In the most common situation, a husband and wife execute mirror wills which say that in the event of death, each of them will leave their estate to the other spouse. Should the other spouse pre-decease them , then the estate is left in trust for the benefit of their children until they reach an age of sufficient maturity to handle the bequest responsibly. In this situation, there is relatively little likelihood that the estate will go astray and not get distributed in accordance with the testator's wishes. The following are situations that one should look out for when preparing an estate plan.
A. Second Marriages
If one or both spouses in a marriage have been married before, and have children from their previous marriage, then problems can arise. The problem is that each spouse usually wants to make sure that all or a portion of their estate is going to go to their own children. The danger is that if a spouse dies before making a proper will, then the bulk of their estate may go to their spouse on intestacy (ie. they die without a will). The Intestate Succession Act says that if a person dies without a will leaving a surviving spouse then the spouse gets the first $40,000.00 of the estate, plus one half of the rest of the estate if there is one surviving child, and one third of the rest of the estate if there is more than one surviving child. Once the estate has passed to the spouse, there is no guarantee that the spouse will leave the estate for the deceased party's children. In this fashion, the testator's first family can lose the benefit of the estate.
If you want to see how such a scenario can play out, you may wish to review the Banton case from Ontario. In this case, a 33 year old woman seduced an 88 year old man. The new will that the new wife had the old man execute was declared to be invalid, which meant that the fellow died without a will. Under the Ontario Succession Law Reform Act, the invalidity of the Wills executed after the marriage would result in the fellow dying without a valid Will at all. The Ontario Succession Law Reform Act dictates that in circumstances where a person dies without a valid Will and is survived by a spouse and children, the surviving spouse gets the first $200,000.00 of the Estate of his or her deceased spouse and one-third of the assets in excess thereof. The net effect in the Banton case was that the new wife received most of the estate, to the chagrin of the testator's children.
B. Joint Property
Assets can be held by parties in Joint Tenancy. For example, many people own their houses as joint tenants with their spouse. The primary significance of joint tenancy is that upon the death of one party, the other party automatically is entitled to the asset. This is called the right of survivorship.There is no need for probate, and the asset does not become part of the estate. This is usually a good thing, as it provides for a quick transfer from the one party to the other, and saves the requirement of having the estate probated in order to transfer the title to the property. However, it may also thwart the testator's intention. If a testator drafts his will thinking that he is leaving all of his assets in accordance with the will, he may overlook the fact that some of his most significant assets will never become part of his estate because they pass automatically by right of survivorship. This is something to bear in mind when creating an estate plan.
C. Designated Beneficiary
Some financial assets such as RRSPs allow the owner to designate a beneficiary of the assets upon their death. This means that the asset does not become part of the estate, and will get transferred directly to the designated benficiary. The designation may have been made long before the testator got married, or the testator may forget that they made such a designation in the first place. This may also thwart the testator's estate plan as set out in their will. When preparing a will, one should take an inventory of their assets, and make sure that the will they create is consonant with the designated beneficiary. This is not to suggest that the designation of a beneficiary is a bad thing. It is often beneficial to transfer the asset without the necessity of going through probate. It is also possible to avoid paying taxes on RRSPs by transferring them to a designated beneficiary (if the designated beneficiary is a wife or dependent child) rather than leaving them to the estate.
There are no estate taxes in Alberta, but this does not mean that the estate does not have to pay any taxes. If the testator owns RRSPs or RIF's, then they will be deemed to be cashed in in the year of death if they cannot be rolled over to the testator's wife or children. These assets will be taxed as income, which will usually attract the highest marginal tax rate. Capital assets are deemed to be disposed of in the year of death at fair market value. This means that capital gains tax must be paid on the difference between the original acquisition cost of the asset and the fair market value at the time of death. If the asset is not actually sold, it can be a real hardship coming up with the money to pay the tax. This is especially a problem if the asset is one that the beneficiaries wish to retain, such as a cabin at the lake. For example, if the cabin has appreciated by $500,000 since it was purchased, then the estate will need to come up with about $100,000 to pay the capital gains tax on the cabin (1/2 x $500,000 x 40% marginal tax rate).
If there is no market for an asset, but it has appreciated a lot, then the estate may have a real problem. For example, the testator owns an interest in a closely held business. When he dies his interest is worth a lot of money, but the other owners have no money or inclination to buy out his interest. The estate needs to find a way to pay the capital gains tax, even though they may not be able to sell the interest in the business for several years. This is a relatively common problem among small business owners. In order to avoid the problem, the business owners frequently take out insurance that can be used to buy out the deceased partner's share. Obviously, this mechanism must be put in place before one of them passes away.
This is by no means meant to be an exhaustive list of the pitfalls that may arise when planning an estate. It is just intended to give you a heads up as to some of the problems may crop up. I would be more than happy to discuss your own situation with you a greater length if you are contemplating an estate plan.