Other Factors to Consider when Making a Will

15.2 Other Factors to Consider when Making a Will

When planning a client’s estate, a will is most effective if it anticipates and accounts for changing personal, financial, and regulatory circumstances. An outdated or incomplete will can result in unintended asset distribution, unforeseen legal hurdles, and potential burdens on one’s heirs. In this section, we explore several key factors for advisors and clients to address when making a will in Canada.

Importance of Regular Updates

Clients’ lives can undergo significant transformations that warrant a will update. For example:

• Marriage or entering into a common-law partnership
• Birth or adoption of children
• Separation, divorce, or remarriage
• Acquiring real estate, a business, or other significant assets
• Relocation to a different province or country

From a wealth management perspective, ensuring the will remains aligned with current family and financial profiles is critical. Under the guidance of the Canadian Investment Regulatory Organization (CIRO), advisors have a responsibility to encourage clients to keep their wills current. If a will fails to reflect changed circumstances, Canadian courts may distribute assets in a way the testator never intended.

Contingency Beneficiaries and Alternate Executors

An essential provision in estate planning is designating alternate or backup individuals to fulfill pivotal roles should the primary choice be unavailable or unwilling to serve. Specifically:

1. Contingency Beneficiaries

   • A client can name a “backup” beneficiary for assets that might otherwise revert to the estate.
   • Example: If the testator’s spouse predeceases them, the estate can specify that certain assets pass directly to children, siblings, or other named parties.

2. Alternate Executors

   • Executors manage and distribute the estate according to instructions in the will.
   • If the primary executor is unable (or chooses not) to serve, an alternate executor steps in to minimize potential delays or legal disputes.

Guardianship Provisions for Minor Children

Canadian laws typically allow parents to nominate a legal guardian for children under the age of majority through their wills. Clear guardianship instructions help avoid custody conflicts and can ensure that funds and other resources are managed responsibly on behalf of minors. For example:

• Naming a sibling or close friend to care for children.
• Establishing a testamentary trust to detail how and when funds will be distributed.
• Including instructions regarding education costs, medical care, and day-to-day living expenses.

If no guardian is explicitly named, the courts typically decide guardianship based on the best interests of the child—an added layer of uncertainty during an already difficult time.

Validity, Provincial Regulations, and Witnessing Requirements

Each Canadian province and territory has specific laws influencing how wills are created, witnessed, and validated. For instance, Ontario’s Succession Law Reform Act outlines rules for the minimum signing age, the necessary number of witnesses, and the validity of handwritten (holograph) wills. Other provincial frameworks share similar content but may differ on details. Key considerations include:

• Minimum Age: While the age of majority in most provinces is 18, some allow younger individuals to make a will under special circumstances (e.g., if already married).
• Witnessing Requirements: Most provinces require two adults with no direct interest in the will to witness the testator’s signature.
• Holograph Wills: Some jurisdictions recognize handwritten wills, but strict criteria (e.g., the need for the testator’s entire handwriting) must be met to ensure validity.
• Electronic or Digital Wills: Certain provinces have begun recognizing e-wills, but guidance on authenticity and security can vary by region.

Clients should always confirm local laws with a legal professional. Even a small and seemingly insignificant discrepancy—like a misunderstanding of witnessing requirements—can lead to costly probate disputes or invalidation of the entire will.

Mental (Testamentary) Capacity

Under Canadian law, a testator must possess testamentary capacity, meaning they understand:

• That they are creating a will.
• The nature and approximate value of their assets.
• The individuals (and possibly organizations) who can reasonably expect to benefit from their estate.
• The implications of distributing their assets in the manner chosen.

Advisors have no authority to determine capacity but should encourage clients to obtain formal assessment if there are any concerns—particularly in complex family situations or if cognitive decline is suspected. A clear testamentary capacity reduces the risk of will challenges on the grounds of undue influence or lack of mental fitness.

Letters of Wishes or Memoranda of Personal Property

Clients often have personal items (e.g., family heirlooms, jewelry, collectibles) with significant sentimental value. A will might not detail distribution for each item. Instead, advisors can suggest creating a separate “Letters of Wishes” or “Memoranda of Personal Property” document. While not always legally binding, these documents can:

• Provide clarity and reduce confusion among heirs.
• Simplify the estate administration process.
• Communicate personal hopes or sentiments with certain bequests.

Because these letters usually do not have the same legal force as a will, they should not replace critical instructions that must appear in a properly executed will.

Tax Implications and “Deemed Disposition”

In Canada, there is no traditional inheritance or estate tax at the federal level. Instead, the deceased is generally treated as if they have disposed of all their capital property at fair market value immediately before death (referred to as a “deemed disposition”). This may result in taxable capital gains if the assets have appreciated. Key points include:

1. Registered Assets:
   • Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) assets are included in income on the deceased’s final tax return if not rolled over to a surviving spouse or financially dependent child.
2. Capital Gains on Securities:
   • Shares in a portfolio managed by a Canadian bank (e.g., RBC, TD, BMO) may trigger capital gains taxes on any increase in value since purchase.
3. Principal Residence Exemption:
   • Real property that qualifies as a “principal residence” is exempt from capital gains tax, though additional residences can be fully or partially taxable.
4. Planning Techniques:
   • Trusts, spousal rollovers, and estate freezes can defer or mitigate taxes.
   • Estate planning that leverages charitable donations may provide tax credits.

Advisors are encouraged to work closely with tax professionals and refer to Canada Revenue Agency (CRA) resources (https://www.canada.ca/en/revenue-agency.html) to help clients forecast potential tax liabilities and manage tax-optimizing strategies.

Practical Example: Updating a Will After Major Life Events

Consider a client who originally drafted a will soon after marriage, naming their spouse as primary beneficiary and their brother as alternate beneficiary. Over the years:

1. The client has children.
2. The couple finalizes a divorce.
3. The client accumulates significant securities in both non-registered and registered accounts at RBC Dominion Securities.

If the individual never updates the will:

• The ex-spouse could inherit assets unexpectedly, depending on provincial laws around marital breakdown.
• The children might not receive the care or oversight the client intended if guardianship instructions were never added.
• Potential capital gains and RRSP distribution taxes could be triggered in suboptimal ways.

An updated will might:

• Designate a new guardian for children.
• Provide for a testamentary trust to fund education or living expenses.
• Realign beneficiaries to reflect new family relationships.
• Account for capital gains tax on the increased value of the RBC Dominion Securities portfolio.

Step-by-Step Best Practices for Canadian Clients

1. Conduct a Discovery Discussion

   • Assess the client’s personal, family, and financial situation.
   • Clarify personal values and estate objectives.

2. Identify the Key Parties

   • Primary and alternate executors.
   • Primary and contingency beneficiaries.
   • Guardians for minor children.

3. Draft or Update the Will

   • Ensure validity under local provincial or territorial laws.
   • Incorporate guardianship provisions, trusts for minors, and instructions for specific assets.
   • Consider writing a separate Letter of Wishes for sentimental items.

4. Evaluate Tax Implications

   • Estimate potential capital gains for assets like securities or investment property.
   • Confirm spousal rollover strategies and investigate testamentary trust options.
   • Consult CRA guidelines or a tax specialist.

5. Review and Execute with Legal Assistance

   • Engage an experienced estate lawyer.
   • Comply with witnessing and signing requirements.
   • Complete any associated forms, such as guardianship nomination or trust documentation.

6. Maintain, Update, and Communicate

   • Encourage periodic reviews—especially after major life or financial shifts.
   • Inform executors and key family members of where to locate the original will.
   • Keep records of asset holdings updated.

Example of a Will-Related Process Flow

    flowchart LR
	    A[Client] --> B[Initial Will Drafting]
	    B --> C[Engage Estate Lawyer]
	    C --> D[Execute Will with Witnesses]
	    D --> E[Implement Will and Communicate]
	    E --> F[Regularly Review & Update]

This diagram illustrates a simplified flow of activities in creating and maintaining a will. The client initiates the process by drafting or outlining their wishes, then engages an estate lawyer to ensure legality. After execution, periodic reviews keep the will up to date.

Potential Pitfalls

1. Neglecting to Name an Alternate Executor
   Leads to court-appointed administration if the primary executor is unwilling or unable to serve.
2. Failing to Update Beneficiaries
   May result in ex-spouses or estranged relatives inheriting significant assets.
3. Overlooking Testamentary Trusts
   Without them, minors may receive large sums upon reaching the age of majority, lacking financial management guidelines.
4. Ignoring Tax Exposure
   Unnecessary taxes might erode the estate’s value, leaving heirs with less than intended.
5. Underestimating Family Dynamics
   Failing to address or acknowledge unique circumstances (e.g., blended families) can lead to disputes.

Additional Resources

• Canada Revenue Agency (CRA): https://www.canada.ca/en/revenue-agency.html
  • Guides on final returns, filing requirements, tax credits, and taxation of inherited assets.
• CIRO: https://www.ciro.ca
  • Canada’s self-regulatory organization overseeing investment dealers and market integrity; offers guidelines on advisors’ obligations in financial planning.
• Provincial Legislation
  • Ontario’s Succession Law Reform Act, Alberta’s Wills and Succession Act, etc.
• “Wills and Estate Planning for Canadians For Dummies” by Margaret Kerr and JoAnn Kurtz
  • A reader-friendly guide offering insights into will drafting, estate administration, and more.
• Canadian Bar Association
  • Offers webinars and publications for deeper exploration of estate planning law and best practices.

Recap and Conclusion

In Canadian wealth management, making an effective will is a dynamic process—one that must adapt to new life events, evolving goals, and changing regulations. Frequent reviews help align the client’s estate instructions with their financial reality. By clarifying contingency beneficiaries, naming alternate executors, ensuring guardianship provisions for minors, and addressing potential tax liabilities, clients minimize legal conflicts and ensure legacies pass on as intended.

For advisors, ongoing discussions and reviews around will planning exemplify a client-centric approach. By integrating tax considerations, family law concerns, and the complexities of provincial legislation, advisors help clients prepare for a seamless transition of wealth that protects both assets and loved ones’ best interests.

Factors to Consider When Making a Will: Test Your Knowledge