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Estate plans should go hand-in-hand with retirement plans

No one wants to think about dying, but one of the most unselfish things you can do is to plan carefully and get the right advice


Date: January 07,2015

Planning for retirement is a difficult but vital exercise, envisioning how you will live on your assets long into the future.

But don’t stop there, the experts say. It’s time to think about your estate and put a plan in place to ensure the assets that remain after you’re gone are distributed fairly and properly from a tax perspective.

“Estate planning is about avoiding problems and fulfilling wishes,” says Peter Drake, vice-president of retirement and economic research for Fidelity Investments Canada, noting that most of us avoid talking about our retirement and especially our estates.

“The problem is when you start thinking about your own life expectancy, you start thinking about what happens when that life runs out. A lot of people don’t like to do that.”

Mr. Drake, who is 71 and is dealing with many of these issues himself, suggests that financial advisors talk to clients about everything from drawing up wills and powers-of-attorney to communicating their wishes to loved ones.

Indeed, retirement and estate planning go hand-in-hand, especially as those family members who may be making financial decisions on your behalf as you age will likely be the primary beneficiaries of your estate after you die. The issue is also more critical as families become extended and blended and as we live longer, with some people at retirement still in the “sandwich generation,” supporting children as well as elderly parents.

Those who don’t draw up a formal estate plan can end up leaving problems and unequal assets for their heirs, Mr. Drake cautions. A will is central to the plan, he notes, as an instrument of “intergenerational wealth transfer.”

Knowing the tax consequences of your wishes is key, he says, “making sure that what you intend doesn’t go by the wayside” because there is a tax liability on one asset, such as a RRIF or the family home, and not on another. Another important issue is health-care expenditures as we age, especially as one spouse can live much longer than another and require escalating levels of care, diminishing the estate.

Jeanette Brox, a certified financial planner who is a senior financial consultant at Investors Group in Toronto, brings all family members into the estate planning discussion and ensures it is wide-ranging.

“I don’t believe that you can have a proper financial plan without an estate plan,” she says, adding that “if you don’t have a will as your starting point, the best intentions aren’t going to come to fruition.”

Ms. Brox says that parents want to be fair to their children but are often concerned about the stability of their marriages, for example, which could mean that part of an inheritance ends up going to an estranged spouse. “You can control that,” she says.

Even young people with few assets should have a will in place, she says. It’s even possible to write one out yourself or download one from the Internet and have it witnessed, although a lawyer with expertise in estates should look it over. “You may know what your intentions are, but you may not have expressed them properly,” she cautions.

Ensuring that beneficiaries are apprised of and are able to pay the terminal tax owed is important to avoid an “estate meltdown,” where there aren’t enough funds to cover costs. She says that people should consider taking out a life insurance policy to cover such taxes, as well as probate fees.

She recommends that people name their estate as the beneficiary of their assets so that the proceeds can be distributed after taxes. People should also bequeath amounts in percentages rather than dollar figures.

Estate planning can be a cultural issue, Mr. Drake notes, with parents of some cultures giving more value to leaving a significant legacy. He cautions advisors to avoid being critical of situations where couples live in retirement below the standard they could because of the importance they place on a legacy.

Those in blended families have added complications, Mr. Drake says, suggesting that it’s smart to draw up an estate plan when you remarry and revisit it as situations change.

Estates are particularly tricky as the population ages. According to the 2014 Fidelity Retirement Survey, 27 per cent of pre-retirees anticipate that an inheritance will form part of their retirement income. However, Mr. Drake says that just about 12 per cent of people in retirement say that this has happened to them. “You need to manage those expectations.”

He says that when he retires, for example, he wants to be able to spend money on activities such as canoeing and skiing. People in retirement should live as they want, with the understanding they will have to increasingly pay for services and don’t know what their health issues will be. As they age, their children could eventually be making decisions on what money is spent and how; he cared for his aging parents and an elderly aunt knowing that what was left would be his inheritance.

“It’s a question of balance,” he says, noting that in drawing up powers of attorney for financial matters and personal care, you should pick people who you think will act ethically and make good decisions about your portfolio and its management. “It helps to have the conversation now.”

Gifting inheritances in advance can be an option for those with significant assets who want to help their kids get established. There is some innovative thinking on such matters, such as gifting funds to grandchildren who are in lower tax brackets.

Such strategies can reduce the tax that those with large holdings pay on interest income, Ms. Brox says. Legacy planning can also include leaving money to charities, she notes, suggesting that charitable remainder trusts can being tax relief while you are alive and benefit the charity when you die.

It’s important to see a financial planner and revisit your estate plan and will when there are major life changes, such as the sale of a business or the birth of a new grandchild, Ms. Brox says. Having an open and honest discussion with your family about how assets such as cottages or valuables should be distributed and being up-front with your wishes and their expectations is critical.

“Nobody wants to think about dying, it’s not a popular subject but we all do it,” she says, adding that secrecy can lead to mistakes and surprises down the road. “One of the most unselfish things you can do is to think carefully and get the right advice.”

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