Estate-planning lawyer Keith Masterman (BA ’84) shares what is (and isn’t) shared with your loved ones when you don’t have a Will
Keith Masterman is a lawyer and vice president of the tax, retirement and estate-planning group at CI Global Asset Management. He also writes about tax and estate planning for Advisor’s Edge.
A well thought out and well-drafted Will is a cornerstone of an estate plan. It ensures assets are transferred in accordance with a person’s wishes in a tax efficient fashion. However, despite its importance, a recent study found that over half of Canadians do not have a Will, and of those who do, 25 per cent felt their Will was outdated.
If you die without a Will, you are said to die intestate. The ramification can be dire. You do not choose your beneficiaries; your estate will be distributed according to a government scheme. The scheme is set out in provincial legislation and what your loved one will receive depends on the province where you reside.
Consider the case of Michael who recently died without writing a Will. Michael married Gloria twenty years ago and they have two children: Aiden (age 15) and Maggie (age 17). In addition, Michael is the stepfather to Gloria’s daughter Jenny. Jenny was only two when Michael and Gloria married, and he is the only father she has ever known.
Michael and Gloria separated about three years ago. About six months after the separation Michael moved in with Nancy. Although he and Gloria were separated, at the time of his death they had not yet started divorce proceedings. Michael and Nancy intended to marry as soon as his divorce was finalized. Shortly before his death, Michael and Nancy welcomed a new addition to the family, their son Robbie.
With no Will in place, what will happen to Michael’s estate?
In all provinces, a surviving spouse will inherit at least a portion of an intestate estate. However, what per cent the spouse will receive and who is recognized as a spouse depends on where the parties lived. British Columbia, Alberta, Saskatchewan, Nova Scotia, Quebec, Nunavut and The Northwest Territories all recognize a common-law partner as a spouse. In the other provinces—Manitoba, Ontario, PEI, Newfoundland and Labrador and the Yukon—only a married survivor is recognized as a spouse.
If Michael and his family lived in Ontario, his spouse is entitled to the first $350,000 of the estate, called the preferential share. Half the remaining estate would be paid to the spouse and the remaining half would be divided amongst Michael’s children.
Ontario’s legislation defines “spouses” as two people who are legally married. In other words, a common-law partner like Nancy is not entitled to receive anything.
Ontario law is currently going through a transition. As of January 1, 2022,the definition of spouse is being amended and will not include a separated spouse.
So, if Michael died in 2021, Gloria would be entitled to a share of his estate. If he were to die after January1, 2022, she would be entitled to nothing. Under either scenario, his current partner Nancy would be disinherited.
What if Michael and his family lived in another province—for instance British Columbia? British Columbia’s legislation provides a different distribution scheme. It provides a different preferential share depending on whether all the children left by the deceased were also the children of their spouse. If so, the spouse is entitled to the first $300,000. If not, the preferential share is $150,000. Half of the remaining estate is paid to the spouse and half to the deceased’s children.
In British Columbia, “spouses” are defined as two persons who are married to each other or who have lived together in a marriage-like relationship for more than two years. In Michael’s casee, it is possible that both Gloria and Nancy could be a spouse for inheritance purposes. When there are two surviving spouses and no Will, the spousal share is divided in a way they agree upon. If they cannot agree, it is divided as determined by a Court.
In addition to the various provincial schemes, the Federal Indian Act establishes a distinct distribution scheme. The rights of a spouse are even more nebulous for First Nations people resident on a reserve. The first $75,000 of an estate is transferred to the survivor, defined to include a spouse or common-law partner, and the remainder is divided between the survivor and any children. However, the act also contains a provision that where “the Minister is satisfied that any children of the deceased will not be adequately provided for, he may direct that all or any part of the estate that would otherwise go to the survivor shall go to the children.” With a clear Will, this unnecessary oversight can be avoided.
Another potential issue for Michael and his family is whether Jenny, his stepdaughter, is considered his child. The law recognizes adopted or children by blood, but not stepchildren. In Michael’s case, his stepdaughter Jenny, who he raised for nearly twenty years, would not inherit a share in his estate. In a Will, Michael could make his wish to include Jenny clear.
What happens to Aiden, Maggie and Robbie’s share? All three of them are minors and as such are unable, with minor exceptions, to receive funds directly. Someone will need to bring a court application and be named as guardian for each of the children. Each of the children will be entitled to their share when they reach adulthood, which in most provinces is 18.
Had Michael written a Will he could have named a trustee of his choosing to act on behalf of the children, and set out terms for when and under what conditions any money may be used. Further, if he thought 18 was too young for a child to inherit, he could have directed the funds to remain under the trustee’s control for a longer period.
Michael was an active member of his community, and gave back in many ways. Annual donations are a holiday tradition for his family. He was also a long-time volunteer at his local food bank and alma mater.
Michael and thousands of people like him, a gift to a charity or non-profit organization is a vital part of their estate plan. It not only benefits an organization of personal significance; it is also a way to show the importance of community to the next generation.
A charitable gift as part of an estate plan also has important advantages from a tax perspective. Tax credits from charitable gifts can reduce taxes payable on the deceased person’s terminal tax return for the year of death or the year preceding death. Credits can also be carried forward for use in the estate. In addition, an estate may donate publicly traded shares, ecologically sensitive land, or certified cultural property to a charity, as opposed to cash.
The Income Tax Act includes exemptions from capital gains tax where these types of capital property are donated. Not only will the estate receive the benefit of a donation tax credit, it will also mitigate tax arising from deemed capital gains realized on death.
Since Michael died without a Will these advantages are lost, meaning more of the estate is paid in taxes and the charitable organizations he valued will not benefit.
Although there are countless other pitfalls in not having a Will, Michael’s story demonstrates the devastating effect intestacy can have. His story is not unique to the Canadian setting. Intestacy laws exist in most countries in the world and the results for those living abroad or with international assets can be devastating. The bottom line: due to a lack of planning, Michael caused undue hardship to his family, likely created the need for expensive court applications and removed the opportunity to properly plan for his beneficiaries’ futures.
