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Your Will and

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Your Will and

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Your Will and Estate Planning Guide

Copyright © 2011 Mennonite Foundation of Canada. All rights reserved. Contents of this book may be used freely by individuals and in study sessions, workshops and seminars of the Foundation’s sustaining conferences. For all other uses, written permission must be obtained from Mennonite Foundation of Canada. ISBN: 978-0-9868567-0-9

Published in Canada by Mennonite Foundation of Canada

12-1325 Markham Road Winnipeg, Manitoba R3T 4J6 Design by Helen Dimitrijevic

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Contents

Introducing Mennonite Foundation of Canada 4

Introducing Your Will and Estate Planning Guide 5

Chapter 1: Getting started on estate planning 7

Chapter 2: Your will 11

Chapter 3: Dying without a will 15

Chapter 4: Role of an executor or trustee 19

Chapter 5: Role of guardians 23

Chapter 6: Tax considerations in estate planning 27

Chapter 7: Records of assets and liabilities 31

Chapter 8: Leaving a legacy 33

Chapter 9: Incapacity documents 39

Chapter 10: Trusts 43

Chapter 11: Personal effects 45

Chapter 12: Your family and your estate 47

Chapter 13: Succession planning 53

Chapter 14: Probate 55

Chapter 15: Final tax returns 57

Chapter 16: Implementing your estate plan 61

Glossary 63

Appendix 1 70

Appendix 2 71

Appendix 3 72

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Introducing

Mennonite Foundation of Canada

Giving you the financial stewardship tools you need

People often ask why Mennonite Foundation of Canada (MFC) gives away books like

Your Will and Estate Planning Guide and why it provides free counselling on charitable gift and estate planning.

We provide these services as part of our stewardship ministry of promoting faithful, joyful giving. In 1974, several Mennonite groups started MFC as a national public charitable foundation that uses dollars pooled by like-minded individuals, churches, and charities to help support a variety of charitable causes. They did it with a vision to support a ministry of teaching, preaching, and counselling related to Christian stewardship of finances. Since its inception, MFC has been helping people understand that having their affairs in order is an act of good stewardship.

Over time, MFC has grown to an organization with five offices across Canada that serves many more groups and individuals from a variety of denominations. In the past decade, MFC has distributed $50 million on behalf of its clients, to help them support registered Canadian charities that matter to them.

Today, MFC’s trained consultants can provide you with the following financial stewardship services:

• counselling about will and estate planning

• helping give gifts to charities in the most effective way • simplifying the distribution of charitable gifts from a will • setting up gifting accounts

• providing educational resources such as seminars, sermons, and books • creating and administering foundations for individuals and families • managing funds for charities.

For additional information, visit our website, www.mennofoundation.ca, call 1-800-772-3257, or email contact@mennofoundation.ca.

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Introducing

Your Will and Estate Planning Guide

A step-by-step guide for estate planning and

record keeping

Thoughtful, informed, and prayerful planning for how your estate will be handled and disbursed after you have passed away is fundamentally an act of good stewardship. Whether your estate is large or small, careful planning serves your loved ones and the institutions you care about. It also allows you to consider the tax implications of various alternatives, so you can make the most of what you leave behind.

Yet, even if you agree that estate planning is a good thing to do, you may be tempted to put it off. Some people avoid making a will because they feel uncomfortable thinking about death or find it difficult to decide how to distribute their assets. Others want to wait until they have the assurance that they understand what’s involved. If you don’t write a will, you are leaving the responsibility of dealing with your assets and belongings to your children, relatives, or the government, when the time comes. To help make writing a will and estate planning easier for you, Mennonite Foundation of Canada has developed Your Will and Estate Planning Guide as a valuable resource. This guide draws not only on our experience in assisting people from many walks of life understand will and estate planning issues, but on our wealth of knowledge about Christian stewardship of finances and related legal issues as well.

Your Will and Estate Planning Guide takes away some of the mystery of the estate planning process by providing you with practical information and tools. It can help you consider how to provide for your family and leave gifts for charities. It gives you guidance on how to ease the burden of settling your estate and reduce expenses to the estate, including taxes.

Using this guide will help you understand how to develop an estate plan that carries out your wishes. By planning now, you give yourself and your family peace of mind. MFC is here to help you. If you have any questions about the contents of this guide, contact an MFC Stewardship Consultant to find out more. Call 1-800-772-3257 or email contact@mennofoundation.ca.

The purpose of this guide is to provide general information only and users are recommended to seek qualified professional advice in relation to both legal and tax matters, as Mennonite Foundation of Canada does not provide tax or legal advice in relation to specific matters. If you have assets outside of Canada, it is important to get specialized advice from someone experienced in international law.

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Studies suggest that close to half of Canadian adults don’t have a will.

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Chapter 1

Getting started on estate planning

Where do I begin?

Simply put, estate planning is a thoughtful, caring act. Putting your plans in place is an intentional act of stewardship that expresses your faith and values and shows what is important to you. It allows you to care for those you love in the way you want to. Estate planning also lets you express generosity through charitable giving and show your commitment to being generous, just as God has been generous to you. For Christians, estate planning can be an expression of gratitude to God. In the words of Psalm 24, “The earth is the Lord’s and everything in it.” The Apostle Paul affirms this when he writes to Timothy that God “richly provides us with everything for our enjoyment” (1 Timothy 6:17). It is by God’s grace and mercy you have gathered what you now have.

What is an estate plan?

The components of an estate plan are as follows:

• a will, which is the cornerstone of your estate plan and would include instructions: - to an executor, who is someone you trust and is capable of carrying

out your wishes

- to guardians for any minor children or dependants - regarding the distribution of your assets

- regarding trusts, if any

- regarding your charitable giving plan

- regarding the distribution of your personal effects.

• a document naming the person(s) authorized to carry out your financial affairs if you are not able to do so

• a document naming the person(s) authorized to carry out your wishes if you are incapable of making those decisions due to serious health issues

• instructions for the executor and family on where your important documents are stored.

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Will

A written document that lays out the wishes of the deceased with regard to the distribution of his or her assets and personal property. Executor

A person named in a will to administer the estate of a deceased person (executrix, if female); referred to as an estate trustee in some provinces. See also “Personal representative” in the glossary.

Guardian

A person who has the legal authority to oversee the affairs of a minor and has the legal responsibility to care for that minor until he or she attains the age of majority. Also a person who has the legal authority to oversee the affairs of an adult dependant. Trust

A legal relationship whereby a person or persons holds title to an asset (including money), but the benefit of the asset belongs to someone else.

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How do I develop an estate plan?

Step 1: Set goals

Before you decide on any details of your estate plan, identify what you want to achieve through the process. Establishing a clear set of personal and family goals for the outcome of your estate planning will help you focus on what’s really important to you. Your goals might include the following:

• to provide for your family, particularly your spouse, children, or anyone else who is dependent on you

• to be a good steward (manager) of what God has given you

• to ensure that your assets are distributed according to your wishes and beliefs • to reduce stress for your family

• to reduce the cost and time required to settle your estate

• to arrange your assets so as to reduce taxes and make the most of what you will pass on to your chosen beneficiaries

• to make charitable gifts, now and/or through your estate. Step 2: Read Your Will and Estate Planning Guide

Your Will and Estate Planning Guide is designed to provide an overview of the basic issues in estate planning and to walk you through the planning steps. To get the most out of it, read this guide carefully and, as you do:

• make notes and a list of your questions • ask yourself questions such as:

- Will my spouse have enough to live on if I pass away?

- Who should make financial and medical decisions for me if I am not able to myself?

- How much is enough, or too much, to leave my children and grandchildren? - What kind of legacy do I want to leave?

- How much tax will have to be paid when I die? Step 3: Fill in the planning Your Will worksheet

The Planning Your Will worksheet, located in the pocket of this guide, is another practical tool in your estate planning. Filling it in will help you consider the key decisions you need to make. It will also provide you with most of the details that a legal professional requires to draft your will, making your meeting with that person more productive.

• Complete as much of the Planning Your Will worksheet as you can. • If you want a reminder of what a term or question means, review the

appropriate section of the guide or the glossary. Each section of the form refers to a section in the guide, where you will find more background information. • Keep notes and a list of your questions.

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Putting your plans in place is an intentional act of stewardship that expresses your faith and values and shows what is important to you.

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Step 4: Meet with an MFC Stewardship Consultant

Meet with an MFC Stewardship Consultant to review and finalize your will instructions for your lawyer. A consultant will meet with you at a time and place that works best for everyone. Based on the information you provide, the consultant will prepare notes and questions you will need when you meet with your lawyer and will give you that information. Our consultants do not charge for assisting you.

• To find the MFC office closest to you, go online at www.mennofoundation.ca, call 1-800-772-3257, or email contact@mennofoundation.ca.

• Have this guide, including your filled-in Planning Your Will worksheet, and any other notes at the meeting.

Step 5: Meet with a lawyer

Having a lawyer offer advice, and prepare your will and other estate planning documents is wise and will reduce the risk that your will might be challenged. If you do not have a lawyer in mind, an MFC Stewardship Consultant may be able to suggest a few names.

• When you make the appointment with the lawyer, ask about the cost of having a will prepared. Ask what the process involves.

• Take the will memo an MFC Stewardship Consultant has prepared for you to your meeting with the lawyer.

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Chapter 2

Your will

The cornerstone of your estate plan

A proper will is the basis of a good estate plan because it is the main tool you have to ensure that your wishes will be carried out with the least possible expense and delay. A will is a written document that lays out your wishes with regard to the distribution of your assets and personal property after you die. Your will does not come into effect or become public until your death. Provided you are mentally competent, you can change the terms of your will or revoke it completely up to the time of your death.

You should review your will every three to five years to ensure that changes in your family situation or in government legislation have not made it out of date. In some situations, a badly outdated will may be worse than no will at all.

Types of wills

Formal

Formal wills are drawn up by lawyers who are trained to draft documents that are complete, meet your needs, and accommodate family births and deaths without becoming obsolete.

Sign only one copy, as only the original, signed document is valid. For a will to be legally valid, a number of technical requirements must be satisfied. Each province has different requirements. These may include execution of the document in the presence of two proper witnesses. To ensure your will is legally valid, you should obtain the assistance of a legal professional.

Usually a lawyer will require the two witnesses to sign additional documents known as affidavits. Affidavits establish the identity of the witnesses and may be useful if there is any question later about the will’s validity. People who are named to receive gifts from your will (often known as beneficiaries) or their spouses should not sign as witnesses. Doing so may disqualify them from receiving an inheritance from your estate.

Holograph

A holograph will is one that you write entirely in your own handwriting and sign without any witnesses. This type of will is valid in all provinces and territories except for British Columbia and Prince Edward Island. Writing a holograph will is not advisable, because you may not have the information you need to make it clear or complete. If your instructions are not clear or are incomplete, the will may be partly or entirely ineffective, which could result in much higher costs in wrapping up your estate, and result in assets not being distributed as you wish.

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Kits

Will kits are packages of information and forms that allow you to draw up your own will. They are available in many bookstores, on websites, and as computer software packages. Self-help will kits do not usually explain differences in provincial laws concerning estates — information you need to write a proper will.

Some people use will kits because they want to save on legal fees. However, using a will kit might leave your wishes open to misunderstanding; a challenge by your beneficiaries might result in costs to the estate that are much greater than the legal fees for drafting a will.

A poorly drafted or incomplete will may be legal, but if its provisions are challenged, a court may not interpret them as you intended.

Special situations

Wills for couples

Since wills are personal documents, you and your spouse must each have your own. Some spouses have reciprocal (or mirror) wills. Some write wills that are quite different from that of their spouse. In the latter case, both you and your spouse should be aware of this and agree to the differences.

International wills

If you own assets such as a vacation property or investments outside of Canada, consult with your lawyer about making an international will. Whether an international will is effective depends on the laws of the country in which the will is made, the laws of the country where assets are located, and whether the countries are parties to international treaties dealing with wills and succession.

Changing a will

You can update your will either by replacing it with another, or by changing it with a codicil. A will may be revoked by destroying it, but that can lead to confusion if executors are uncertain as to whether you intended to revoke it or whether the will was lost or accidentally destroyed. If you wish to revoke your will without replacing it, you should obtain legal advice.

Adding codicils

A codicil is a formal document that makes specific (and limited) changes to your existing will. Do not write the changes on your existing will, as it may cancel part of your will. Given the ease of modifying an electronically stored version of a will, some lawyers prefer not to do codicils, but to revise the provisions of the will.

Cancelling

You may cancel a will by destroying it or by replacing it with a new one. Your new will should contain a clause cancelling any previous wills you have made. When you

Review your will every three to five years to ensure that it’s up to date.

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make a new will, destroy the old one or clearly record that it has been replaced

with a new one.

When you get married, your marriage may automatically revoke your existing will, unless the will contains specific information indicating that it was made in contemplation of marriage. It is recommended that you review your will with a legal adviser before you get married in case any changes are required. The interpretation of a will may also be affected by a separation or divorce, so in those events, you should also obtain legal advice.

Storing your will

You should store your will in a safe place that is easily accessible, because only the signed original will be accepted after your death. You may choose to store the original (signed) copy at your lawyer’s office (some will provide this service for free), in your home or office, or in a safety deposit box at a credit union, bank, or trust company. Make sure your executor knows where the original will is located and has access to it after your death. Some provinces have central registries where a notice can be filed about the date and location of your will.

Keep a copy of your will at home. Make a note on the copy indicating where the original will is stored to help your family or executor find it without delay. File the copy in a safe place along with your other important papers, including a completed copy of MFC’s Personal Information Directory. This book can be an important reference for you, your family, or your executor. A copy of this directory is inside the front cover of this guide and is available online at www.mennofoundation.ca/ resources/publications.

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Chapter 3

Dying without a will

Intestacy causes problems

If you are like most people, you do not particularly enjoy thinking about the prospect of your death. However, you should not let that keep you from writing a will. Making plans for your estate and writing a will while you still have the health and ability to do so is wise.

If you die without a will (or intestate, which is the legal term), the consequences can be devastating for those you leave behind. It could result in your assets being squandered. Your wishes may not be followed

If you die without a will, your estate will be distributed according to the laws of your province or territory, which may not reflect your wishes. These laws cannot be changed by a court.

Decisions on beneficiaries

You may want your spouse, partner, or children to receive much or all of your estate upon your death. If you do not make a will, this may not happen because the laws throughout Canada vary widely. Please refer to the chart on page 17 for a summary of the provincial and territorial laws that outline the distribution of assets of an estate when a person dies without a will.

In some provinces and territories, a common-law partner is treated the same as a married spouse for estate purposes. The relationship may have to have lasted a certain length of time, however, for the partner to qualify. In other provinces and territories, common-law relationships are not treated as the equivalent of a formal married relationship for estate purposes, even though they may be treated as equivalent under other areas of the law.

In some parts of Canada, separated spouses may still be considered spouses for estate purposes. That may mean that a separated spouse would receive the first share of the estate. In some situations, more than one person could be considered a spouse under estate law.

Only biological or adopted children are able to inherit under estate law. If you wish to leave any of your estate to stepchildren, you must state this in your will.

If you do not have a will and have no surviving spouse or children, your estate will be given to other family members. Priority will first be given to surviving parents, then siblings, followed by nieces and nephews. In the event that no living blood relatives are found, the estate will go to the government.

If you want to make an end-of-life charitable gift, you need a will. (Exceptions to this are beneficiary designations on life insurance policies, RRSPs, RRIFs, and TFSAs, as described in Chapter 8.)

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Writing a will while you still have the health and ability to do so is wise.

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Choice of a guardian

You may want a particular person(s) to be the guardian for any minor children or dependants. However, if you die without a will or without indicating in your will whom you want to be the guardian, a court will select someone for this role. That may not be in the best interests of your children or dependants and may result in conflict among surviving family members.

Distribution of assets is delayed

If you die without a will, before any estate assets can be distributed, a court has to appoint someone to oversee your estate. Until that happens, no one can write cheques or make withdrawals from your bank account.

If no family members or friends apply to do this job, a court may put this in the hands of the Public Guardian and Trustee for your province or territory. Once this happens, your estate will be distributed according to the one-size-fits-all approach of whatever the law is where you resided.

Dying without a will results in higher costs to the estate, with the costs being paid from money you leave behind. The value of your estate will decrease as a result of paying higher taxes. With a will you can plan so that your estate pays less tax.

Troubled legacy

Bob and Alice were happily married with two small children. The young couple took the time to purchase life insurance and felt good that their retirement plans were on the right track. However, they had never made wills. They had good intentions, but the question of guardianship for their minor children always seemed to stall the process.

On their 10th wedding anniversary, tragedy struck when their car collided head-on with a drunk driver. Bob died instantly and Alice two days later.

With no will in place and no recommendations as to who should care for the children, many people stepped forward and disagreements ensued. Lawyers were hired and the matter was settled by a judge at a cost of thousands of dollars over several long and tedious months.

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Summary of provincial and territorial laws regarding

division of an estate for people who die without a will:

Province /

territory Spousal share* Spouse and one child** Spouse and children** Can common-law spouses inherit?

British Columbia $65,000 ½ to spouse½ to child 1/3 to spouse2/3 to children Yes – minimum 2-year cohabitation required Alberta***

Saskatchewan $100,000 ½ to spouse½ to child 1/3 to spouse2/3 to children Yes – minimum 2-year cohabitation required Manitoba Greater of $50,000 or

50% of estate

All to spouse (if spouse is parent of the child)

All to spouse (if spouse is parent of all the children)

Yes – minimum 3-year cohabitation required OR 1 year with child together Ontario $200,000 ½ to spouse½ to child 1/3 to spouse2/3 to children No

Quebec Nil 1/3 to spouse2/3 to child 1/3 to spouse1/3 to children No New Brunswick Marital property ½ to spouse½ to child 1/3 to spouse2/3 to children No Nova Scotia $50,000 ½ to spouse½ to child 1/3 to spouse2/3 to children No Prince Edward

Island Nil ½ to spouse½ to child 1/3 to spouse2/3 to children No Newfoundland &

Labrador Nil ½ to spouse½ to child 1/3 to spouse2/3 to children No

Yukon $75,000 ½ to spouse½ to child 1/3 to spouse2/3 to children Yes – minimum 1-year cohabitation required Northwest

Territories $50,000 ½ to spouse½ to child 1/3 to spouse2/3 to children No Nunavut $50,000 ½ to spouse½ to child 1/3 to spouse2/3 to children

Yes – minimum 2-year cohabitation required OR child and relationship of some permanence

* A spouse receives the first portion of the estate. The size of this share varies according to province. Others inherit only if the estate is larger than the amount of the spousal share. In some provinces and territories, a common-law relationship is treated the same as a marriage for estate purposes. In other parts of Canada, common-law relation-ships, although equal under other areas of the law, are not treated as equal to a marriage for estate purposes. Also, separated spouses may still be considered spouses for estate purposes. That may mean that a separated spouse would receive the first share of the estate. In some situations, more than one person could be considered a spouse under estate law.

** Only biological or adopted children are able to inherit under estate law. If you wish to leave any of your estate to stepchildren, you must indicate this in a will.

*** Under new legislation coming into effect in January 2012, there is an “all to the spouse” rule in the case of intestacy where a person leaves both a spouse and children of the relationship with that spouse or partner. This change covers the cells of the chart referring to spousal share, spouse and one child, and spouse and children, except if there are children of more than one relationship who survive. In that case, the spouse gets a preferential share of at least 50 per cent of the net value of the intestate estate.

Because of the constantly evolving nature of the law, please verify this information with your local MFC office or a local lawyer.

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Chapter 4

Role of an executor or trustee

Someone to carry out the terms of your will

An executor is the person who is legally authorized to carry out the terms of your will, so choosing a suitable executor is one of the most important estate planning decisions you will make.

An executor is responsible for ensuring that your estate and trust assets are well managed, debts are paid, income tax returns are filed, and estate assets are distributed according to the terms of your will. Depending on the complexity of your estate, the job might last only a few months or might continue for years following your death.

Job description of an executor

Upon your death, your executor will:

• locate your will quickly and review it to determine whether you left any directions regarding your funeral or burial arrangements. While your family may plan the funeral, the executor is legally responsible for the arrangements. It would be wise to make your wishes known to your executor as well as to your family. Some churches keep these records for their members, as do funeral homes • locate (and secure) all of your property and assets to make an inventory of the estate • settle all bills and outstanding debts and collect all debts owed to your estate • apply for insurance proceeds and other outstanding benefits and pension credits • arrange for probate of the will, if required

• ensure that a copy of the will and an inventory of assets are sent to all beneficiaries, if appropriate. Many people hire a lawyer to perform this task • sell or distribute your assets and investments in a way that is consistent with the

instructions in your will

• manage any trusts created by your will

• report to all beneficiaries on how the estate administration process is progressing • file all necessary tax returns

• distribute your estate and get releases from all your beneficiaries.

How to choose an executor

Acting as an executor is a big job. You want to be sure that the person you name to carry out this role is willing and able to do it. Many spouses name each other, their adult child or children, or a trusted friend.

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Pick an executor who is:

• completely trustworthy and capable of doing the job • willing to do the job and has the time to do it

• close to your age or, preferably, younger. As you move into your senior years, finding someone younger than you to act becomes increasingly important. A 70-year-old friend is just as likely to die before you as he is to still be living and able to act as executor at the time of your passing

• familiar with your affairs and preferably living in the same province or territory as you.

Consider making provisions in case the executor you have named is unable or unwilling to serve — or predeceases you. You may appoint:

• an alternate executor. If appointed as an alternate, the person serves only if the person of first choice cannot serve

• joint executors. If named to act jointly, the executors need to work together and sign any documents

• several people to act together or independently of each other.

If your estate is complicated, or you have difficulty finding a suitable executor, consider naming a professional, such as a lawyer, accountant, or trust company. Choose a person or a company in whom you and your family have a high level of trust and with whom you feel comfortable.

• A professional acting as an executor must meet certain legal requirements that a friend or family member may not have to.

• You may appoint the professional to work alone or as co-executor to serve alongside a family member or other person.

If you are thinking of appointing a professional, before you write your will, consult several professionals to get information about their services and fees. Various trust companies owned by banks and credit unions offer this service. Some trust companies have a minimum fee or will act only if the estate is of a certain size.

Help your executor as much as possible by preparing the person for the task ahead: • Give the executor a copy of your completed will so that he can review it and

ask questions.

• If you are giving your executor leeway in how he carries out the job, provide written instructions regarding your wishes and intentions (for the distribution of personal items, for instance) and the location of important papers.

• Include instructions regarding the guardians for minor children or other dependants.

• Include instructions for the management and use of a trust for minor children or other dependants.

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Expenses

Your estate pays all costs for settling your estate. Your executor is responsible for ensuring this happens. These costs may include fees to manage trust funds and fees associated with any legal and tax assistance the executor requires. The estate may also have to pay fees to a court for estate administration, which is also known as probate or estate administration tax.

Because of the work involved, your executor is allowed by law to receive payment for services from your estate. Although the amount paid often depends on the size of the task and the degree of professional assistance your executor hires, the maximum fee is established by provincial law. If your executor is a member of your family who is also a beneficiary, or a close friend, it is unlikely that any fee will be charged.

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Chapter 5

Role of guardians

Someone to care for your minor children and

other dependants

If you want to influence how your minor children or dependants will be cared for when you and your spouse die, you must make a will and name a guardian for them in it. The term “guardian” refers to the person or persons named to care for, in the event of the parents’ death, minor children or dependants who are mentally incapable of caring for themselves. Persons named in your will as guardians may serve immediately in that capacity upon your death (provided no one else has custody), but that appointment does need to eventually be confirmed by the court.

While the court has the final say, it will give serious consideration to the wishes you express in your will. The person(s) you recommend will likely be appointed unless the court has good reason to believe that it is not in the best interests of your minor child(ren) or dependants.

You also need to name someone in your will to act as a trustee of any assets you leave to a minor child because minors cannot take control of their inheritance until they become adults (see Appendix 1, page 70). You will want to do the same for a mentally incapacitated dependant.

Job description of a guardian and a trustee

The person you choose as a guardian must be an adult and willing to assume all the duties guardianship entails:

• ensuring that the child is looked after properly

• providing food, clothing, shelter, transportation, health care, education,

recreation, and spiritual care.

The person you choose as a trustee must be an adult and willing to assume all the duties that being a trustee entails:

• holding the assets of a minor child or mentally incapacitated adult in trust • using the inheritance for the child(ren)’s or dependant’s needs, as specified in

the will. A common example of this is for educational costs

• distributing the inheritance as specified in your will. You may direct that a child

receive an inheritance when that child reaches the age of majority. Or you may delay any distribution until, for example, age 21, 25 or even 30, or direct that the inheritance be paid in instalments.

You may appoint the executor of your estate or another person to be the trustee.

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It is a good idea to review your choice of guardians every few years.

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How to choose a guardian

Choosing a suitable guardian to care for your children or dependants is a serious decision. You are, after all, entrusting your guardian with what is of greatest value to you — your children. You want to be sure that the person you name to carry out this role is willing and able to do it. Choose someone trustworthy who:

• is both willing and able to take on the responsibility of caring for your children • has a faith, values, and lifestyle that are similar to yours

• lives near your children so as to minimize disruption in the children’s lives should they live in the home of the guardian

• has a trusting and loving relationship with your children, and is someone with whom your children would be happy to live.

You may name someone related to you to be the guardians but this is not essential. Naming guardians who meet the above criteria is more important. In your will, you may state reasons for naming specific guardians (or why you are not naming someone else), or you may simply name the people you have chosen. Choosing suitable guardians is about doing what is best for your children first and foremost, not necessarily about satisfying the wishes of other family members.

You may name alternate guardians in the event that your first choice is unable to fulfill the role.

Some people name their executors to also be guardians of their minor children. Though it is legal and may be convenient, it may remove a degree of accountability on how money is spent. As your children get older and their financial desires and requirements change, they may have greater leverage over their guardians. As well, disputes with their guardians become more complex if the guardians are also the executors of the estate. Under these circumstances, naming people other than the executors to be guardians is a good idea.

How old is old enough to inherit?

Even when they are legally considered adults, many young people are not mature enough to make

good financial choices. If you don’t specify otherwise in your will, your children will receive their entire

inheritance as soon as they reach the age of majority.

At one estate planning seminar, an MFC Stewardship Consultant was questioning the wisdom of letting children inherit as soon as they become adults. Suddenly, a young woman leapt out of her seat and agreed. She said that when her father died, she and her brother each received $60,000. Within two years, her brother had depleted his share, wrecked vehicles, ran up debts, and left a string of unpaid bills. She did little better in spending her portion, and is determined not to repeat the mistake with her children.

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Because children’s needs and people’s circumstances change over time, it is a good

idea to review your choice of guardians every few years.

• It is good to review your choice of guardians as your children get older because the guardians you name when your children are young may not be the best choice when they are older.

• It is wise to involve your children in the discussion of who would be suitable guardians.

• Be sure to check with your guardians every few years to ensure they are still willing to serve. When the people you choose to be guardians go through major life changes (marriage or remarriage, birth of children, a growing family, relocation for school or work), it is important to ask if they are still willing and able to act as guardians for your children.

Expenses

Being guardians is a relationship that could last for several years and will certainly involve extra expenses. It is a good idea to give discretion to the trustee to cover reasonable and ongoing expenses involving your minor children so your guardians do not have to bear all the costs themselves.

If the guardians will need to add on to their house or buy a larger vehicle to care for your minor children, it is recommended to grant the executor the right to use trust funds for this purpose.

A guardian’s legal responsibility may end when the children reach the age of majority, but trust funds created for the well-being of the children may last much longer.

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Chapter 6

Tax considerations in estate

planning

Making the most of your assets

You have worked hard throughout your life to increase the value of your assets, and you want to use them to secure the well-being of your family and to help charities you support. Since capital gains taxes can reduce the value of those assets at your death, it is important to know how tax laws could affect your assets. It is also important to know which financial tools you can use to reduce tax costs to your estate. Good planning may prevent an unnecessarily large tax bill.

Capital gains taxes

Capital gains tax can significantly reduce the value of your estate because Canada’s tax laws deem (assume) that your registered assets and capital assets are sold at fair market value (FMV) immediately upon your death. Registered assets include Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). Capital assets include stocks, mutual funds, and property. The deemed sale of assets can trigger a capital gain, 50 per cent of which is taxable. The estate pays the capital gains taxes. Capital gains taxes could apply, for example, to shares of a private company, shares of a public company, and real estate (other than your principal residence, normally the house you live in).

Exemptions exist for some assets. If property is owned with someone else (held in joint title) or willed to your spouse, it is not deemed to have been sold upon your death. A family farm or small business assets that are rolled over to eligible family members are not subject to capital gains taxes at your death.

Tax planning

There are a number of legal ways to reduce or defer taxes, both while you are alive and after your death. These include gifting assets to charities, setting up RRSPs and RRIFs, or using Tax-Free Savings Accounts (TFSAs).

Gifts of shares or mutual funds

If you have charitable intent, you could eliminate the capital gains tax that would be payable on publicly traded shares or mutual funds by gifting them to a charity through a will. If you decide to do this, make sure your lawyer puts special wording into your will to allow your executors to make the gift. This will enable you to leave a charitable legacy and reduce the taxes payable by your estate.

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Tax terms

Capital gain

The profit that results from investing in a capital asset, such as stocks, bonds, or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller. RRSP

A plan to hold deductions from taxable income, within certain limits, in a tax-deferred state with various investment options and a tax deferral on investment income and gains.

RRIF

A maturity option for RRSP assets, to provide a stream of income upon retirement. The plan holder invests the withdrawn RRSP funds in the RRIF, and each year must withdraw and pay income tax on a set fraction of the total assets of the fund.

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property ownership

If you and another person own property, you are considered either

Joint tenants — If you own something as a joint tenant, your interest will

normally be transferred to the surviving tenant(s) and won’t become part of your estate when you die;

or

Tenants in common —If you own something as tenants in common, the portion you own (your interest in the property) forms part of your estate at your death and is distributed to your beneficiaries according to your will.

Most couples hold their personal property as joint tenants. When couples own property as joint tenants, upon the death of one spouse, full ownership of the property is given to the surviving spouse without passing through the will. Joint bank accounts and any other assets held jointly with the right of survivorship are treated the same way.

Though joint tenancy is a popular way for assets to be transferred, having another name on the title can sometimes lead to problems. Think carefully before you put property in joint title, because you will be giving up exclusive control of the asset.

• When one spouse has business interests, couples sometimes choose to have the

family home owned by the other spouse. This protects the home if the business-owning spouse is sued or suffers business failure.

• If one co-owner files for bankruptcy, separates, divorces, or is sued, creditors can

also start a lawsuit to try to get at the other named owner’s share of the asset. It is important to obtain legal and tax advice before making joint ownership a key component of your estate plan, because transfers to joint ownership can lead to legal and tax complications.

Registered Retirement Savings plans

The use of Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) provides good opportunities to defer taxes while you are living. It may also help defer taxes upon your death if you have a spouse or minor child to roll it over to.

The contributions you make to an RRSP reduce your taxable income in the year in which you made them. The money is then allowed to grow on a tax-deferred basis until withdrawn. RRSPs must be converted to RRIFs when you turn 71 and begin paying out annual income in the year in which you turn 72.

When you die, in most cases, RRSPs and RRIFs are treated as income and any funds that remain in them become taxable income in your estate in the year you die. However, you can reduce and/or defer the tax impact by doing the following:

• If you are married and/or have minor or disabled children, you can have the

investments transferred without tax to your spouse or to a dependent minor child or adult child in certain circumstances, by means of direct beneficiary designations.

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• If you are married and wish to make a charitable gift, you can name your

spouse as the first beneficiary and your estate or charity as a secondary designation to receive part or all of the money. Any RRSP or RRIF balance that remains after the death of the surviving spouse must be included as income in that spouse’s final return. When a charity is designated as the beneficiary, the charity may issue a charitable receipt to the estate of the person who owned the fund.

• If you are single, the tax treatment of RRSPs and RRIFs means that it is usually

a good idea to name your estate or charity as the beneficiary rather than family or friends.

tax-Free Savings Accounts

Canadians 18 or older can use a Tax-Free Savings Account (TFSA) to help reduce taxes on assets that increase in value. You can contribute up to $5,000 a year into a TFSA.

Advantages

Using a TFSA as a vehicle for savings can help your money go further.

• Your contribution limit is indexed to inflation, meaning the Canadian government

will make increases in $500 incremental changes, as inflation requires.

• Money in a TFSA can grow tax-free, and no tax is payable when it is withdrawn. • Unused contribution room can be carried over to future years.

• Taking money out of a TFSA will not result in claw-back of a senior citizen’s

Old Age Security or Guaranteed Income Supplement, as is the case with other income.

• TFSAs can be used as collateral for a loan.

Money taken out of a TFSA in a given year can be replaced the next year, on top of that year’s $5,000 maximum annual contribution.

Using a TFSA can help you reduce the taxes the estate may pay.

• All Canadian provinces (except Quebec) allow a TFSA to be passed on tax-free

and outside of an estate to a surviving spouse, or to charity, provided the owner of the plan completes a beneficiary designation form.

• Donating a TFSA to charity will result in your estate receiving a charitable

receipt for the value of the gift. That receipt can be used to offset or eliminate other taxes owing.

Disadvantages

TFSAs do have some drawbacks. The most relevant one for estate planning purposes is that capital losses on investments held inside a TFSA cannot be declared for tax purposes. This benefit is available for people who hold stocks or mutual funds in a regular investment account; if they suffer a loss, they can claim that loss to offset capital gains from the sale of other stocks or mutual funds.

tFSAs

If Sue Smith contributes $2,000 to a TFSA in 2010, she has $3,000 to carry forward, and would be able to contribute up to $8,000 to her TFSA in 2011.

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Life insurance

Life insurance can be used to provide for a person or a charity without incurring tax costs to the estate. The person(s) or charity you name as beneficiary(ies) of your life insurance policies will receive the proceeds in a tax-free lump sum. This money is not considered part of your estate, and as such is not subject to probate.

Think carefully about the beneficiary designations on your life insurance policies. In some cases, it is worth naming a secondary, or backup, beneficiary who would receive the insurance payout if your primary beneficiary (often a spouse) dies before you or at the same time.

If thinking about naming an adult child as a beneficiary, consider whether it might be problematic for that child to handle the lump sum payment. It may be fine for older beneficiaries with experience in handling large sums of money; it may not be a good idea for those who have become adults without such experience.

If the proceeds of the insurance policy go into the estate, that money becomes vulnerable to the claims of creditors.

There are significant advantages to naming a beneficiary other than your estate. If you designate your estate to receive the proceeds of the insurance policy, that money is subject to the trust and distribution instructions left in your will, as well as to probate costs. If you have paid up your insurance but no longer need insurance protection, you may have an excellent opportunity to name your favourite charity(ies) to receive the proceeds of your policy. The charity will then issue a charitable receipt to your estate. In some cases, people choose to transfer ownership of an insurance policy to MFC while they are still living, in order to benefit a number of charities after they pass away. This often happens when it is more useful for a person to get a charitable receipt (or receipts) while they are living than for their estate to get a large receipt after they have passed away. If the policy is not fully paid up, MFC will also provide charitable receipts for ongoing premium payments. For more information on the tax advantages of charitable giving, see MFC’s First Things First publication.

Reasons to purchase life insurance

As part of your estate planning, you may find it useful to purchase life insurance to:

• provide income for your family in the event of your death • cover your debts

• increase the size of your estate • make a significant gift to charity

• provide funds so your farm or business can continue to operate

• leave an inheritance to heirs who will not receive an interest in your farm or business.

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Chapter 7

Records of assets and liabilities

Provide your executor with detailed information

You can save time and reduce the possibility of problems for your executor by making a detailed list of everything you own in your name alone or with some other person (assets), of what you owe (liabilities), and of the location of documents needed to settle your estate.

Record of assets

Assets include anything you own, such as savings, TFSAs, RRSPs or RRIFS, stocks, bonds, land, a house, a cottage, a car, farm property, a business or interest in a business, coins, or collectibles.

Keeping records of who owes you money, including the interest rates and terms of any loans, can be very helpful to the person looking after your affairs.

To avoid misunderstandings, it is important to have clear records about any loans, including money given to children or beneficiaries. If the loan was made to a child or beneficiary, state whether the money was:

• a loan to be repaid to the estate. Leave a record of the amount, the interest rate,

and the terms of the loan

• an early inheritance with the amount to be subtracted from the inheritance at

the time of the distribution of the estate

• not to be repaid upon your passing. If the loan is to be forgiven at death, it is

important that that is reflected in your will. This is because forgiveness of the loan at death could be interpreted as being a testamentary instrument, in which case the document needs to comply with all the requirements for a valid will. Some families have adult children write and sign letters acknowledging the loan and the terms under which it is to be repaid (or not).

Record of liabilities

Liabilities include money owed on credit cards, lines of credit, loans, promissory notes, guarantees, mortgages, reverse mortgages, and lease agreements. Keeping a list of people or institutions to which you owe money as well as the amount, interest rates, and terms of any loans can be very helpful to anyone who has to look after your affairs.

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Make a list of everything you own for your executor.

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personal Information Directory

Your executor will need a number of documents to carry out his duties, and if the executor cannot quickly find them, he may have to do detective work to locate them, which could delay the settling of the estate. To avoid this, you can assist your executor by leaving a list of all the documents and information needed to settle the estate or by leaving all the documents in one file.

To help you prepare such a list, MFC has enclosed the MFC Personal Information Directory in the front pocket of this guide. Complete the directory and give a copy to your executor and to the person who will look after your affairs if you become incapacitated. If you don’t want to give them a copy, at least advise these people (and your family) where they can find the directory.

Leave your executor and family a list of the location of the following:

• personal papers, including your will and birth certificate

• information on company benefits or private benefits plans and statements for life

insurance policies

• account statements from credit unions, trust companies, banks, or other financial

institutions

• papers related to ownership of property, including vehicle registrations, property

titles, and information on assets held outside of Canada, a farm, or other business holdings

• information related to RRSPs or RRIFs, TFSAs, annuities, GICs, term deposits,

Canada or provincial savings bonds, stock certificates, bonds, mutual fund statements, tax-sheltered investment statements, loan or mortgage agreements

• location and number of any safety deposit boxes, the names of persons who have

the right to open the box (your executor and whoever will handle your affairs if you are incapacitated should be on that list), and the location of the keys

• the names, addresses, and phone numbers of your accountant, lawyer, tax

preparer, financial planner, trust officer, insurance agent, and stockbroker in case your executor has to work with them.

If you have prearranged your funeral and your cremation or burial, list the name, contract number, and address of the funeral home and/or cemetery. Leave a receipt or a copy of the receipt to prove that payment has been made. You may also leave additional funeral wishes that are not part of your prearranged plan. (See Appendix 4, page 73, for a funeral arrangements form you can use to leave a record of your wishes.) Regularly updating your records ensures that no significant information is overlooked. Some people like the discipline of doing it at the same time as tax filing or end-of-year statements are done.

Simplify banking

If you have accounts at more than one credit union or bank, stock brokerage, or mutual fund dealer, consider putting all your accounts with the same organization or reducing the number of accounts you use. This will make your executor’s job easier.

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Chapter 8

Leaving a legacy

Making end-of-life gifts to charity

Gift planning is an important part of estate planning. Many of us are in a position to make a gift from our estate to help support the church and other charities we care about. This final act of giving is also an expression of thanks to God for the gifts God has allowed us to gather during our lifetime.

How much is enough?

Some people hesitate to make end-of-life charitable gifts because they feel an obligation to leave their whole estate to their family and/or dependants. Often, however, it is possible to provide for your family and dependants and to make an end-of-life charitable gift. In some cases, family members may not need to inherit your whole estate. For example, if your adult children are already doing well financially, you have an excellent opportunity to make a more generous gift to your favourite charity(ies).

Some people have found that asking themselves “How much is enough?” helps them to decide on the size of their end-of-life charitable gifts. To come to a decision, you could think in terms of:

• age and stage: Given the current size of your estate, what would your gift mean

for each recipient? Would it be too little, too much, or just right for them at the age they will likely be when they inherit? An inheritance could be very useful to a younger person with a mortgage, family to raise, and bills to pay. It may be less important for someone nearing retirement

• current help: Helping your loved ones financially during your lifetime may ensure

you give gifts when they are most useful.

In some cases, people don’t make charitable end-of-life gifts because they don’t know how easily it can be arranged and what help is available to them. The following sections provide a good overview of ways to make end-of-life gifts. You can ask an MFC Stewardship Consultant for more detailed information and assistance.

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Gifts to charity may be large or small

Whether you make a large or small charitable end-of-life gift, you will be helping others. You can use a variety of methods to make your gift, but typically you would designate a percentage or share of your estate to charity, rather than a specific amount. Leaving a specific dollar amount means the value of the gift will not change as the value of your estate grows or shrinks, so the size of the gift may not ultimately reflect your wishes. Options include:

• choosing to leave the bulk of your estate to charity

• considering charity as an extra child that will receive the same amount or, in

some cases, more than your biological children

• leaving a tithe (10 per cent of the estate)

• leaving a smaller portion than a tithe, owing to family obligations

• dividing the estate in half — one portion for family and the other portion for

charity — particularly if you are single

• leaving everything to charity, particularly if you have no family obligations.

Tax considerations for end-of-life charitable gifts

There are considerable tax benefits to making an end-of-life charitable gift. As discussed in Chapter 6, while there are no estate taxes in Canada, any taxes that apply during your lifetime also apply at your death.

If you leave a gift to a registered charity, your estate can use the receipts issued to reduce or eliminate taxes owing. During your lifetime, you can use charitable receipts for up to 75 per cent of your net income in a year to offset taxes owing. However, your estate can use charitable receipts for up to 100 per cent of your net income in the year of your death. Your executor may re-file your tax return for the year prior to your death if there are more charitable receipts than are required to eliminate taxes in the year you passed away.

Tax laws also allow you to minimize or eliminate taxes to your estate through in-kind donations of mutual funds or stocks, as well as direct designation of life insurance policies, RRSPs or RRIFs, or TFSAs.

Tax credits gained through charitable donations provide a valuable and responsible tax-planning tool during your lifetime and for your estate.

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Charitable bequests

Charitable gifts made through a will, also known as charitable bequests, are the most common form of end-of-life gifts. Many Christians leave charitable bequests as a testimony to their values and to make a final show of support for causes they care about. Ways to give include the following:

• cash gifts • life insurance

• Registered Retirement Savings Plan (RRSP)/Registered Retirement Income Fund (RRIF)

• Tax-Free Savings Account (TFSA)

• publicly traded stocks, mutual funds, and bonds • property.

Cash gifts

Gifts of cash are typically stated in your will in one of three ways: • tithe — 10 per cent of your estate

• another percentage of your estate • residue (remainder) of your estate.

The residual value of the estate is the amount remaining after payment of all outstanding debts, expenses, income taxes, and any specific bequests. Life insurance

If you have life insurance policies that you no longer need to protect your family or an asset, you could use them to make end-of-life gifts. If they are whole life or universal life policies, they may have a substantial cash surrender value.

If you make MFC the beneficiary, the Foundation will give you a form on which you can list the names of the registered charities you wish to benefit from this gift at your passing. You can update this form, without cost, at any time. Upon your death, MFC will distribute the gifts as you directed. Having MFC distribute the gifts is another way of reducing the costs of settling your estate.

You can make a gift of an insurance policy now by changing the beneficiary and ownership of your policy to Mennonite Foundation of Canada.

If you make a charity the beneficiary and owner of a policy, the charity will issue a charitable receipt to you when it is notified by the insurance company that it has become the beneficiary and owner of the policy. The receipt will be for the donated policy equal to the value of the policy (cash value plus dividends on deposit plus interest). You, as the donor, may have to report a portion of the policy value as ordinary income if the cash surrender value exceeds the adjusted cost base of the policy. This information will be provided to you by the insurance company.

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When you name a charity as a beneficiary of an insurance policy, the policy is not considered a part of your estate and so is not subject to probate. As a result, the proceeds will be forwarded to the charity more quickly than if the money were to go through the estate, which is another advantage of making a gift this way. Whether a charitable gift or not, a life insurance benefit is not subject to tax.

RRSps, RRIFs, and tFSAs

You can direct assets such as RRSPs, RRIFs, and TFSAs to MFC. Although your estate must still declare the registered retirement funds as income, the tax credit generated by the charitable receipt can offset any taxes that are due on the income. As is the case with life insurance policies, making a charity the beneficiary of a retirement fund means that the money will usually get to the charity much more quickly than if it flows through an estate and is not subject to probate.

publicly traded stocks, mutual funds, and bonds

You can make a gift of publicly traded shares (stocks), mutual fund units, and bonds through your estate. This can provide the estate with significant tax savings, if these investments are worth more at the time of your passing than when you purchased them. Make sure your will gives your executor the option to make donations in-kind. property

You can make a gift of property (for example, real estate or art) to a charity, either while you are alive (called a life interest) or at your passing. If you make a life interest gift of property, you are allowed to continue to use that property during your lifetime. Gifting property, particularly in a life interest arrangement, can be a complex process that should not be undertaken without carefully considering all the implications and consulting various professional advisers.

When thinking about when to make a gift of property, consider whether it would be more useful for you to use a charitable receipt now by making a gift while you are alive or for your estate to use the receipt after your passing. This depends on your tax situation.

Using insurance as a way to give

Will and Jean Stoltz found a creative way to look after their family in their estate planning, and make a significant

gift to charities they care about. “First of all, we want to provide for our children and to pass on to them what we can,” says Will, who worked as a Mennonite pastor, then as a prison chaplain prior to his retirement.

“But we also wanted to make a provision for the church and its mission,” he says. “We were able to take out

a charitable insurance policy with MFC as the owner and beneficiary, and then designate proceeds payable

at our passing to the charities we want to support.”

The insurance policy requires them to pay annual premiums, for which they receive a charitable receipt. For some people, it is more useful for their estate to receive a receipt when the policy is paid out rather than

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Family endowment

If you want your giving to continue to support causes you care about for years after your passing, consider setting up a long-term family endowment fund, also known as a family foundation. The money is invested and the annual earnings are distributed to your chosen charities each year. MFC administers foundations for individuals, families, and charities across Canada. Using MFC to establish an endowment provides all the flexibility you need to achieve your charitable goals, without the costs and annual paperwork that go along with setting up a private foundation.

Some people that set up endowments with MFC making provision for their children or grandchildren to be involved in decisions about annual distribution of endowment earnings after they are gone. In many cases, subsequent generations make gifts to these funds.

Talk to the MFC office nearest to you for more information.

MFC’s role in your gift planning

MFC Stewardship Consultants are available to work with individuals, couples, and families on their estate planning.

planning

MFC Stewardship Consultants have detailed knowledge of charitable gifting and tax matters, and can highlight tax issues where you may wish to obtain further professional advice.

An MFC Stewardship Consultant can meet with you without charge and help you plan your end-of-life charitable giving. The consultant would also prepare a memo that guides your lawyer in developing or updating your will and other estate planning documents. Distribution of charitable gifts

Mennonite Foundation of Canada can also distribute gifts to any registered Canadian charity, which includes churches, on your behalf. As mentioned earlier, you would leave instructions for MFC regarding gift distribution, using the MFC distribution form. You can use the distribution form to:

• name the registered Canadian charities that you want to receive gifts

• designate what percentage of the amount given to MFC is to go to which charity • designate whether MFC is to distribute the gift(s) all at once or over a specified

period

• indicate whether you want to give anonymously.

In your will, you would indicate the percentage (or share) of your estate that you are leaving to Mennonite Foundation of Canada, to be distributed to charities. After you die, your estate sends a cheque to MFC for the amount. The Foundation then issues a charitable receipt for the gift and distributes the amounts to the specified charities accordingly.

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Using MFC to distribute your end-of-life gifts has a number of benefits:

• The distribution form makes it easy to help multiple charities and reduces work for your executor.

• You can change the distribution form at any time, without incurring fees, as you would in redoing your will.

• Using this form enables you to make gifts anonymously, if you wish.

• If a charity you have named ceases to exist, your gift would not fail, as could happen if it were named in your will. MFC would work with your executor to find another suitable cause.

Check with an MFC Stewardship Consultant, your financial adviser, or a tax preparer to get information on which method of charitable giving would be most beneficial to you.

References

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