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Will Planning Considerations for Mature Clients

1. Married Couples

This is usually the simplest situation for Will planning, especially if the parties want to leave everything to each other. If both parties to the relationship retain the same lawyer to prepare their Wills, it is usually considered acceptable to prepare both wills without independent legal advice being needed, provided both spouses are fully open with each other, and therefore, and there are no secrets as to the contents of the Wills being made. If, sometime later, one party comes back to the lawyer and wants to change the benefits to the other party, without letting the other spouse know that the change has been made, the lawyer may not be in a position to act for either party. When he or she acted for both halves of the couple, there was no confidential information excluded from one party or the other. The lawyer cannot later continue to be retained by one spouse and take an action that affects the other spouse without advice to him or her as to what is being done. It is wise for a lawyer to insist on written acknowledgement from both spouses or partners that they understand the matter, that they understand that the lawyer cannot later act for one or the other to change the Will to the detriment of the other, and that they still want to proceed with that lawyer.

A. First Marriage

Most married couples who have never been married before tend to each leave the entire estate to the other. Wills for such couples need to address executors, guardians if there are young children involved, and divisions of assets in the event that both spouses die at the same time, or within a short time of each other. It is common for married couples to arrange their affairs by joint ownership and beneficiary designations on insurance policies, RRSPs and RRIFs, annuities, and pension plans. Therefore, on the death of the first spouse, there is often very little actual estate administration to be completed. The administration work and most of the probate fees and tax consequences arise on the death of the second spouse.

B. Second and Subsequent Marriages

Many spouses in second and later marriages have made marriage contracts going into marriage and have made Wills at that time. Some others fail to realize that a marriage invalidates a prior Will, and it takes much prodding and reminding on the part of professional advisors to ensure that the clients actually make new Wills to address their new status. If a marriage contract has already been made, it must be reviewed before making new Wills for either or both spouses. Where one or both spouses have ongoing support obligations to a former spouse or children from the prior marriage, the Will may have to provide that funds are segregated to fund such obligations. Even if there are no ongoing obligations for support, most spouses in second marriages want to ensure that their estates go ultimately to the children from their own prior marriages, after providing for the needs of the current spouse. Sometimes a trust for the spouse to provide income during his or her lifetime, with the capital going to children from prior marriage, is the best way of providing the protection that the client wants. The danger of the trust structure, in the absence of a marriage contract that addresses the issue, is that the surviving spouse, or his or her personal representatives if the spouse is mentally incapable at the time of the death of the first spouse, can elect to take an equalization share under Family Law Act, rather than the benefits of the trust. The solution may be a limited form of marriage contract that deals only with the provisions of the Will. Such a contract amounts to an agreement by both spouses, when they are both mentally competent, to abide by the terms of the Wills each are making, and agreeing not to make any future elections against the Will under the Family Law Act. Such marriage contracts will be much simpler than an overall marriage contract that addresses all aspects of the couple's assets and affairs. However, even though the agreement may be simple, it must still be made only with each spouse receiving independent legal advice.

Individuals who are remarried and have not made new Wills, have to appreciate the amount that a spouse receives if there is no Will. The spouse receives the first $200,000.00 of value in the name of the deceased souse as preferential share, plus one half of the remainder if there is only one child, or one third of the remainder if there are two or more children. If there are no children, the spouse receives the entire estate. This amount is in addition to any jointly held property that passes by survivorship, and designation of benefits under life insurance polices, RRSPs, pension benefits and the like. For individuals with fairly modest estate who want to provide for a spouse, as well as children or other relatives of friends, only a well crafted Will and proper arrangements with assets outside of the estate can ensure that the testator's wishes are accomplished. On the death of the surviving spouse, starting in the 2016 tax year, there will be a deemed year end on the date of death, and all assets in the trust will be deemed disposed of, with the resulting realization of the taxable capital gains into income for tax calculation. All of the resulting income is deemed allocated to the spouse who has just died and is taxable as income for the year of death of the spouse. The consequence of this requirement to allocate the income including the taxable capital to the spouse is to make the estate of the spouse/beneficiary liable for the tax payable on those capital gains in the spousal trust.

Estate planning between spouses, for purposes of avoiding or limiting Estate Administration Tax and for income tax planning, particularly in second marriage situations, has often included the use of spousal trusts. Many of these planning considerations will need to be re-examined in light of changes in the Income Tax Rules relating to trusts. The use of spousal trusts for the purpose of deferral of capital gains, and reduction of Estate Administration Tax (assets held in trust in one estate and not passing outright to the survivor are only subject to Estate Administration Tax on the death of the first spouse, and no further Estate Administration Tax is payable on the death of the surviving spouse) will continue to be worth considering. However, some of the reasons for spousal trusts in the area of allowing a limited degree of income splitting between the surviving spouse and the trust through the taxation of some income in the trust will cease to be applicable. Starting on January 1, 2016, there will be no distinction between inter vivos trusts and testamentary trusts in terms of the tax rates applied to income taxes in the trusts, other than a provision for what is referred to as a "Graduated Rate Estate" or "GRE" for 36 months following the date of death. Therefore, at least after the first 36 months of administration, all income taxed in a testamentary trust, other than a trust for a disabled beneficiary, will be taxed at the top marginal rate with no graduated rates applied. Spousal trusts will undoubtedly continue to have an application for estate planning purposes where there is a need to preserve capital but income splitting will not be one of the reasons for the creation of such trusts. Spousal trusts have also been used to protect capital assets, particularly in the case of second marriages where there is a need to look after the spouse through the provision of income, coupled with a desire to prepare capital for the benefit of the children from the first marriage. Planning of this nature must be revisited due to a further change in the Income Tax Rules which creates deemed disposition of assets on the death of the surviving spouse and a required allocation of all of the income, including the tax arising on the deemed realization of capital gains, to the estate of the spouse. To make the beneficiary spouse liable for the tax on the gains arising in the trust, from his or her own assets, (which under such a planning scenario were probably intended to benefit his or her own children from his or her own first marriage), creates a result that was not intended in the initial planning stages and is unfair to the beneficiaries of the surviving spouse. This obligation on the estate of the spouse and not the original taxpayer creates a large change in the overall consequences of a spousal trust such the viability and practical usefulness of such trusts will have to be re-examined.

Where couples have arranged their affairs so that most or all of their assets are held jointly between them, and one party becomes mentally incapable, it is not then possible to "undo" the joint ownership so that a trust can be established for the benefit of the incapable spouse. Under those circumstances, it may not be possible to prevent the assets from passing to the now incapable spouse if the other spouse dies first. For situations of this sort where assets are held in joint names between a disabled spouse and a spouse who is still mentally capable, a solution may be the creation of a joint spousal or joint partner trust to ensure that management of the assets can continue until the death of the second spouse. However, if the ultimate disposition of the assets at the death of the second spouse is different than would have been the disposition through an existing Will of the disabled spouse or on the intestacy of that spouse, the creation of such a trust may not be effective to control the assets once the second spouse has died, and such a trust would stand a very good chance of being overturned as invalid to deal with the assets at the death of the second spouse.

2. Unmarried Spouses

If the parties in a relationship are not married, the rights of the parties vary. Some benefits are available after one year of marriage. These include Canada Pension Plan survivors' benefits and rollover rights under RRSPs and RRIFs. Pension benefits from plans governed by the Pension Benefits Act are available to unmarried spouses and same sex partners after three years of cohabitation. For unmarried spouses, whether same sex or opposite sex couples, there are no automatic property rights on death. On an intestacy a spouse is entitled to be appointed as estate trustee without a Will, but he or she is not entitled to any share of the property in the same way as married spouses have an automatic right to a share  of the intestate estate. Support between spouses and support from the estate of a deceased spouse is provided under both the Family Law Act and the Succession Law Reform Act, but the Succession Law Reform Act in dealing with intestate succession defines spouses as persons who are married to each other. Same sex spouses who have married have the same property rights as any other married couples. For parties who have been living as unmarried spouses, and who subsequently marry, it needs to be emphasized that marriage revokes an existing Will. Therefore, as with second marriages where the parties need to remember to update their Wills, spouses who have been cohabitating and subsequently marry need to revisit their Wills and either do new ones or at least do codicils to confirm that their existing Wills are effectively reaffirmed. Other provinces are beginning at a limited level, to move to the recognition of property rights of common law spouses. No such movement has occurred in Ontario, and testators who are reading and being influenced by the news from other provinces must understand that the property law for common law spouses in Ontario remains as set out above in this paragraph.

3. Never Married or Widowed

Subject to a dependant's claim from children or siblings, the person who has never been married, or is widowed, and is in a common-law relationship, has no legal obligations affecting Will planning. Often people in these positions are also unpleasantly surprised to learn that there are relatively few tax benefits available. An annuitant of an RRSP or RRIF can however designate a charity to receive the funds on his or her death. Such a designation permits the charity to issue a donation receipt for the value of the fund and it can offset the tax liability arising from the income inclusion of the plan in the year of death of the testator. RRSPs and RRIFs and annuities purchased from RRSPs are fully taxable on the death of the initial taxpayer or annuitant. If there is no spouse who can receive the fund on a tax deferred rollover basis, but there is a dependent child or grandchild, who is either under 18 or permanently disabled, there can be a rollover to the child or grandchild by way of designating the child or grandchild to receive the refund of premiums. In the case of RRIF, the amount can be designated to go to a successor annuitant. However, in any case of a child or grandchild, the funds are either taxable in the hands of the child or grandchild in the year that the initial holder dies, or the tax can be deferred to a degree by putting the funds into an annuity. In the case of a child or grandchild under 18, the annuity must be fully paid out by age 18, and the tax is payable as the funds are received. In the case of a permanently disabled child or grandchild, the annuity can be a life annuity, and the tax is paid as the annuity is paid out. In the absence of dependent children or grandchildren, as defined in the Income Tax Act, no deferral of tax is available and the tax is fully payable from the estate of the deceased holder for the year of his or her death.