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tax matters

There is no better time than the summer to sit back, relax and reflect. Reflect on what is likely to take place when you're no longer here. I know if I'm no longer around there will likely be a big celebration, followed by immense disappointment when my kids realize that my scratch'n'sniff stamp collection and fishing-reel toilet paper holder are being left to our neighbour.

When you're no longer here, who should inherit your assets? How much is enough for them? Will your heirs know where to find your personal and financial information? What about funeral arrangements? The answers to these questions, and more, collectively make up your estate plan. So, take some time this summer to get your estate plan in order.

To help out, I want to share a framework for thinking about that plan. These are the five "Ds" of estate planning: Define, design, document, discuss and distribute. I want to give credit to author Sandra Foster for her thinking around this. I have adapted the five Ds from her Estate Planning Workbook published a number of years ago. Today, let's talk about the first two Ds.

1. Define

The first step in the estate planning process is to define who in your life will receive something from you, and how much they'll receive.

There's also the question of when they should receive it – during your lifetime or on death? Jot down your responses to the following questions as you define who, how much and when: Do you want to enjoy your money while you're alive? Do you feel an obligation to help your heirs? Do you want your spouse to inherit everything if she survives you? Should your kids benefit equally from your estate? Are there specific assets that specific children should receive? Are you concerned about leaving your heirs too much?

More questions in this first essential step: Do you want to donate organs upon death? If you have children from a previous marriage, do you want to keep an inheritance for them separate in your plans? At what age do you want your heirs to have control over their inheritance? Do you want to make gifts to charities? Do you have debts that will have to be paid off before your heirs get anything? If you own a business, have you considered the appropriate transition of management and ownership?

Many parents have the view that they want to leave their kids enough to create opportunities for them, but not so much that the kids can choose to do nothing. The approach I like, if you're concerned about leaving the kids too much, is to define: 1) specific assets you might want to leave each child; 2) how much to leave the kids to help them with emergencies, and; 3) how much you'd like to supplement their income and for how long.

2. Design

The second step in the process should be to design what strategies, tactics and tools you'll use to bring about the transfer of your estate to your heirs. This needs to start with understanding your objectives. I won't pretend to know your specific objectives, but some common ones include: 1) minimize tax at the time of death; 2) provide for proper management of your assets after you're gone; 3) watch the kids enjoy some of their inheritance today; 4) ensure children who are minors will be looked after; 5) ensure kids from a first marriage receive an appropriate share of the estate; 6) help your surviving spouse maintain her standard of living; 7) help your favourite charities, and; 8) maintain harmony in the family after you're gone.

When designing the specific strategies, tactics and tools you'll use to accomplish your objectives, you might find that some objectives are in conflict, and you may need to prioritize them. For example, wanting to see your kids enjoy some of their inheritance today, and ensuring that your spouse maintains her standard of living after you're gone, could be in conflict.

Some of the tools that you may find helpful in accomplishing your objectives include: Trusts to hold assets for minors until they reach a certain age; using the principal residence or lifetime capital gains exemptions to shelter gains on a home, cottage, or private company shares; a spousal trust to provide for your spouse after you're gone but ensure the assets go to your kids after your spouse's death; life insurance to provide cash to give to charity, fund a tax bill, or top up an inheritance so everyone is treated equally.

There are many more ideas we can, and will, talk about. I'll continue this discussion of the five Ds next time.

Tim Cestnick is president of WaterStreet Family Offices and the author of several tax and personal finance books.

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