How estate planning works in Canada

A last will and testament is a legal document that defines how you want your assets to be distributed when you die and to whom. The assets you name in your will are up to you and can include your banking and investment accounts, real estate, vehicle, furniture, and clothing. In the will, you will name your beneficiaries, who are the person or people you want to inherit your assets, and your executor, the person who will carry out your wishes when you die. If applicable, you can also appoint guardians in your will to be responsible for taking care of your children or pets. 

Having an updated will in place before you pass away is critical because it designates the recipients of your belongings. If you do not create a will, your provincial laws will take over and decide who inherits your home, money and personal items. 

Also read: A 10-point will preparation checklist

A power of attorney (POA) is a legal document that authorizes one or more people to act on your behalf while you are still living if you are unable to do so. In Canada, there are two types of POA’s you can appoint: one to manage your finances and property and the other to manage your personal care. 

When it comes to finances and property, there are two types of POAs: a general power of attorney and an enduring or continuing power of attorney. A general POA has access to manage your assets only while you are mentally capable of doing it yourself, and will end when you become mentally incapable. A continuing POA has access to manage your assets on your behalf even if you become mentally incapable. 

For personal care, in most provinces and territories in Canada, you can appoint a separate POA to manage your medical care if you’re unable to do it yourself. Some provinces refer to a medical POA by different names; for instance, in British Columbia it is called a Representation Agreement, while in Quebec it’s called a Protection Mandate. The person you appoint will make decisions about your health care, medical treatments, living situations, and other personal needs. 

To ensure you’re cared for as you wish, you can create an advance care directive, or a living will, which will outline instructions for your future medical care. This can include your treatment choices, such as whether you’d want to be given a feeding tube or dialysis, among others. 

Since a power of attorney typically has the same level of access to your finances as you do, it is essential that you choose someone you trust, like a spouse, child or close family member.

In Canada, an executor is the person you appoint to carry out the instructions left in your will. The key difference between an executor and a power of attorney is that the executor steps in only once you pass away to carry out your wishes. You can name the same person as your power of attorney and executor, but two separate documents must be prepared. 

The key responsibilities of an executor include identifying and securing your assets, such as bank accounts and personal property; applying for probate; paying off debt, filing taxes; and distributing the estate. The duties of an executor can take over a year to fulfill. To ensure your estate is handled properly, it is important to select someone reliable and trustworthy as your executor.

Pre-planning your funeral arrangements allows you to clearly outline your wishes and reduce stress for your loved ones. In your instructions, detail how you want to be buried, decide on the type of service you’d like, choose your final resting place, and include any personal touches you’d like at your funeral, such as music to play, a photo to use and the flowers you want displayed. 

Part of your funeral instructions should also include how the funeral will be paid for. You can prepay for your service or leave a lump sum of money for your loved ones to carry out your wishes. You may want to consider purchasing final expense insurance, a type of whole life insurance policy, designed to cover the costs associated with end-of-life arrangements. The death benefit from a final expense insurance policy can be used for anything your beneficiaries wish, including a headstone, transportation, and administrative fees.

An essential part of your estate plan is a life insurance policy. Life insurance provides a tax-free lump sum death benefit to your beneficiaries and can support tax and estate planning.

There are several types of life insurance policies you can use depending on your goals. Term life insurance provides coverage for a set duration of time, say 10, 20, or 30 years, and allows your beneficiaries to use the death benefit for anything, from paying outstanding debts and making mortgage payments to covering education fees and paying for daily living expenses. 

Whole life and universal life insurance are usually better for tax and estate planning because coverage lasts for your entire lifetime. Both of these policies also include cash value that grows tax-deferred, as well as policy loans that aren't immediately taxed, and withdrawals that are tax-free up to a limit. This means you can borrow against the cash value of your policy without facing immediate taxes. Withdrawals are tax-free up to the policy’s adjusted cost basis (ACB), which is generally lower than the total premiums paid. These withdrawals offer a tax-efficient way to transfer wealth to your beneficiaries. 

Ultimately, which type of life insurance policy is right for you depends on your long-term goals. Regardless of the plan you choose, having a life insurance policy in place ensures your beneficiaries receive a death benefit payout after you die (subject to the terms of your policy).

Note: the beneficiary you designate for your life insurance will override any conflicting instructions in your will. So, it is critical to keep your life insurance policy up to date so that the benefit is paid to the person you want to receive it. 

Also read: How to use life insurance for tax and estate planning

In addition to securing insurance for after you die, you should also consider living benefits coverage as part of your end-of-life plan. Living benefits such as disability insurance and critical illness insurance are designed to provide you with financial support during your lifetime if you’re unable to work due to a covered disability or diagnosed with a critical illness. Both coverages pay out a benefit you can use for anything you need, including medical bills, income replacement, debt and everyday spending. 

Another living benefit to consider is long-term care insurance, which helps cover costs associated with long-term needs, such as assisted living and personal care, if you’re unable to do them yourself. Having a policy in place can help fill in any gaps from government assistance programs and ensure you are comfortable and cared for as you see fit.