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Five new trends in estate planning

It’s easy to feel like everything is under control. After all, you signed your will years ago. So everything is great, right?

Canada is in the midst of a massive intergenerational transfer of wealth with the owners of trillions of dollars in assets thinking they’ll pass all that wealth on to their children.

Despite this historic handoff from one generation to the next, the Investment Planning Counsel reveals that few Canadians have discussed their investment plans with the beneficiaries. Perhaps even more concerning, research from LawPRO has found that 56 per cent of Canadians don’t have a signed will.

These are the kinds of statistics that get a lot of farm families feeling a bit smug. After all, they’ve already signed their wills. The lawyer did them years ago. So the farm is safe and everything is looked after.

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Isn’t it?

Well, it’s worth taking a hard look, says Brent Dekoning, associate advisor with Lorkovic Wealth Management of RBC Dominion Securities. “It’s not uncommon to meet with farm families… who have wills that are 10 to 15 years old,” he says.

Estate planning has gotten more complicated — and the value of Canadian farms climbs ever higher — so your estate plan is more important than ever.

“Estate planning was much simpler 10 to 20 years ago when there wasn’t as much wealth,” Dekoning says. “There’s a lot more wealth than there has been in the past, and there are some unique planning strategies that are only available to farm families.”

Regular changes to the laws and tax code might mean that the will you created is no longer effective. Trends in estate planning have changed, too.

Whether you put off creating a will or have a will but haven’t updated it in a while, these five trends are a reason to call the pros to make sure the provisions in your will align with your estate planning goals.

Trend #1: Changes to Trust Laws

In the past, an estate plan might have included the creation of trusts that allowed a second taxpayer such as a spouse to benefit from a lower tax rate.

Trusts were taxed at graduated tax rates and offered exemptions from alternative minimum tax, as well as the ability to tax income distributed through the trust at graduated rates, and to have the trust, not the beneficiaries, pay the tax. Trusts also allowed all unrealized capital gains to be deferred until the death of the last surviving income beneficiary.

The government changed the taxation of trusts in 2016, removing the pass-along tax benefits and taxing beneficiaries at the top marginal tax rate rather than graduated tax rates, according to Kurt Oelschlagel, accountant and national agriculture tax leader with BDO Canada.

“They (trusts) are not as useful anymore given the change in the tax rules,” Oelschlagel says. “When the tax laws changed, there was no grandfathering, which means people need to change their wills because of those changes.”

All estate plans created before 2016 that included a trust for tax purposes should be reviewed.

Trend #2: The Inclusion of Multiple Will Strategies

If the idea of creating a single will feels overwhelming, your reaction to creating two wills might be a resounding no. However, a multiple will strategy could reduce your tax burden and help keep a portion of your estate out of probate, a process that validates the appointment of an executor and is required before changes are made to asset ownership.

As the name suggests, a multiple will strategy involves creating two wills: one for personal assets — including shares of a corporation — that do not require probate, and a second to bequeath assets administered by third parties such as real estate, bank accounts and other investments that are subject to probate.

“As soon as one of the assets in your will triggers probate, it pulls all of your other assets in,” Dekoning explains. “For lots of farmers… creating a separate will to deal with their corporate shares avoids probate, which, in Ontario, (has a fee of) 0.5 per cent on the first $50,000 in assets and 1.5 per cent on assets above $50,000.”

If your farm corporation has $10 million in value, a 1.5 percent probate tax would cost the estate $150,000. By comparison, the cost to get a second will is under $2,000, Dekoning says.

The use of multiple wills is not recommended — or even allowed — nationwide. It’s common in Ontario and British Columbia but in Alberta, where probate fees are low, it is not commonplace and Nova Scotia added a clause in its probate legislation that rendered the multiple will strategy ineffective. Talk to your accountant and lawyer to see if makes sense to prepare multiple wills based on your location.

Trend #3: New Tax on Split Income

Establishing a corporation allows farmers to add family members as shareholders. Under previous tax on split income (or, TOSI) rules, shareholders with the highest salaries could shift — or split — some of their income to shareholders, like a spouse, with lower incomes to reduce their tax liability.

The federal government changed TOSI rules in 2018 and limited — and often eliminated — the tax benefits on split incomes. Under the new rules, all income, including dividends and shareholder benefits, income received through partnerships or trusts, interest income, and income from capital gains, that is split with family shareholders is taxed at the highest individual tax rates.

There are some important exclusions, including a provision that states capital gains incurred due to taxpayer death shall be excluded from TOSI, that could affect estate planning.

“We’re seeing that if we plan the estate properly, maybe we can avoid that tax for the next generation, particularly for someone who is not active in the farm,” Oelschlagel says.

With tax codes and trends changing all the time, your estate plan needs to change, too. An outdated (or non-existent) will only increases the odds that your final wishes might not be carried out as planned.

Oelschlagel recommends reviewing your estate plans every three to five years (or every time you experience major changes such as the addition or loss of a family member or acquiring land or other major assets), explaining, “Whenever tax rules change, we need to look at the (estate plan) to make it more tax efficient.”

Trend #4: Increases in Land Values

Farmers often leave the farm assets, including land, to a farming heir while leaving life insurance, retirement savings and other investments to a non-farming heir, aiming for an equitable split based on the estimated value of those assets. Without an updated will, significant increases in the value of farmland might have created a lopsided division of assets.

The value of farmland has increased each year since 1993 with land ranging from less than $1,000 per acre in Saskatchewan to more than $186,000 per acre on the south coast of British Columbia, according to the latest data from Farm Credit Canada.

In 2019, the value of Canadian farmland increased just 5.2 per cent — far lower than previous years when values increased as much as 22.1 per cent — but even the lower rate far outpaced the returns on traditional long-term fixed income investments, which a 2020 Edward Jones report estimated at less than 3.5 per cent for Canadian investors.

“If your plan isn’t updated and reviewed, you may leave a disproportionate value of your estate to some of your beneficiaries in relation to others,” warns Nate Martin, partner with the SmithValeriote Law Firm LLP in Elora, Ont. “While this plan may have been equitable 10 years ago, it’s possible that the increased value in the land has outpaced (the value) of the life insurance policy or the investment accounts.”

The trend of rising farmland values is among the top reasons Martin advises farmers to review their estate plans.

Trend #5: The Rise of Cryptocurrency

Digital currencies like bitcoin might not be very common — yet — but awareness is on the rise. In fact, the Bank of Canada found that 58 per cent of Canadians use bitcoin for investment purposes.

If your estate includes cryptocurrency, your estate plan should include information about the amount of bitcoin you hold and language that permits your fiduciaries to access and manage the digital investments. Similar to cash assets, cryptocurrency is taxable in Canada and must be included in your estate plan.

In addition to leaving instructions about who should receive cryptocurrency, it’s essential to provide details, including passwords and the whereabouts of the private key needed to access the assets.

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