Category: Meridian GoodSense

How much will my executor cost my estate?

Qualification and components of estate trustee compensation

One of the most important decisions in your estate planning is to name an estate trustee. That’s the technical title in Ontario, but you’re probably more familiar with the term “executor”, the person who executes the instructions in a Will.

It’s a huge responsibility to take on this job – and make no mistake about it that this is a job. You want someone who has the right skills, availability and integrity so that your estate is managed and distributed the way you intend.

After that, your next question is likely how much the executor will cost.

Executor’s claim goes before the beneficiaries 

In theory, an executor can claim whatever amount the beneficiaries may agree upon. Specifically it’s the residual beneficiaries – the residue being what’s left after specific items and dollar gifts have been paid – as it comes out of their entitlement. Note however that if any residual beneficiaries are minors or if there is a question about someone’s mental capacity, government agencies or a court may have to weigh in.  

Is it a straight 5%, or is there more involved? (… it’s the latter)

If they can’t agree, the executor will have to pass the accounts before a court officer. The starting point is a formula originating from old case law: 2.5% of income & capital gathered, 0.4% of average annual estate assets, then 2.5% of income & capital distributed. Roughly that’s where that 5% figure comes from. 

That official will then conduct a qualitative review of time spent, estate size, care called for, special skills required, and what success or results came about. Each of these may be an addition or detractor, but overall it is very rare that the final determination goes past that 5% figure.

Lastly, while an executor can and should employ appropriate professionals to assist in specialized tasks, to the extent that the executor’s own responsibilities have been handled by someone else who has been paid out of the estate, the executor’s compensation will be reduced accordingly.

Can I use my Will to limit or deny compensation?

If you are concerned that executor fees may eat away at your estate, you may be contemplating placing a term in your Will to deny compensation. The difficulty here is that your nominee may decline taking on the time-consuming role with its related liabilities, leaving the estate administration a bit uncertain. 

A better option may be to cap the compensation, preferably with a reasonably flexible formula rather than a fixed dollar figure that will become stale over time. Alternatively if you name a corporate executor, usually that organization will allow (or likely require) that its compensation policy be appended to the Will. Apart from knowing you’ve hired a qualified professional, you’ve taken the mystery out of the cost.  

Tax treatment for executor

A final consideration is the fact that compensation is taxable to an executor as income from an office. That’s not your concern with a professional trustee, but you may see it differently if it’s a family member.

You might consider a gift out of the estate to that executor, designed to be in lieu of taking compensation. That kind of estate distribution is not taxable, so if it is structured properly – on advice of a qualified estate lawyer – both estate and executor could be better off by the amount of the tax savings. 

Who pays the tax on mom’s RRIF at death?

Sibling stressors, legal rules, moral dilemmas

Some of the largest dollar value estate planning decisions we make are the naming of beneficiaries on registered plans. 

By doing so, the plan proceeds go directly to the named beneficiary/ies, rather than falling into the estate of the deceased. This bypasses exposure to estate creditors and probate tax, as well as the potential delay of having to pass through the estate. 

But while making a beneficiary designation streamlines both time and cost of distribution, the tax result could present an unexpected dilemma for the recipients.

Why is there tax on registered plans at death?

A registered retirement income fund (RRIF) is the payout form of what originated as a registered retirement savings plan (RRSP). Together they are legally-authorized income deferral arrangements. When a person dies, there is no more future deferral time, so the arrangement is generally terminated. 

The main exception is a tax-deferred rollover to a spouse (or possibly to a dependent child), but otherwise the account value is brought into the deceased’s income in the terminal year. 

Who is responsible for paying the tax?

Absent a rollover, and assuming for the moment no named beneficiary, a deceased’s RRIF will be paid to the estate. 

It is the executor’s job to deal with the deceased’s debts, with tax liabilities being top of the list. The RRIF proceeds can be used to pay the tax associated with its terminal income inclusion, and the net remaining funds are then available to be distributed to estate beneficiaries along with other estate assets.

Does a beneficiary designation avoid income tax?

If the deceased had named a beneficiary on the plan, the gross proceeds would be paid in accordance with that designation. However, despite that no money flowed into the estate, the RRIF would still have been included in the terminal year income, the tax on which remains the estate’s responsibility.

But who actually bears the tax?

If the estate has insufficient assets, the CRA can follow that RRIF into the named beneficiary’s hands and require payment of the deceased’s tax on that amount. Otherwise with a solvent estate, if the RRIF beneficiary/ies and the residual estate beneficiary/ies are different, then the latter effectively bear the tax on the former’s RRIF receipt. 

What did mom know, and what did she want? – Jeffrey’s dilemma

That last situation was the subject of a recent conversation with Jeffrey. He and his brother were named as beneficiaries of their mom’s RRIF, while they and their sister were the three estate beneficiaries. It was openly known that mom intended the brothers to get the RRIF, but it was unclear if she was aware of the tax rules. 

While everyone got along fine, the sister could potentially have questioned mom’s knowledge and intention at the time of making the beneficiary designation. Whether that would be successful before a judge would depend on the facts and available evidence, but it would be certain to hurt family relations and cost money.

The brothers, who were also the executors, looked into whether there was an accepted practice in such cases. Ultimately, it came down to a moral decision, and they decided that they two would bear the tax. 

In all, it’s a reminder that even apparently simple decisions could have unexpected effects. While it’s impractical for you to have each RRSP or RRIF designation legally reviewed as made, the topic should be on the agenda next time you’re with your estate planning lawyer, to be sure they properly reflect your intentions and expectations.

FOMO and market timing

Turbulence can breed troublesome behaviour

Fear-of-missing-out — FOMO — can have a dangerous influence on investors who subscribe to ‘market timing’. Acknowledging that there is always a time when you enter, remain and exit, market timing suggests that you can get better investment returns by predicting when to move in and out of markets or asset classes, sometimes on short timelines. 

Witness yesterday, October 24, 2018: With eyes & ears pealed to devices awaiting the Bank of Canada interest rate call (it went up by 0.25%), markets took a tumble. Closest to home, the Toronto index had its largest one-day decline since 2015. 

Are these events connected, could you have predicted this, and could you have moved to avoid fallout? “Maybe” on all counts, but most importantly on that last one, should you?

The financial planning lens 

Financial planning is the broad view of you, informed by your past and aware of your future, so that you can act confidently in your present. A critical component of this is how you view and manage your investments, from the overall purpose of funding your future, down through the particular parts with nearer-term intentions. 

As conditions change out there, you need to make appropriate adjustments so the investments continue to serve your defined purposes. It’s about getting and staying informed, and being at-the-ready. You’re not merely reacting and being driven by observations, but rather responding in a measured manner that always comes back to you. 

From principles to the practical – What experienced financial advisors say and do 

Market timing as a concept has been around as long as markets. As to its ease-of-use and effectiveness, the website Investopedia points to research from Morningstar that suggests it most often comes up short in both respects. That said, none of us are made of pure logic. We’re emotional, some more than others (especially in turbulent markets), which makes the notion of market timing enticing. How do you keep yourself on-track?

First, look to your advisor to provide you with insight, backed up by credible research, until you are content that you understand what is going on presently. That’s what our advisors do, and based on their experience they can share how they have dealt with this in the past. And without downplaying the seriousness, relevant stories and analogies also help as emotional reinforcement, so here are some I’ve collected from a few of our advisors:

Not in my house 

Advisor Paul Shelestowsky asks, “If one day you woke up and found out your $500,000 house is now worth $450,000, would you sell it, put the money in cash, rent for 6 months, then buy your house back for $500,000?”

Cruising along

Advisor Nancie Taylor points out that, “Cruise ships will often run into rough water during a voyage, but you don’t jump on the life rafts and abandon ship. You trust the captain and crew to get you to your destination.”

Wear blinders, but don’t act blindly

Advisor Jordan Damiani sums up, “Blinders keep a race horse focused on the track ahead, not on the distractions at the side. In fact, they’re not blinders at all – they’re ‘focusers’.” In short, focus on your individual time horizon, goals and risk tolerance, with diversified investments that take speculation out, so you have a successful long-term result.