Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss the key considerations when becoming the executor of a will.
Specifically, we are going to discuss:
- The crucial first step
- Three documents every executor needs ASAP
- Major pitfalls to watch for
- Ways to help minimize tax for the deceased
- The key document you need from CRA to protect yourself
- Lastly, a few action items for you to consider
In today's episode, we will explore the duties required of the executor of a will. In some provinces, this person or persons may also be referred to as the personal representative, administrator, estate trustee, or liquidator. For the purpose of today’s episode, I will refer to this role as the executor of a will.
In today’s world, many retirees and pre-retirees may already be named on a number of wills, including that of their spouse, parents, and perhaps even their children. In the case of their parents or children, they may be considered a contingent executor, which would thrust them into the position of being the executor of the deceased's estate if the original executor is deceased, unwilling, or unable to perform their duties.
The executor role is one many people may not fully consider when they are asked to be named on a will. It really is one of those responsibilities that you can’t exactly practice for. Sure, you can ask for help from others who have gone through the process, your financial planner, or professional legal counsel, but the truth is that most people will just deal with it when the time comes.
Which I totally understand; in a sense, you are preparing for the loss of someone you love, which is an unpleasant thought.
Today I will touch on a few key roles and responsibilities you should be aware of if, or when, you are asked to be the executor of an estate. There are a number of items that are time-sensitive and should be top of mind.
The first step is to find a copy of the will. If you are unable to find a copy of the will, you may need to request access to a safety deposit box, or speak with the trust company or lawyer who often hold copies of these documents in safekeeping. If you know you are an executor of an estate, it would be wise to ask where a copy of the will can be found to avoid a scramble to find it when the person passes.
Once the will has been located, you will likely be required to obtain probate. Probate is the formal process of confirming the will and the authority of the executor. If the deceased had any real property, this process is a must, even if the property is only their primary residence. Furthermore, most financial institutions will not deal with you or release funds to the estate until you have letters of probate, so it's best to get started on this step as quickly as possible.
There may be other immediate financial needs such as funeral expenses, which the executor will usually help to cover from the deceased's assets. During this time, the funeral home will also be able to provide you with a death certificate. This document will be needed to notify various agencies and institutions.
So as a quick recap, the first three crucial steps are to:
1. Find a copy of the will.
2. Determine if letters of probate are needed and apply for them.
3. Obtain a death certificate.
Next, take these documents to the deceased's main banking institution and discuss the opening of an estate account. This will be the account where proceeds may be directed, expenses covered, taxes paid, and later distributions made to the beneficiaries.
Next is to locate the assets of the deceased and determine their value. In the way of bank accounts, investment accounts, RRIFs, TSFAs, life insurance, etc., finding a recent copy is a good start. Have a look at these statements closely; is there one or more beneficiaries named on the account? If so, make note as these assets will be sent directly to the beneficiaries and will not go through probate.
However, if you notice direct beneficiaries on an RRSP, RRIF, or LIRA account, be careful.
If the beneficiary of the RRSP, RRIF, or LIRA is not a spouse, the accounts will be 100% taxable to the estate.
So as an example, as an executor you discover that the deceased has named her three adult children as equal beneficiaries of a $750,000 RRIF. If we assume a 50% tax rate, this will mean the estate will be required to pay $375,000 in tax, but because the three adult children were named as direct beneficiaries, they will each receive $250,000, without any tax withheld. If there isn’t enough money in the estate to cover the tax bill, the executor is liable for ensuring the taxes get paid.
This could mean going back to each beneficiary and asking them to cover their inheritance's share of the tax bill. This is where things can get really, really messy.
So how can this be avoided or mitigated? If the person you will represent as the executor is still alive, ask them if they have reviewed the beneficiary designations and tax implications of their current estate plan. With the answer likely being “not in a very long time” or maybe even “what is an estate plan,” you will want to meet with a financial planner who understands the nuances of minimizing tax and optimizing estate transfers.
One other comment about the deceased's investment accounts is to scrutinize how they are currently invested. Here I would strongly suggest moving the underlying investments to, say, a money market fund or high-interest savings while the estate is being settled. In a scenario where the risk tolerance and investments are not addressed, there is a chance the underlying investment decreases in value substantially due to market fluctuations. Needless to say, the beneficiaries will not be happy.
Ok, so now that you have located and found their bank accounts, RRSPs, insurance, etc., the next step is to gather information on physical assets like homes, vacation properties, rental units, and land. This process may take some additional third parties to determine fair market value.
Furthermore, in the event the deceased had two properties, say a home and a vacation property, you will want to work with a financial planner and tax accountant to determine the optimal way to utilize the primary residence exemption to minimize tax.
Now, as you are in the midst of settling the estate, there are a number of other considerations. Here is a list of other items you will need to consider:
- Settling debts
- Canceling credit cards
- Notifying CPP and OAS
- Applying for the CPP death benefit
- Paying outstanding bills
- Canceling and closing social media accounts and more
Now that you have most of your ducks in a row, it is time to prepare the deceased's final return. If the death occurred between January 1st and October 31st, this return is due the following year on April 30th. If the death occurred between November 1st and December 31st, the final return and balance owing are due six months following the death.
You will also want to gather copies of previous years' returns filed by the deceased to help with this process, consider certain optional returns, and ultimately receive the Tax Clearance Certificate from CRA. A Tax Clearance Certificate protects the executor in the event it is subsequently determined that the deceased or the estate owes additional taxes.
Lastly is to distribute the assets, which can be either very stressful, very rewarding, or both, depending on how the will was written, if taxes were minimized, and the sheer number of assets. Before getting to this point, I would strongly suggest that you have regular communication with the beneficiaries about the progress of the estate. If the beneficiaries don’t hear from you for some time, it may be perceived as bad news, which can only cause additional stress during the process and when it comes time to distribute.
Now, there are countless other considerations as an executor of an estate that I did not cover in this podcast. For example, if the deceased owned a business and/or had a corporation, whether or not they earned residual income after their date of death, the need to set up a testamentary trust, province-specific considerations, and many more. My goal with this, and all other podcast episodes, is to provide high-level professional advice without getting too deep into financial jargon.
It is really easy to get into the weeds when discussing finances, and I have been trying my best to keep things simple and easy to digest. I strive to reflect this same philosophy in the way we do business and how we help prospective clients gauge our value through our complimentary one-page plan process. You can learn more by visiting our website.
Ok, so that does it for today’s episode. But before I sign off, here are your action items to get the most out of what you learned today:
1. If you are an executor, ask the person who appointed you where a copy of the will can be found. At the lawyer's office, safety deposit box, or in a folder somewhere in the basement—you need to know these things.
2. Now that you understand a bit more about the process, pass along this knowledge and share this podcast with the person or persons you have asked to be your executor. They really should have some understanding of what they will be in for when the time comes.
3. Don’t shy away from asking for help. If this all sounds very overwhelming and time-consuming, bringing in a professional may be the right choice, especially in complex scenarios. Many wills have provisions written in them that allow the executor to utilize some of the estate assets to hire professionals to help sort through everything.
Ok, that will do it for today’s episode.
For the links and resources discussed, please check out the link in the show notes or visit retiringcanada.ca.
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.