How to avoid mistakes when making a will — and other estate planning tips
Sergiu Hirtescu CFP®, FCSI®, CIM®, RRC®
Senior Financial Consultant at IG Wealth Management
It’s not easy to talk about estate planning; after all, who wants to think about what might happen when they’re no longer here? It’s also a complicated topic, covering investments, tax and real estate, not to mention hard-to-navigate family issues. There’s far more to it than just making a will — find out exactly what’s involved in estate planning. As a result, many people make mistakes or forget important steps when developing their estate plan, which can lead to trouble for their loved ones.
Therefore, before you start making a plan, it pays to be aware of these common mistakes when making a will or estate planning.
Believing you don’t need a will or estate plan
Many people assume that you need to be extremely wealthy to have a will or an estate plan. Firstly, once you consider your home and all the belongings you own, along with any investments or savings you have, you could realize that you have more than you thought. You need to ensure that everything is distributed according to your wishes. Without a will there could be family disputes or litigation when you’re gone.
Secondly, if you don’t make a will or set up powers of attorney (for financial and health care decisions), this could cause a lot of added stress and expense to your family members further down the line. It could also mean that, if you’re no longer able to make decisions for yourself, you won’t have a say in who makes those decisions on your behalf.
Going DIY
It’s easy to find an estate planning kit online, but while it might be convenient to fill out a few digital forms, do-it-yourself estate planning can be disastrous. Anyone who takes this kind of quick, non-personalized approach can easily run into issues with taxes, wealth distribution to children and even family litigation.
It’s extremely advisable to work with an estate expert (such as a lawyer or notary public) who can review your assets, liabilities and wishes, and draw up a customized, comprehensive plan that leaves nothing to chance. Although there is no such thing as an ironclad will, a professional can fully assess all your finances and the needs of your beneficiaries, and ensure that your will leaves the right assets to the right people.
Letting your estate plan go stale
A common mistake when making a will or an estate plan is to never look at it again, after initially drawing it up. You should revisit your will frequently, especially when there’s a change to your family structure, such as a divorce, marriage or birth of a child.
For example, if you separate from your spouse, you should make sure you update your beneficiary designations, along with your will, so that your documents reflect your new life situation. There are many other complicated situations where, if the right trusts aren’t set up, or if a will isn’t updated, then family members (such as kids from a first marriage) could accidentally get left out. If this happens, your children or family members could take legal action against your estate.
It’s also important to review other aspects of your estate, such as powers of attorney and life insurance coverage, says Christine Van Cauwenberghe, Head of Financial Planning at IG Wealth Management. Find out more about four key times you need to update your will.
Similarly, you may need to change the executor of your will if their circumstances change. For example, they might move abroad, which could have a serious impact on their ability to execute your will. If your named executor is an ex-spouse, a former friend you’re no longer in touch with or an estranged child, you should name a different executor.
Not having a plan B
If you’re fortunate enough to live a long and happy life, there’s every chance that you could outlive one or more of the people named in your will. It’s important, then to include provisions in your will in case someone dies before you.
For example, if you name beneficiaries A, B and C to have an equal share of all of your assets, you could also include in your will that, if one or more of them dies, the assets are either shared equally between the surviving beneficiaries, or the deceased beneficiary’s children receive their share.
Designating the wrong beneficiaries
Designating a beneficiary, for an RRSP or an insurance policy, for example, is an important decision and should be thought through very carefully, notes Christine. While indicating who you’d like to leave an asset to after you pass away can clarify who gets what, there are situations where adding a beneficiary could complicate the transfer of assets (and in Quebec, direct beneficiary designations are only effective on insurance policies).
For instance, if you choose a child as a beneficiary, the estate may end up being held by the government until they reach the age of majority, says Christine. To prevent this, she suggests designating your estate as the beneficiary of the plan. You would then establish a trust in your will to ensure your estate is paid out in stages to your children, such as at ages 18, 25 and 30. Otherwise, your children could receive a large lump sum at age 18 or 19 (depending on the province).
Being imprecise
A very common mistake when making a will is to not list your personal items (such as a piece of jewelery, a picture or a piece of furniture), and who should have them when you’re gone. It can be surprising how heirs can fight over low-value belongings that have sentimental value if the will doesn’t specify who those items are to go to.
Similarly, people often make the mistake of being vague when writing their will (such as only using beneficiaries’ first names when referring to them). To avoid these problems, it pays to make a list of your belongings and write the full name of the person you want to leave each item to, along with your relationship to them. This will reduce the chance of any misunderstandings or in-fighting among your loved ones.
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Choosing the wrong executor or attorney
Choosing someone inappropriate as your executor can be a common mistake when making a will. Ideally, you want to choose someone who:
Similarly, when naming someone to act as your attorney, as named in your power of attorney (either to make financial or health decisions on your behalf), the same criteria should apply. Find out more about powers of attorney and why you need one.
Not considering taxes
One of the biggest mistakes when making a will or preparing an estate plan is not considering how income taxes can impact the amount of money and assets that get passed on. In many cases, taxes will have to be paid on RRSP or RRIF assets. “The full amount of your RRSPs are taxable at the time of death, unless they’re transferred on a tax-deferred basis to a spouse,” warns Christine.
Unrealized capital gains can also be triggered at the time of death on assets other than a home that either qualifies for the principal residence exemption or is to be rolled over to a spouse. If you don’t think about tax, your kids may have to sell the family cottage or use more of your estate than they expected to pay the Canada Revenue Agency (CRA).
Many experts suggest using life insurance to help cover any estate-related taxes. Sit down with an advisor to see how much money you’re likely to owe the CRA, and then buy a corresponding amount of insurance. When you pass away, your children will get the proceeds from the policy and can use it to pay any outstanding taxes, explains Christine.
Neglecting to share your plans with your heirs
Too many people keep their estate plans to themselves, and that can be a problem. If your family knows what’s going to happen, they’ll be better prepared to deal with what they may or may not inherit.
In most situations, it helps to make everyone aware of your intentions; that way, they’ll understand the nuances of your wishes and will be more likely to accept them.
Leaving out details of your accounts
Forgetting to leave a comprehensive list of your accounts and investments is one of the most common mistakes when writing a will. Without this list, your executor would have to hunt around to find all of your assets and savings, which could delay the process considerably (and waste a lot of their time).
There could also be accounts or investments that are never found, meaning some of your estate would be lost for good (this is particularly likely with digital assets, such as cryptocurrencies). By sharing a list with your executor (and updating it whenever necessary), you’ll ensure that your estate remains intact and is easier to administer.
Get help avoiding making mistakes when making a will and estate plan
At IG, we have a team of tax and estate planning team experts (including lawyers and certified Trust and Estate Practitioners) who are dedicated to helping our clients build and maintain a comprehensive estate plan. They have the experience to help you avoid the common mistakes listed above and help ensure that your loved ones are taken care of, as per your wishes.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
This IG Insight from ig.ca is shared by: Sergiu Hirtescu
Sergiu is a senior financial consultant with IG Wealth Management where he partners with Canadian families, incorporated professionals and business owners with strategic advice and services to create and maintain a holistic financial plan. He brings over 25 years' experience in the financial services industry. Before joining IG in 2017 he worked at one of Canada's leading banks. Sergiu is a Certified Financial Planner and a Fellow of the Canadian Securities Institute. Sergiu is based in Richmond Hill, Ontario and operates in the broader GTA.
Sergiu's contact details can be found on his web-page.
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