Many of us think of estate planning as something only seniors must do. The truth is, it's essential for every adult with a spouse, child or business, regardless of age, to have solid plans in place. People in their 20s and 30s are in high gear. They may marry, start a family and buy a home. Some may start or buy a business. It's all about getting started in life and nobody wants to think about taking their foot off the accelerator.
But even those just starting out have important people and assets to protect.
For example, if a young couple is killed in an accident, their young children must be raised by someone else. If the parents haven't made wills, they have lost the opportunity to choose the new guardians of their children, and to have the children raised together in one family with someone they know. Most parents, confronted with the choice, would rather not have extended family members dispute guardianship in court. And certainly not many would want to risk the children becoming wards of the government.
Using a will, the parents can also make provision for money to flow from their estates to the guardians of the children to help pay for raising the children. This could be vitally important if two or three children are left behind to join a different family that already has two or three children of its own. Without money from the estate, the new family could suffer financial consequences by trying to raise all of the children on its own resources.
Young parents also need to consider what they are leaving behind for their children. Assuming there are funds to be inherited, each child will each receive his or her share on their 18th birthday. Many parents will agree that 18 is too young for a person to inherit a significant amount of money, for a number of reasons. By making a will, the parents can stipulate a later age, or can choose to dole the funds out in staggered payments over a number of years, to help the child make the most of his or her inheritance.
Buying a home
Even young people without children should plan ahead for a premature death that leaves one of them widowed. As mentioned, a will is essential - but estate planning doesn't stop there. Some assets are not governed by a will, namely jointly held assets and assets with designated beneficiaries. It's important that everything works together.
One of the largest purchases a young couple will make is a family home. They must understand the legal effect of a jointly owned home as opposed to a home held as tenants-in-common. An incorrect title can have a devastating effect if it causes a widowed person to lose his or her home as well.
Joint tenancy, which is by far the most common way that couples own their property, provides a right of survivorship to one owner when the other passes away. It keeps the house out of the estate; probate is not required for its transfer to the surviving owner. Tenancy-in-common doesn't provide a right of survivorship. The half of a house owned by a deceased tenant-in-common falls into the deceased's estate, where it's subject to creditors, claims and delays.
Saving for retirement
Couples often start contributing to RRSPs when they're young and they need to understand the legal, tax and financial effects of naming a beneficiary. They also need to consider who will be named as the beneficiary of life insurance policies. Leaving insurance proceeds directly to a spouse will have quite a different effect than leaving them to an estate, depending on what else is going on in that estate.
Because assets of a deceased are deemed to have been sold immediately before death, any tax that has been deferred becomes payable. RRSPs are funded with pre-tax dollars, so on the death of the owner, the deemed sale triggers the payment of taxes on the RRSP. The payment of this tax can be avoided on the death of the RRSP owner if he or she names a spouse as the beneficiary. When a spouse is named, the payment of tax is deferred again - until the spouse dies or takes the money out. This also protects the spouse in the sense that the RRSP doesn't fall into the deceased's estate so it is safe from claims, creditors or litigation.
Buying life insurance
Leaving a life insurance policy to a spouse directly also keeps the insurance proceeds out of the estate, ensuring that there are funds in the spouse's hands no matter what is going on in the estate. This is better for the spouse. On the other hand, there are excellent reasons to name the estate as the beneficiary of a life insurance policy. The main benefit is that it provides cash in the estate that can be used for paying tax or paying debts (such as paying off the mortgage on the couple's home).
Life insurance can also be used to provide money that can be distributed to one of the children, if, for example, the deceased was leaving his or her major asset - a business or farm, for example - to one child and didn't have enough assets to give a similar amount to another child. Another use of life insurance is to create funds for holding a property such as a cottage in trust. So it's very individualized depending on what the person is planning to do, and based on what assets already exist.
Life insurance is much cheaper at this age than it is when people are older, and young people should consider the various ways that life insurance can be used to their advantage. It can replace income. It can pay out a mortgage, leaving the widowed spouse with clear title to the home. It can provide funds to leave in trust for the children. It can provide cash flow to be used to pay taxes and expenses. Young couples should ensure that they are neither under-insured nor over-insured.
Starting a business
Finally, young people who are tying up a great deal of time, effort and capital in a business must plan right from the start to protect their families in the event they pass away prematurely. If the business is incorporated and there are other shareholders, there should be a buy-sell agreement put into place that clearly states what happens to the shares of a deceased shareholder. Often the agreement provides that the other shareholders will buy back the shares. In a fledgling company (and often in more established ones, for that matter), this probably means that a life insurance policy owned by the company will be taken out on the shareholder's life.
It's never too early to get started on these very important steps.
Lynne Butler has worked in estate planning and law for more than 20 years and is the author of several books about estate planning, published by Self-Counsel Press .
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