance in the amount of probate tax across Canada. So it's set by the province, collected by the province, through the courts. Well, what do you, and by you, I mean your beneficiaries and your executor, get in exchange for pain probate? Well, when you probate a will, a judge reviews your will and stamps it as probated. If he or she agrees that this is the last will and is a representation of your final wishes. So legitimacy is what you get. When in Ontario, you pay approximately 1.5% of the total value of your estate to the province, through the courts. I want you to remember that number, 1.5%, that's it for a stamp of legitimacy that can help to avoid or diffuse conflict between beneficiaries and reduce or eliminate liability for your executor. 

Sara McCullough (03:21):

A state is your stuff. Probate is the tax you pay to legitimize your will and your stuff. Wait, roughly 50% of Canadians don't have a will. Let's talk about what a will is and what happens if you don't have one. A will is a legal document that outlines what you want to happen to your stuff when you're dead and who you might want to continue to support when you're gone. That's it - sounds simple. So why have 50% of us not done this and the other 50% of us that do it? Well, we let the documents get outdated or they get canceled by other decisions we make, or they just don't have the correct legal wording in there so that what we want to happen will actually happen when we're gone. That's a lot to pull apart in there. So let's start with what happens if you don't have a will when you die. 

Sara McCullough (04:21):

If you're in a relationship, either a marriage or a common law relationship, you might think, no, Sarah, I don't have a will, but that's okay, my spouse will inherit everything, which is fine by me. And they can continue to raise the kids like we planned and it will be fine. I don't need to pay a lawyer to write that down. If you don't have a will or you have an invalid will, you are deemed to have died intestate and testate is Latin for not testified or not witnessed. In that case, each province has a set of intestacy rules for you and your stuff and your family and loved ones. If you're married with children, your spouse, doesn't get all of your stuff. They get a portion. And then the remainder is divided up between your spouse and your kids. Yes, your tiny kids and your grownup kids, your spouse doesn't get it. Your spouse might not end up controlling it either, if your kids are under 18. There's also a government department that in an intestacy, might weigh in on whether your spouse, the surviving parent of your children, is the best person to act in the interest of your now monied, minor children. Sound good? Sound like what you wanted? Probably not. Well, there is a good reason to get a will. 

Sara McCullough (05:49):

You're in a common law partnership? Think the person that you have made a commitment to will get your stuff, because it's obvious that you want them to have it after your death, the way you shared it in life? Nope. Property laws for common law relationships are different than the property laws for those who are legally married. In most provinces, that means there's less rights and possibly less chance that your common law partner will have access to your estate and your stuff after you're gone. Again, that's not what most of us intend, but that is the reality of dying intestate. Each provincial government has a format for division if you die without a will, and there is no mechanism to submit anywhere, a verbal or written cry by your family of that's not what was wanted at all. This is wrong for us and the way we live together. I hope you now see the reason for a will, but some of you are still not convinced or you've pushed it to the back burner. 

Sara McCullough (06:59):

Intestate sounds scary, Sara. So I'll get around to writing a will before I die. Mm, that's the part we don't control. Remember I said of the two certainties, we can control one of them? Death isn't the one. Taxes is the one, but we can only control taxes if we write a will and have a plan before we die. The thought that, well, I don't really have that much stuff. I'm not a multimillionaire, so do I really need one? Most of us have a slightly fuzzy idea of what we own, who's going to get it when we die, and how complicated the asset or debt may be to transfer. So let me give you a few quick examples. If you think you don't have much stuff. Are you a member of a pension plan and you're not retired yet? How quick are we to say how comfortable government and teachers’ pensions are? If you're in that group and you die before you collect your pension, as in while you're still working, that pension is an asset of your estate and there will be a payout. 

Sara McCullough (08:21):

You can't control the asset while you're working and while you're alive, but there is an amount of money with your name on it, if you die while you're working. So naming the correct beneficiary here matters because there can be six figure payouts for fairly young employees. Is your mortgage joint with somebody else? When you're gone, that someone will need to qualify for the mortgage using only their income or the lenders want their money back. Sure, if we're talking about a jointly owned house, the survivor owns the house, but they don't own the mortgage. Hear the distinction in there? Yes, your spouse is gonna own the house, but if there's an outstanding mortgage, they are going to need to qualify for the amount that's still owing with that lender on their own income or the lenders gonna demand that that mortgage be paid off. 

Sara McCullough (09:26):

Do you own property in another country? Like, say a condo in Florida? That automatically makes you a complex estate. That condo that you got a great deal on that's in your name? When you die, somebody needs the authority to act to sell it or transfer the title. And those states that your condo is in, are usually not only looking for a will. They're looking for a will that's familiar. I.e., a will that's drafted and executed in that state, not from a will up in Canada. Do you have a corporation? Any corporation, not just a big multinational corporation, even just, you know, a one-person professional corporation, like doctors, lawyers, and accountants have, or like that flower shop or that small business that you incorporated. That corporation is a separate legal entity from you. That's probably part of the reason you set up the corporation in the first place, for the benefits of it being separate from you. When it's separate, your corporation doesn't die when you do. The corporation is still exactly the same as before you died, but without a will, no one's in charge of it, no one can direct it, access the funds in it, and tax stuff will happen to both your personal final tax return and the corporation’s return if nobody’s in charge. 

Sara McCullough (10:47):

We've talked about three of the big four definition here – estate, probate, will - that you need to understand when you're thinking about your estate. The fourth big definition is the beneficiary designation, and a quick primer here. Think life insurance and RSP. Both of those have a beneficiary designation, which is a mechanism to say who you want to leave that thing to when you die. So when you die, the thing, a life insurance check or an RSP balance, goes to the person or organization that you've named as beneficiary and it goes to them directly. Hold that definition while I talk about some examples to anchor what we've talked about so far. So I'm going to give you a real life example of someone who didn't have a will and died, versus if they had done some planning and had a will. 

Sara McCullough (12:08):

So Mike and Michelle, again, not the client's real names, were both in their early forties, had two kids who were 9 and 12, both professionals. Michelle is a doctor, has a professional corporation. So these are high income earners. They're also conservative spenders, and consequently, they had a large net worth, but they had no will, nothing. Michelle died. And her estate, remember, this is the stuff she owns in her own name was valued at $5 million. No will, the government has a plan for that, those intestacy rules. So, most of us in this situation want Mike to inherit all of Michelle’s stuff. That's her husband, he's the parent of their minor children, so he would get all her stuff and continue to raise the kids with the values that they had together. 

Sara McCullough (13:11):

The intestacy rules did give one and a half million dollars to Mike. They also gave $1.1 million to the 9 year old, $1.1 million to the 12 year old, in trust. But that trust can only hang around until the kids turn 18. Then they have access to whatever's left in that account. And CRA got $1.2 million outta this turnover. Remember way back when I said Canada doesn't have an estate tax? We don't. When you die in Canada, CRA treats your estate like you just sold everything you owned, turned it into cash and plopped it into a bank account the moment before you died. Then they tax all those transactions. Got an RSP? CRA acts like you cashed it out, deregistered it, plopped it in your bank account. So they tax it as income. So, no will? CRA gets a whole lot of transactions. For Mike and Michelle's family, that amounted to $1.2 million. Still think paying a lawyer to draft your will is expensive and unnecessary? 

Sara McCullough (14:28):

Still think talking to an advisor about what you want for your family when you're gone, can wait? With a properly written and executed will, this scenario would play out with Mike inheriting, roughly $4.9 million of Michelle's five million dollar estate, and CRA would get roughly a hundred thousand dollars. Oh, and Mike stayed in direct control of the money and raised the kids with the values and financial control that he and Michelle together had intended. Single parent with kids under 18, or you're in a second marriage, you've got out a blended family? I'll give you a brief piece of what happened to John and Tiffany's family when John died suddenly. John was in his early sixties, he had two adult children from his first marriage. Tiffany's son from her first marriage was 14. They didn't have any children together. They had talked about needing to update their wills and stuff, but days are busy, life happens, and we think that we’ve got time to get this done. 

Sara McCullough (15:39):

John and Tiffany didn't, John died suddenly. Remember what I said about beneficiaries? That handy designation that sends your life insurance proceeds, or your RSP money directly to the person named in the paperwork that you did possibly years ago? John's life insurance went right to his first wife because that policy was placed during the divorce and that money from that policy was needed to cover his support payments in case he died before he finished up that commitment. Well, he outlived the commitment. Those kids are adults now, but he never got around to changing the beneficiary on that policy. So, insurance check went to the first wife. His RSP beneficiary designation? The last time he looked at that was when he was doing all of the other stuff around the time of his divorce. 

Sara McCullough (16:43):

And he didn't want his ex-wife to get that, so he named the kids directly. That money went straight to his adult kids who didn't need it. And CRA sends the tax bill for that RSP account, all the RSP money, to the estate. So that $600,000 RSP that was divided between John's two adult kids, generated roughly a $300,000 tax bill. Tiffany, as his wife, was dealing with John's final estate, because his will was invalid. Therefore intestate, she did apply to be executor, but what was missed was this RSP money, but the tax bill went to the estate. So Tiffany is responsible for the tax bill, John's adult kids have the $600,000 from the RSP account. For a longer version of the other fallout for John and Tiffany's family, head over to my blog@wddevelopment.ca. Is it fixable after the fact? Sometimes, and in some ways, but part of that blog goes through the tax bill that happened without planning and what would've happened with planning. And there's a half million dollar difference for that estate. 

Sara McCullough (18:23):

Sometimes it isn't fully solvable, even with long expensive litigation. Chips fall where the intestate legislation pushes them, houses are sold to cover cost, and lives are changed beyond the loss of a family member. So would you volunteer for that? If I told you that not writing a will is the same as volunteering for family relationship ruptures, long expensive litigation, and sending CRA a large cheque, would you write a will then? Would you get advice so that your loved ones had a clear version of your wishes that could be followed after your death and that your loved ones would be more likely to still love each other because there wasn't mass confusion and misdirected assets? We know we should have a will. We joke about how adult it would be to have one. We think we have time to get this done. And yet we also have this unsettled feeling that we might not have time. And we have an unsettled feeling that maybe we don't understand what we own, and we don't know how to start the conversation about our will and about our estate. And maybe our family situation or our personal situation feels complicated and we don't know how to talk about that with an advisor. 

Sara McCullough (19:54):

I'm telling you now that it is possible to solve all those unsettled feelings, sort out what you own and what you owe and talk through your complicated situation to find the best solution for your family. You need to do your part and show up for that conversation. We've only scratched the surface of what can happen without estate planning and what is possible with planning in this podcast. And there's been no mention of the beautiful legacies that I've seen left by people who sat down and did the work necessary to pass their stuff. More importantly, pass their values, hopes, and dreams to their family and how that work has continued to benefit generations beyond themselves. In life we all have pieces scattered here and there, whether or not they involve your estate, your will, your assets, your goals, or your dreams. From time to time, we need someone who can cut through the noise. Somehow, someone who not only gets to know you as a person but can also really show and make sense of your plan. Not just the numbers, but truly what the numbers mean for you. This relationship, this plan, it belongs to you, not your planner. I'm Sara McCullough. Thank you for listening to Sara Makes Sense. 

Disclaimer (21:25):

The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include: Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, and holding an insurance license.