If you are incorporating friends into your estate plan, there could be cases where family expectations might conflict. Mindi Banach, Tax and Estate Planner, TD Wealth, joins Kim Parlee to outline the key documents you should have and steps you can take to help ensure your wishes are followed.
- When a lot of people think about passing on assets and money after we die, we typically think of the role children and other family members will play. But what happens if you prefer to or need to pass those things on to close friends, your chosen family, instead? Mindi Banach, Tax and Estate Planner, TD Wealth, joins me now to dig into some key considerations when making friends a part of your estate plan-- more common, I think, than people know, first off.
- So just maybe start broadly. Are there specific challenges you have to think about when you're thinking about friends versus family?
- So yes, and the first thing you want to be thinking about is, with the exception of being required to provide legally for certain people who are financially dependent upon you, in common law jurisdictions, of which most provinces in Canada have, you typically have the freedom to choose whoever you want as your beneficiary. So that includes both friends as well as family. But in civil law jurisdictions like Quebec, they have a concept known as forced heirship, which actually requires you to provide a certain portion of your estate to certain close family, which limits your ability to provide for friends. So again, you want to look at the jurisdiction that you reside in.
You also want to look at your family dynamics. If your family and loved ones were expecting and assumed that they were to be receiving a certain inheritance--
- Surprise. [LAUGHS]
--and they are not, this may cause that family relative to legally challenge your will. And if your will is determined to be invalid, the intestacy laws are going to govern. And under the intestacy laws, which govern if you don't have a will or you don't have a legally valid will, only your close family and your close relatives are going to inherit.
- OK, so there are things to consider. So let's say we've thought about those. The next part is, is there a timing that might be better? Is it better to give to friends, perhaps, when you are still alive, rather than including the will afterwards, after you pass, just to avoid-- to make sure that it happens, I guess, is what I want to say.
- So it's really going to depend on each client's unique facts and circumstances. In some circumstances, it may make sense to gift assets to your friends while you're alive. In other circumstances, it may not. Some of the benefits of gifting while you are alive is that you can witness the advantage of your friends being able to utilize that gift, and they can enjoy the gift immediately.
However, there are also going to be disadvantages. Depending on the type of asset that you're gifting, there may be an immediate tax implication to both you and your friend, as well as you want to ensure that, when you're gifting assets, you're still ensuring that you have enough money for your own financial needs. Whenever you're dealing with the possibility of your will being legally challenged, you want to ensure that you have a well-drafted, legally sound will, preferably drafted by an estate planning lawyer.
- Got it. Yeah. Make sure-- yeah, just make sure that it's legally sound, whatever your wishes are going to be. What about if-- I mean, as part of-- and we've talked to us before-- you're looking to designate beneficiaries in your, let's say, TFSA or your RRSP, can you designate a friend as a beneficiary there too?
- Yes, you can. And with most financial institutions, they have a form, a beneficiary designation form, that you can sign. You obviously want to be reviewing that form and updating that form whenever there's any changes that you want to make. One thing I do want to highlight-- while it's not legally required that you inform the person that you're naming as your beneficiary-- again, communication with your loved ones so that there's no surprises, especially during an emotionally challenging time.
- Yeah, which can become more emotionally challenging if it is-- those surprises come out there. What about an executor? Could you maybe ask a close friend to come in and be your executor because maybe they know you well, and they understand things? What-- I know it's much more complicated than people think. First off, we'll start with that. But what kind of conversation should you be having with them to get them ready for that kind of role?
- So the first thing I want to highlight is that, when it comes to the executor, it's a job.
- It is.
- And while, when you appoint somebody, it can be considered an honor because, clearly, you trusted them enough to appoint them, but you still got to recognize that it's a job. So one of the first things that I tell clients is, again, while it's not legally required, you may want to ask your friend, are they willing to act as your executor, because if you know in advance that your friend is not willing to act as your executor, that gives you the opportunity to ask someone else.
So again, you want to find out are they willing. You want to talk to them about, again, the role and responsibility. Do they have the expertise? And lastly, you really want to bring up the topic of compensation. I tell clients, without adequate compensation, it's arguable if someone is going to act as your executor or possibly as your attorney, so you want to ensure that adequate compensation is provided.
- Yeah, and I know stories of friends, of they've said, oh, I thought this would be a great idea, and then hated it, utterly hated it. So--
- (WHISPERING) It's a job.
- It is a job, yeah.
MINDI BANACH: [LAUGHS]
- So there are other options, like a corporate executor.
- Yes. So a corporate executor is a professional company whose job it is to act, and they are professional in acting as the administrator of your estate. So for family or friends or clients who don't have anyone that they can appoint, or if you don't want to place that burden on your family or friends, a corporate executor is a really good option.
Now, I tend to find that, with many clients, one of the challenges that they face when they appoint an individual, whether that's a friend or family, is the concern is are they going to be able to act when you need them to be? People get sick. People pass away. And so when you're appointing an individual, this is really a concern. This is not a concern, however, when you're appointing a corporate executor.
- They're legally bound to do what they're going to do.
- And then, also, the fact is, even if the person who is actually working on your estate, the one who has that job, is no longer in that job, the corporation is going to seamlessly replace that person with another professional who can continue to act on your estate. And a corporation doesn't get sick, and a corporation doesn't die.
- Yeah, that's a very good point. What do you need to include into your estate plan to make it clear what you want your wishes to be? And I know you've got a list here of documentation. I'll just let people know I was looking because you had a letter of instructions and wishes, which was in addition to the will. So just take us through what you think is the right package to put together.
- So there's three key and cornerstone documents to your estate plan. Like you mentioned, there's a will. And there's also two powers of attorney, one document where you're appointing somebody to make your financial decisions and someone else to make your medical care decisions.
But in addition to those three key and cornerstone documents, there are other documents that is beneficial, especially when you're considering a friend in any of these fiduciary roles. And essentially, what you're trying to get at is you're trying to communicate your wishes. Now, obviously, it is best to communicate verbally about your wishes. But providing that written documentation can also be helpful.
So like I was talking to you before about a letter of wishes or a letter of instructions, it's just written documentation about what your wishes are. In addition to your will, there are certain things that are not appropriate to go in a will and are more appropriate to go in a letter of wishes or a letter of instructions.
- Like what? Just what kinds of things might go there?
- So when it comes to your personal effects, oftentimes, you may change your mind frequently. If you put it in your will, you have to go through the same formalities of execution for your will.
- Who gets the painting? Who gets the chair?
- But in a document outside of your will, you can update your document as frequently as you want. It's not going to be legally binding. But it provides what I call a lot of moral persuasion on the executor to follow your wishes. And oftentimes, executors will follow your wish.
In addition to, again, a letter of instructions or a letter of wishes, you also want to look into a living will or a medical or health care directive, which is where you're providing an expression of what your wishes are. Now, I tend to find that a lot of clients don't understand the difference between a power of attorney document and a living will and a medical or health care. And just to briefly explain, in a power of attorney document, you're actually appointing a person, who we call your attorney in some provinces, to make your medical care decisions. In a living will or a medical or health care directive, you're actually expressing what your medical wishes are. So having both of those documents can be very helpful.
And then, lastly, another document you want to look at, in terms of the consents or authorizations needed for tissue and organ donations, again, communicating your wishes with your friends about what that is and depending on the jurisdiction that you need-- that you live in, excuse me-- what documentations you need-- some jurisdictions have what we call an opt-in jurisdiction, and some are opt-out in terms of whether or not you can donate your organs.
- Yep, it's the ultimate act of generosity. Last, I've only got about 30 seconds here, Mindi, but it's the team, I think, that really brings this to life, right? So you talk about it could be somebody like yourself, but accountants and your advisor who understands some of the financial wishes as well. And in some cases, you're seeing a family mediator could be involved.
- Yeah. So if you have a family business, there are certain family mediators, specifically a family enterprise advisor, who can really provide guidance in navigating, oftentimes, the complex relationships that you may have in a family business. And we certainly recommend talking to those family mediators.
- Great content, as always, Mindi. It is always a pleasure. Thank you.
- My pleasure. Thank you.