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tax matters

No doubt about it, there are disadvantages to not preparing a last will and testament. One drawback is that you can't have fun by making some wild and wacky request, such as: "My ashes shall be handed to my children to be scattered on the grounds where the Bavarian Finger Wrestling Championship is held," or "The residue of my estate shall be donated to the Star Trek Fan Club of Canada."

A much bigger disadvantage is that your estate may not be distributed in accordance with your wishes, and there could be more tax to pay than necessary.

Let me share William's story. He was a gentleman who procrastinated in preparing a will. He also detested legal fees, which was more likely the real reason he didn't get around to preparing a will. At the time of his death, William owned half of his Toronto home worth $800,000, a cottage worth $400,000 (for which he had paid just $100,000 years ago), and investments worth $1-million (with an adjusted cost base of $500,000). William passed away earlier this year at the age of 88. His wife, Ruth, survives him, as do his three children (all in their 50s).

William died intestate – the legal term for dying without a valid will. Here's what happened next: His wife Ruth received $200,000 out of the investment portfolio. She also received William's half of the family home because, in this case, it was owned jointly by them with right of survivorship.

The balance of the estate, worth $1.2-million (the $400,000 cottage plus $800,000 of the investment portfolio) was split with one-third going to Ruth, and the balance going to the children. That is, Ruth received $400,000 of the balance of the estate while the children inherited $800,000 split among them.

You see, when an individual dies intestate, there are provincial laws that apply to dictate how the estate of the deceased will be distributed. Each province is different. As it happens, Ontario – where William lived and died – gives the surviving spouse the first $200,000 of the estate while the balance is split one third to the surviving spouse and the balance is split among the children (where there is more than one child). The problem in William's case is that he didn't intend for his children to receive an inheritance before Ruth passes away. Tough luck.

Further, there was tax to pay that could have been avoided. When you die, you are deemed to have sold your assets at fair market value, which can give rise to a tax hit if those assets have appreciated in value. By leaving those assets to a surviving spouse you can defer the tax hit until your spouse dies.

William lost the opportunity to do this since he died intestate. Instead, he was deemed to have sold the $800,000 in assets that were given to the children under the province's intestacy laws. The tax hit at the time of William's death was about $100,000. This is cash that Ruth certainly could have used in her retirement years.

It's important to recognize that any legal fees you save by not having a proper will prepared will almost surely be lost – and then some – by additional administrative and tax costs after you're gone. It's a very good idea to have a lawyer experienced in wills prepare one for you. Preparing a will yourself could have results ranging from paying more tax than necessary to having the will considered invalid.

There are specific rules around the execution of wills that must be followed. For example, it must be properly witnessed. If you type up your own will that is not properly executed it won't be valid. A hand-written will – called a holograph will – may be valid in some provinces but not in all, and can lead to misinterpretation or an inability to read your hand writing. And don't forget that tax planning, like the creation of testamentary trusts in your will, can't be done unless you know what you're doing. Even an inexpensive will kit doesn't generally provide for this type of planning.

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