The Basics of Estate Planning with Jason Pereira | E039

An introduction to estate planning.

In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, and writer, is interviewed by Guy Anderson in the first episode of his series on estate planning for business owners!

Episode Highlights:

  • 1:25 – What is estate planning from a broad perspective?

  • 2:19 – What are the different parts of estate planning?

  • 4:57 – Jason breaks down what happens for those who don’t have their estate affairs sorted out.

  • 6:32 – How long does it take to get someone else’s estate in order?

  • 8:28 – Jason explains how your assets are organized and how that affects your estate.

  • 10:42 – Why do people open up joint accounts?

  • 12:06 – Where does the Will come in during this process?

  • 14:11 – Jason dives into the succession plans of business owners.

  • 15:18 – Who is in charge of what in regards to the will?

  • 15:56 – Jason explains the 2 parts of power–of–attorney.

  • 19:31 – Jason previews the rest of the Estate Planning for Business Owners series.

3 Key Points

  1. After you die, your money can go to your beneficiaries, the government, and charitable organizations.

  2. You do have a choice with your estate plan. You can plan one for yourself or leave it up to the government to figure it out for you. Only one is under your control.

  3. The 3 scenarios that have to be addressed in the will are what happens if one spouse dies, both spouses die with children left behind, and the entire family dies.

 

Tweetable Quotes:

  • “Estate planning is the process of organizing everything that matters to you...and figuring out what you want your legacy to be.” – Jason Pereira

  • “It’s not just about where everything goes in the administration. It’s about, what is the outcome on the people and places you leave behind?” – Jason Pereira

  • “The last thing I want my family to have when I die is resentment.” – Jason Pereira

  • “The will establishes the rules for the estate.” – Jason Pereira

  • “There is a separate branch of the criminal code for theft under power–of–attorney and it is more punitive than normal theft.” – Jason Pereira

 

Resources Mentioned:

Full Transcript:

Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry  insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews  with different experts, with their stories and advice, you will learn how you can navigate the challenges  of being an entrepreneur, plan for success, and make the most of your business and life. And now, your  host, Jason Pereira. 

Jason Pereira: Hello, and welcome. Hello, and welcome. Today's the first of a multi-part series on estate planning.  We're going to explore the fundamentals of estate planning right down through the most advanced stuff  when it comes to how to estate plan for business owners, and talking about how to have these  conversations, how to figure it out, what is what you want, and how to avoid massive disasters with  these. And for the first episode, I've actually invited my friend and colleague, Guy Anderson, to interview  me on the fundamentals of estate planning. And with that, here's our conversation. Hello, Guy. 

Guy Anderson: Hi, Jason. 

Jason Pereira: Thanks for taking the time to be my guest host again. 

Guy Anderson: I'm happy to do it. 

Jason Pereira: So I'll let you jump right into it. 

Guy Anderson: Right, so today we're going to be talking about estate planning for business owners. So before we get  into that nuance or that aspect of estate planning, can you just describe for your listeners what estate  planning is, and from a very broad perspective? What is estate planning? 

Jason Pereira: So people hear that term, and the first thing they think is a will. And like so many things in this industry,  too often we confuse the process with the end result. The end result is a will. Estate planning is the  process of organizing everything that matters to you, from sentiment, to the people in your life, to  everything you own, and figuring out what it is you want your legacy to be, both in terms of what you  leave behind for people and how basically they remember you, quite honestly. So it's not just about  creating a will. That is the end result. It's about setting the stage for how you have the best optimal  outcome when you die, and that involves far more than just going to a lawyer and getting some  paperwork done. 

Guy Anderson: Okay, so that's interesting you define it that way, because I was going to ask you a little bit more about  what is involved in estate planning. Because like you said, it's more than just a will. It's the process. Can  you get more into what's involved in estate planning itself? 

Jason Pereira: Yeah, so let's talk about the table stakes stuff. The table stakes is that essentially you start off by doing  an inventory of everything you own. So if you've done a financial plan, all this stuff is basically done. So  bottom line is we have to understand that at some point, we're all going to depart this earth. None of us  has lived forever, last I checked, and essentially that has to... So we have to figure out what happens to  all this stuff, and how is it, again, we want to be remembered and want to leave a mark, whether that be  through the friends and family that we have, or through charities or organizations that matter to us. 

Jason Pereira: So we start off with an inventory of everything we have, and then it comes down to... Okay, what  matters to you? What are the key things that really you're trying to accomplish here? And that includes  things like, "I want my spouse to be secure. I want to leave everything to my kids so that they can do  whatever with it." I mean, that's a really abstract term, but when you start to dig into it, sometimes you  find that they really don't want to leave everything to their kids. I mean, I've had situations where we've  done financial plan and projected what the net worth at death is going to be, and the first thing they say  is, "I don't want to leave them that much. I'm going to ruin them. So then as my friend and colleague,  [Mark Halperin 00:03:19] says, when you die, your money goes three different places. 

Jason Pereira: It goes to your beneficiaries, it goes to the government in terms of taxes, and it goes to the charity. And  with those last two, you can make one worse off for the other. So you can choose to give to charity, and  basically part of that comes from the government. So what's involved is first and foremost, an inventory.  Secondly, is a deep understanding for what you want your family and your situation to look like beyond you being around. Do you want to endow a scholarship at a university, because... You know what? You  had a hard time paying for university yourself. You have to work it through, and you want someone in a  similar situation not have to go through that. Did you have a very close and intimate situation with a  hospital that means a lot to you? What are the things that matter to you beyond the family? 

Jason Pereira: Let's bring those to the table. And then it comes down to... Of course, we want to sustain the spouse  first and foremost after you pass away. We don't want to endanger their lives or their welfare. And we  want to... I've yet to meet anyone who said, "I'm not giving my kid anything." Warren Buffett's got this  great line about giving your kids enough so they can do anything, but not so much they can do nothing.  So basically, what is it you want to do? What is it you want to leave behind to them, and what is it that  you want them to be when you're gone? If you know that they're going to quit their jobs and retire at  age 50 the second you die, because you know what, they're just going to blow all the money that you  built and it's going to be gone for the next generation, is that what you want? 

Jason Pereira: Do you want to leave money to the generation beyond that? So it's not just about where everything  goes in the administration. It's about what is the outcome on the people and places you leave behind.  That takes a lot of introspection.

Guy Anderson: That's great, and I'm glad you described it that way. And before I go onto some of my next questions,  can you describe what happens to an individual if they don't have an estate plan? What are the  ramifications of not doing a plan? 

Jason Pereira: We all have an estate plan, whether you know it or not. Either you have one you develop yourself, or  you have one the government imposes on you. So if you don't have your estate affairs sorted out, you  fall into what's known as intestacy, and intestacy, the government tells you what happens. So the  biggest belief that people have is that, "It's all just going to go to my spouse." Not the case. It depends  on what province you're in. In Ontario, for example, it's the first $200,000 of your personal ownings that  go to your spouse, and then it basically will then be split between your spouse and children. If it's one  child, 50%. If it's two children, two-thirds of anything beyond 200,000 goes to the kids, and the one-third  to the spouse. So that can lead people into some really unfortunate situations that involve the Public Trustees Office and a lot of bad administration pains afterwards. 

Jason Pereira: So you have a choice. You can do nothing, in which case, suboptimal outcome is going to guaranteed be  happening, because the government has painted one picture for everybody. Or you can actually have  one yourself that basically dictates where everything goes. And I'll share a story, a couple of stories. The  most heartbreaking moments I have in this business are when people are dealing their family's estate,  and that family's left behind a nightmare, left behind a terrible scenario. And when that happens, when  you see the resentment these people have for their parents who passed away, or the spouses who  passed away after they're gone, it just breaks your heart. And the last reaction I want my family to have  when I die is resentment because I couldn't be bothered to get my act together. 

Guy Anderson: So it's interesting that you describe it that way, because if someone passes away without a will, it's not  only that they lose control of who gets what, but... Can you explain and maybe describe how long the  process might take if they don't have a will? 

Jason Pereira: How long is a piece of string [inaudible 00:06:35] forever? It depends on how... We're going to talk  about how their assets get organized and the impact on that shortly. But if you had to go through the  intestacy process, someone has to file to be the executor. We're going to talk about roles as well too,  but executor's the person in charge of executing the will or the estate, also known the estate trustee.  They are responsible for basically making sure that final wishes get taken care of. Now, if there is no will,  then they have to apply to the courts to have that privilege. What if there's conflict? What if more than  one person wants to do that? And I've seen it in my own personal life with friends, where... Second wife  versus the kids on this issue, because no one trusted anyone. 

Jason Pereira: Now I'll tell you right now, being an executor is not an honor. It is a massive amount of work. It is a giant  pain in the ass. Pardon my language. Yes, you can. You are financially rewarded for it, but your  financially rewarded as taxable income. So it's not quite as good as just inheriting the money in the first place, but there's also legal liability imposed upon you to do what you're supposed to do. So that can be  just a massive pain. So if not, you have to go to court, you have to get that done. If everything's not  organized, then it becomes a treasure hunt. What did this person own? What did this person owe? It's  going to take forever to figure all that stuff out. Where did they put their passports and their driver's  license that I now have to have canceled? 

Jason Pereira: What's their OHIP number, their health insurance number that has to be canceled now? The rabbit hole  for all these things that have to be done is just immense. And if you had a disorganized person who just  didn't care to get this stuff done... If you want your family to hate you, the guaranteed way to do that is  be disorganized and leave behind no will. Knock yourself out. Your family's going to hate you for the rest of their existence. 

Guy Anderson: Okay. So what exactly does a will do then? We're talking about all the ramifications with and without a  will, but what is it that a will does? 

Jason Pereira: So actually, I'm going to take a quick step, and let's talk about how your assets are organized and how  that impacts your estate. And that's why the will is important. We'll get to this. So with estate planning,  there's something called a 323 process. So the three to three process first off is, how are your assets  owned? Because that impacts your estate. First off, you have three different ways you can leave money  behind. One is in joint trust with rider survivorship, so you own some things you want to go to someone  else. What happens is that that asset passes to the remaining owner without probate, which is a fee  charged by the government for administering estate, and without any... If it's a spouse, it can roll over to  them on a spousal tax-free rollover, but it does not go through the will, because the joint trust with rider  survivorship establishes that the other person on my death is entitled to the rest of this. 

Jason Pereira: So that's the first thing. The second piece is the designated assets, so things that have a beneficiary. So  you legally can't have a beneficiary on everything, but you can have it on RSPs, TFSAs are the big ones.  Insurance policies are the big ones. Those ones, those get paid out directly to the individual, typically  allowing them to roll it... If it's a RSP or TFSA, those can be rolled over into the RSP or TFSA of the  beneficiary if it's a spouse, otherwise it has to get paid out to the individual as is. All those payments get  made without going through probate, and are not impacted by the will. They're not part of the estate.  Everything else you have falls into your estate. And by falling into your estate, that is what the will does. 

Jason Pereira: The will establishes the rules for the estate, for the remaining assets. So anything that I own individually  that does not have a beneficiary on it and does not have a jointly owned, basically goes through the will.  Now, sometimes people will say, "Well, okay, I can make this easy. I'll put everything in joint." Problem  is, what if you have like five kids or four kids? You can put it in joint with all of them, sure. No problem.  That's going to make it a big pain. But if you put it in joint with one of them, or you make one person a  beneficiary of something, the others, technically they own that asset, and the other family members  who you wanted to leave money to have no claim to that asset. It's a real, real pain.

Guy Anderson: And there's also an issue if you open a joint account with a child or something like that. If there's a  breakdown in the marriage, or if there's there's creditor 

Jason Pereira: [crosstalk 00:10:39] issues, yeah. Honestly, people open up joint accounts to avoid probate. Probate is  small. It varies from province to province. Sometimes, it's zero. In Ontario, it's only 1.5% on anything  over 50,000. So yeah, in large amounts, it can be enormous. But the number of stupid things people will  do to avoid this is astonishing. And more often than not... Probate is the tax you pay to basically get the  will executed the way you want. Think of it that way. And at 1.5%, it is far cheaper than the legal fees for  fixing problems for things that go wrong the other way. And you're absolutely right. You're now exposed  to the other person. And honestly, I really wish that in Canada, anytime you open a joint account, there  should be a subsequent questionnaire that requires legal sign-off, because people do not understand  what they're getting into. Guy Anderson: That's a very interesting point. I want to come back to that comment that you just made about probate.  Yeah, it's 1.5%, and most people recognize that as the tax it is. But when you describe it and say it's 15  grand on a million, most people realize, "Oh, that's not that big a deal." So why jump through all these  hoops to avoid probate, when 

Jason Pereira: There's ways to minimize it, yeah. But there's a point at which you got to say the minimization's at the  expense of sound estate planning. So there's that. The other thing people don't realize is they think if  they put everything in joint, they split the tax bill with everybody. That's not how it works. It's source of  fund is [at 00:11:56] works. So I've seen people put things in joint thinking they're going to split tax with  a family member who had no income. Eh, it doesn't work that way. It's called attribution rules. We  talked about that before. So let me go back to the will. The will is a document that basically says, "This is  where I want everything to go." Now, it can acknowledge the existence of the beneficiaries of  designated accounts. It can acknowledge the joint accounts. It can actually override the beneficiary  designation. 

Jason Pereira: So the way the beneficiary designation works on designated accounts is it's the last declaration that  wins. So if you set up an account and say your spouse, but then you set up a will and say your children,  it's the last designation that wins. So the will dictates who's in charge of what, who gets what, and what  is there to be done. So it'll say for the executor to take into account all of everything they own to  basically pay off all their debts and taxes, and then it comes down to who gets what, the beneficiaries.  And back to the 323, there's two ways to leave money to people. One is by direct gift. So I'm going to  give stuff to... I'm going to name an object or an amount of money that goes directly to somebody, or it  goes to a trust on their behalf, which it's basically... We talked about trust before. Please go back and  listen to the interview with Lee Fernandes about the different types of trusts. 

Jason Pereira: And then the last part is basically that everything else falls into what's known as residue. So if you don't  say this one person gets this one thing, it goes into a giant pot, and then it gets split amongst other  beneficiaries as you named them. So you can leave an unequal split, an equal split. If you're leaving an  unequal split, you'd need to provide some color as to why, but a good lawyer will guide you through  that. So that's the two parts, so trust or direct. And the third part is it has to deal with three scenarios to  be effective. First is what happens if you're married, what happens if one spouse dies, second one what  happens if both spouses have died and your children are left behind, and then the third scenario is what  happens if the entire family unit is gone. So if you deal with all three of those scenarios, you've  effectively put together your will. 

Guy Anderson: Great. Now, considering this podcast is financial planning for business owners, can you speak to the  estate planning process as it pertains to business owners? What sort of unique planning aspects are  important to business owners? 

Jason Pereira: That's a teaser. I'm not going to answer that, because I get into that later with Rachel Blumenfeld who's  on a later episode as part of the series, but I will say this much. With business owners, typically your  biggest asset ends up being the value of your shares or your business, and that there are some unique  opportunities around probate planning there that can help reduce the overall costs there. But the bigger  issue comes down to... When you're a business owner, you better have a succession plan in place. And  we've talked about succession planning before on this podcast, but there has to be the separate...  There's an entire separate piece that has to go with... 

Jason Pereira: Once these shares are transferred over, are they going to be redeemed, or my partner is obligated to  buy them out? How does that work? Where's the money come from? So you have to have a plan for  how those shares get treated. Does the spouse remain as a shareholder? If not, how are those shares going to be purchased by everybody else? So that's a partnership agreement, which we've talked about  the podcast also. So, not to go too far into that. 

Guy Anderson: Okay, can't wait to listen to that one too. So on top of just the will, there's typically other documents  that are created when someone's executing on their estate planning process. Can you talk about powers  of attorney for business owners? 

Jason Pereira: Yeah. I'll do the powers of attorney in a second, but I want to go back to one thing I forgot in the will. So  there's one thing I want to talk about the wills. It establishes a couple of things like who's in charge of  what. So you have the executor who's in charge of executing the will, also known as the estate trustee in  most cases. You have trustees for ongoing trusts, you have beneficiaries, and then you have guardians,  guardians for minor children. The one thing people don't realize about guardians for minor children is  your appointment of a guardian is not technically legally binding. Those guardians have to make an  appeal to the court to basically get guardianship. And if they are not fit to be guardians, the court will  not permit it, and there could be conflict there, but your wishes do count. They are taken to  consideration in court.

Jason Pereira: So let me get back to your question now, about the powers of attorney. So the will deals with what  happens when you're gone, the power of attorney deals with what happens when you're not able to act  for yourself, or maybe you don't want to. So two types of power of attorney, one for healthcare... This is  what everybody thinks of. It's the old pull the plug one. Who gets to make medical decisions when  you're not able to make medical decisions? So basically, you have to name who's in charge of that, and  probably a secondary person. If you're going to need more than one person, hopefully it's three, not  two, so there's a dispute mechanism that can be ruled out. But essentially what it's doing is quite simply  saying, "If I can't make medical decisions for myself, someone else has to do it." 

Jason Pereira: I can't remember which TV show it was where someone said, "We've decided we wanted to pull the  plug," and they zoom out. And the guy's like, "I'm right here, I'm awake." So no one can force those  decisions on you if you have capacity, because you can overrule it. But I will always say this much. The  person has to be emotionally capable of making that decision, because it can be very difficult. And I  would also say communicate to the individual what it is that you want, what your wishes are, so that it's  easier for them because they have permission. So that's the first one, the power of attorney for personal  care. The second one's for property. So property basically allows someone to handle all your personal  affairs, financial personal affairs, pay your bills, manage money, all of that on your behalf. And basically,  you want to make sure that someone is capable of doing that, responsible, good with money, good with  records, and also someone you can trust. 

Jason Pereira: Because little known fact, there is a separate branch of the criminal code for theft under power of  attorney, and it is more punitive than normal theft. So me robbing you right now, Guy, for 1000 bucks  out of your pocket, if I was your power of attorney, is far worse if I'm your power of attorney because  it's a fiduciary responsibility. So basically, that person has to be responsible, and there's all kinds of case  law on terrible powers of attorney. Now there's a couple of things to know about powers of attorney  that's important. That person can not rewrite your will. So the will is still solid, and that person has to  act on your behalf. Those are two things that are paramount. Powers of attorney, one of the things that  sometimes is in there is a forbiddance of gifts. 

Jason Pereira: So they cannot gift... Maybe you were gifting money to your kids on occasion. You can forbid that. The  other thing to be aware of when it comes to powers of attorney is that depending on who drafts them,  you'll see a clause, and this clause is known as a springing clause. And a springing clause says that this is  only active should basically I be incapacitated. I am not a big fan of those, because now you've created another administrative burdensome issue to prove that person's incapacitated, get the document to  support that in order to be executing the power of attorney. So that can be useful, because it's  protection. However, it does create burden. Non-springing power of attorneys, which is typically what  the lawyers I work with directly typically write, those are active the day they're signed. 

Jason Pereira: So you have to be careful with those, because the other person can go ahead and start working on your  behalf. Now, this is useful. So I'll give you an example. Let's say I'm on extended business trip, and some  important legal documents need to be signed for whatever. Say we're closing on a house. Technically, if I couldn't be there for whatever reason, my wife is the power of attorney. It's not a springing power of  attorney. She has the right to sign on my behalf for that. So it can actually be really handy, especially  when people travel a lot, just to have their spouse run their affairs in that regard. So that's something to  be aware of. The online will kits have all defaulted to springing powers of attorney just to be safe. But in  general, I understand they make sense to some places, but they can be burdensome in others, especially  when you're dealing with banks, because the people at the bank are not used to reading the stuff or  understanding, and they don't even know what proof to ask for is the problem. 

Guy Anderson: So that's great. We've covered off wills. We've covered off power of attorney for healthcare and  property. We talked a little bit about designating beneficiaries and joint accounts, et cetera. Is there  anything else you think you want to share with your listeners before we wrap up? 

Jason Pereira: No. I mean, I hope you guys stick around for this. I mean, hopefully because you're listening to my  podcast, you're already sticking around. So just to give you a preview of what's going to happen next, we  are dealing with estate planning for business owners with Rachel Blumenfeld, who's a partner over Aird  & Berlis, and one of the more respected or most respected estate planning attorneys in the country, in  my opinion. My colleague and friend Harris Jones is coming on after that to talk about avoiding estate  planning disasters and how to work with a collaborative team in order to make that happen. And then  we wrap it up with [Christina Breslin 00:19:59], who's an estate planning consultant, or legacy planning  consultant she like's to say, which really handles a lot of the vision aspects, and a lot of the... 

Jason Pereira: If you really want to dive into what makes you tick and how to execute on that, that is exactly what she  does. And so it's about bringing purpose to estate planning. And like I said, don't confuse the end  product with the process. The same problem I had with financial planning. People think it's a document.  It's not a document. A document's a financial plan. Financial planning is a process. I mean, it is an  iterative process. Legacy planning is just what happens at the tail end of that process, but it resonates  throughout the entire process altogether. 

Guy Anderson: Fantastic. Well, I really appreciate you asking me on to host your podcast again today, Jason. I think  you've done a great job in explaining to your listeners about the basics of estate planning. 

Jason Pereira: Yeah, thank you. Very much appreciate it. That was Guy Anderson's interview of myself for the basics of  estate planning. This was meant to be a very brief one-on-one, essentially. Please stick around. The next  three episodes are very interesting. I've been holding off estate planning for a while as a topic because I  wanted to line up the guests. Finally came together, and so the month of December looks like it's estate  planning month for everybody. So I hope you enjoy that. Until next time, take care. 

Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm  catering to high net worth individuals, business owners, and their families. To learn more, go to woodgate.com. You can subscribe to this podcast on Apple Podcasts, Stitcher, Google Play, and Spotify,  or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa, or Google Home to subscribe for  you.

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