What is estate planning and why should I care?

By Jennifer Poon, January 3, 2023

Welcome to 2023 and welcome to Jennifer Poon Advisory. I thought for the first post, we would start with the "why" and the basics. Why should you care?

Estate planning is the process of organizing and preparing for the management and disposition of your assets (including property, investments, and personal belongings) after your death or in the event of your incapacitation. Estate planning involves making decisions about who will receive your assets, how your assets will be managed and distributed, and who will make decisions on your behalf if you are unable to do so. Most people feel prepared by having a will in place, I would say that is a good start but what you really need is an estate plan with strategies to properly manage risks and maximize the estate. In Canada (and many high tax countries), taxation at death can be a big erosion of your family wealth. With no planning, the government can take about half of your estate. Preparing for the inevitable (death and tax) can help your preserve and define your family legacy.

There are several different tools and strategies that can be used in estate planning, including wills, trusts, powers of attorney, and advance healthcare directives. The specific estate planning tools and strategies that are right for you will depend on your individual circumstances, including the size and complexity of your estate, your family situation, and your financial and personal goals. Traditional planning involves seeking the advice of your tax and legal advisors to create structures to meet your objectives; simply said, 1. place your assets in the hands of who you choose and 2. minimize tax so you can maximize your gift. As the family wealth steward, you will also want to educate your heirs and set out guidelines to preserve and grow your family wealth. But we will save inter-generational wealth transfer and next gen preparedness for another post.

Insurance is often just a mere footnote in our traditional planning text books. Insurance is a powerful tool for estate planning for 3 key reasons: 1. your savings grow tax free inside a whole-life insurance policy, 2. death benefits go directly to your beneficiaries tax free and bypass probate, 3. insurance has special tax attributes that traditional planning cannot replicate. Life insurance is particularly beneficial for a family business if it's used in a well thought out plan. In the last 22 years, I've learned and implemented strategies where we can leverage the benefit of life insurance to achieve a very specific set of goals. But fair warning, insurance is a wonderful and complex field of study and working with "right" experts is key to your plan's success.

Life insurance can also be cost effective for you. You pay premiums into your policy, the premiums goes to provide for the future death benefit and an investment component that can grow tax free. The net cost to the policy holder is the net cost of pure insurance (often not significant for a healthy person and given the benefit of a long time horizon), policy administrative expenses and the opportunity cost of what you would do with the same capital. Participating life insurance currently pays around 6% dividend rates but your investment and death benefit are guaranteed. In my experience, using life insurance as part of your estate plan can often be more efficient and cost effective than just traditional planning when you have a very simple estate or a very complicated estate.

An estate plan is important to ensure that your assets are managed and distributed according to your wishes after you are gone, and can also help to reduce the risk of disputes among your heirs. Effective tax planning, creditor protection and risk management are crucial to ensuring we can pass on as much as we can. Isn't about time for you to see how this may work for you and your family?