Institute for Divorce Financial Analysts™ (IDFA)
Estates & Wills & Trusts

Getting a head start – estate planning tips for young families

By Mary Wahbi and Seher Goderya

Starting a new family is exciting but taking on new responsibilities can be overwhelming for young parents. As with any endeavour, careful planning can assist in ensuring that such parents can adequately care for their children in the best possible way. The beginning of the year is a great time to plan not only for the present well-being of young children but also for the future.

If you are a young parent, relevant concerns such as who will care for your children in the event of your untimely death and who will preserve your property for your children’s benefit need to be considered as part of creating a sound and viable estate plan. Below are some ways that you can plan for and prevent any unnecessary stress or anguish:

Create mirror wills

A common misconception is that an absence of a will results in the government taking all your money. While this is not true, you should nevertheless be aware that in the absence of a will, Ontario’s intestacy laws come into effect, which provide that if a person dies without a will, leaving both a spouse and children, the spouse is to receive a preferential share of $200,000.00.

The remainder of the estate is to be divided between the spouse and children equally. Any money that minor children are entitled to must be paid into court and administered by the court, which parents may not find desirable.

For the young family, an ideal situation would be for each spouse to inherit each other’s estate so that if one spouse dies, the other receives all of the family accounts, investments, properties, etc. In order to ensure this happens, spouses usually create mirror wills, at the same time, to ensure that they are each other’s beneficiary and that their will instructions match in the event that both of them pass away at the same time.

Appoint custodians for minor children

If both parents die at the same time, the minor children i.e. children under the age of 18 will immediately need to be taken care of. While some young families may be fortunate enough to have extended family members who are willing to take on this role, others may not necessarily have someone on standby and this may create a situation of uncertainty and confusion for their children.

In creating wills, parents with young children can appoint custodians in their will who can act as legal custodians for their children, in the event that both are no longer alive. Important considerations for selecting a custodian or joint custodians should include:

  • How do we want our children to be raised?

  • Where would we want our children to live and grow?

  • Who would my children be most comfortable living with?

  • Will the selected custodians be able to sufficiently care and provide for all the children?

  • If the selected custodians have children of their own, will everyone get along? Will my children be happy growing up with the custodians’ children? 

It should be noted that simply appointing a custodian or joint custodians in a will is not enough for that person to gain permanent legal authority to take care of the children. The custodian has 90 days from the date of the last parent’s death to file an application with court for appointment as a custodian.

Establish trusts and appoint trustees for minor children

  • While the custodians can take care of the children’s basic physical needs, parents also need to consider who they will select as trustees for the financial assets they leave for those children. In some cases, this may be the same person as the custodian; in others it may make more sense to select a different person or persons. Important considerations in selecting a trustee should include:
  • Can we trust this person to manage our financial assets for our children over a long-term basis?

  • Will the trustee get along with the custodians of our child (if different)?

  • What kind of existing relationship does the trustee have with our children?

  • Will the trustee use their discretion in advancing funds to our children or their custodians?

  • Should there be one or several trustees?

Normally, the principal amount of the estate left to a minor child is placed in a trust and invested by the trustee. The income and/or capital that is generated from the amount is made available to the trustee to use for the needs of the child until the child turns 18. For e.g. the custodian will put together a budget for the child’s basic needs such as food, clothing, education and the child’s extracurricular activities and the trustee will pay this amount, likely as a monthly allowance, to the custodian for such purposes out of the income and/or capital of the funds held for the child.

Once the child reaches the age of majority, parents can leave instructions to the trustee to pay the full amount held in trust to the child outright. However, parents may want to consider that at the age of 18, the child may still not be mature enough or financially astute enough to handle a large financial sum.

An alternative is to leave the trustee with instructions to distribute the amount of the trust to the child in installments according to the child’s age. For e.g. the child can receive income starting at age 18 and then 1/3rd of the principal amount at the age of 20, the second 1/3rd of the principal amount at the age of 25 and the last 1/3rd of the principal amount at the age of 30.

Minimize the Effect of Probate Fees on Your Children’s Inheritance

In Ontario, the estate of a deceased person is subject to estate administration tax (“probate fees”). The first $50,000.00 of the estate is liable for $5.00 of tax for every $1000.00. The remaining estate is taxed at $15.00 for every $1000.00 after that. This can add up to quite a significant amount of probate fees being paid to court and in some cases can reduce the amount of inheritance that you may be planning on leaving behind for the care of a young child. Certain estate planning techniques are available to reduce the effect of these taxes:

1. Joint ownership of real estate:

If you and your spouse own property such as your home, consider joint ownership of the property instead of tenancy in common. This will ensure that if one of the spouses dies, the other would gain complete ownership of the home or property with full ownership rights. The property would not be considered part of the deceased spouse’s property and therefore would not be subject to probate fees.

2. Joint ownership of bank and other investments accounts:

Joint bank accounts and joint investment accounts not only allow the survivor to receive the funds without incurring probate fees but also, and quite importantly, give ready and quick access to the surviving spouse to funds that are likely needed for day-to-day expenses.

3. Designate beneficiaries for life insurance policies and registered plans:

Proceeds from registered financial accounts such as RRSP’s and LIRA’s can be designated to beneficiaries directly. Each spouse should name each other as their beneficiary so that upon the death of the first spouse, his or her proceeds can be transferred to the second spouse’s RRSP account on a tax-free basis.

Other registered accounts such as TFSA’s can also be designated to beneficiaries without a will. Similarly life insurance policy proceeds and pension plan benefits can also be designated to the spouse directly. As these proceeds would pass to the spouse outside of the estate, they would not be subject to probate fees.

4. Designate beneficiaries in trust for minor children outside of the Will:

In the event that both parents die, the proceeds from life insurance and registered plans can also be designated to beneficiaries in trust for minor children. In doing so, the proceeds would pass directly to the trustee and instructions in a separate trust document can be provided to the trustee on how the funds are to be used for the benefit of the minor children. As these proceeds would pass directly to a beneficiary instead of the estate, the proceeds would not be subject to probate fees. However the funds would still remain in the hands of the trustee for the benefit of the minor children.

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The above information is only intended to provide options for young parents in ensuring that a plan is in place for the care of young children in the event of an unfortunate disaster. Remember that each family’s estate plan may be different depending on the types and value of assets available and legal advice should be sought in tailoring the best possible plan.

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