The article “When a Do-It-Yourself Will Is Better Than No Will At All” was originally published on The Financial Post on June 23, 2015.
Estate planning and death can be touchy subjects. As a result, wills don’t get nearly the attention that they should. And since they often end up being no more than an add-on service provided by a lawyer and prepared by a legal assistant when you buy a home, even the professionals are making mistakes.
Here are the top four will mistakes I see being made today:
Leaving Too Much, Too Early To Your Kids
This is a mistake I see all the time. If you total up all of your assets and liabilities and determine your current net worth, back out the tax and probate fees and then add in your life insurance, your estate could be quite large – especially if you own a home in one of Canada’s big cities.
But what if you and your spouse both die at the same time and your estate gets both of your life insurance payouts? It’s not uncommon for an estate to be over a million dollars. And if your kids are young, a million dollar estate would generate $30,000 a year of income even at a 3% yield on the estate’s investments. This could be more than enough to provide for your kids each year and cause the estate to grow until it is eventually distributed to them.
Many wills have the estate passed over by the trustees to the beneficiaries at the age of majority, which is 18 or 19 years old depending on your province of residence. And when I project the estate distribution for many estates in the event that both spouses die, it results in a lot of notional multi-millionaire teenagers.
Instead, consider an older age or staggered distribution over a period of years. Or if your estate exceeds a certain threshold in the unlikely event that both spouses die, consider having some of your estate go to other beneficiaries or a charity.
Not Understanding Which Assets Your Will Distributes
This is a big problem for many wills. People often think that their will deals with all of their assets on death. But many assets, like TFSAs, RRSPs, pensions and insurance policies, may have direct beneficiaries. The beneficiary designation will generally trump the will and these assets may pass outside the estate.
Joint assets also generally pass outside your estate, with the survivor getting the asset based on the rights of survivorship. Your share of assets held jointly as “tenants in common” can become part of your estate to be distributed under your will, so how your joint assets are registered is important.
Not Walking Through What Would Happen If You Died
Some of the issues here relate to cash flows. For example, if you have a large portion of your estate in real estate or a business, will there be enough cash and liquidity to pay taxes, funeral costs and probate fees? If not, your trustees may need to sell assets that they might not otherwise want to sell, like a family cottage. Or they may need to be sold under pressure, like a business that may not be easily marketable. As such, liquidity is important and insurance may play a role, even if you don’t need it from a risk management perspective.
Parents should also take the time to consider the impact on the potential guardians of their children. If you have three kids and your guardian is your sibling who lives in a downtown condo, how is that going to work? Would you want them to move into your house and raise your kids? Would they live rent-free? Could the estate give them an interest-free mortgage to buy a house to raise your children? These are all considerations that you need to make to determine if you’ve properly covered all your bases.
Not Having A Will
According to a LAWPRO survey, more than half of Canadians do not have a will. A CIBC survey says nearly 1/3 of Baby Boomers haven’t prepared one.
Unfortunately, not preparing a will won’t keep you from dying. And sometimes, incapacity can prevent you from preparing one if you wait too long.
If you die intestate, your money doesn’t go to the government as some people fear. But it does get distributed based on the government’s formulas, which may not result in things not going as you might have otherwise liked.
Beyond that, a will is an opportunity for you to make provisions for things like your children’s guardianship, your funeral arrangements and even your pets.
It is not uncommon for a couple’s wills to cost over $1,000 with a lawyer, depending upon where you live in Canada. However, the cost of not having one can be tens of thousands of dollars, or even immeasurable depending on the severity of the resulting repercussions.
Unfortunately, not preparing a will won’t keep you from dying
Staples has long offered fill-in-the-blank will kits for $19.95. Companies like LegalWills.ca offer interactive online wills for $39.95. And Walmart jumped into the will market last year, offering $99 wills through Axess Law Offices in some of their Ontario stores.
I’m not saying that a will kit is the way to go, any more than I’m recommending do-it-yourself root canals. But sometimes do-it-yourself seems better than not doing it at all. And even those Canadians who have wills would be well-advised to dust them off and make sure they haven’t made some of the above mistakes – before it’s too late to fix them.
Jason Heath is a fee-only certified financial planner and income tax professional for Objective Financial Partners Inc. in Toronto.