These 3 estate planning tips will leave your heirs a substantial and well-managed estate

As part of their retirement planning, investors (including members of our Inner Circle service) sometimes ask us for estate planning tips to help them set up their finances so they can be easily managed after their death.

When you’re doing this kind of retirement planning, it’s always good to have clear arrangements in place and keep them up to date as your circumstances inevitably change. Here are three estate planning tips you can use to avoid placing undue stress on your loved ones and maximize the investments you leave to your heirs:

Estate planning tip #1: Have a financial contingency plan: This will let someone you trust take charge of your finances and investments if you can’t handle them yourself. However, it’s best to focus on finding someone you trust thoroughly, and giving that person as much latitude as possible.

The alternative—leaving fixed instructions—introduces a random element that can only hurt you. After all, fixed instructions (such as “If I get sick, convert all my holdings into T-bills”) won’t add to your wealth. But they may turn out to be wholly inappropriate, and whoever you put in charge won’t be able to do anything different.

Estate planning tip #2:  Invest based on your heirs’ timelines: If you have substantially more money than you’ll need for the rest of your life, and you plan to leave the excess to your heirs as part of your retirement planning, it makes sense to invest at least part of your legacy on their behalf. That is, invest based on their time horizon, not yours.

For instance, if your heirs are in their 40s, your retirement planning should involve holding at least part of your portfolio in a selection of investments that would suit investors in their 40s. Of course, you’d still want to invest conservatively. But you’d want to take advantage of the many years that 40-somethings have till they reach retirement age.

If your retirement planning involves holding your money in T-bills for the last few years of your life, it will generate a minimal return after taxes—you may actually lose money after accounting for taxes and inflation.

After your death, it may take months or longer to settle your estate. After that, your 40-something heirs may need time to put your legacy to work, especially if they are inexperienced as investors. They may have passed 50 by the time they get around to investing in an age-appropriate fashion. Missing out on, say, three years of even moderate returns can take a big bite out of the funds they’ll have a couple of decades later, in retirement.

Estate planning tip #3: Keep a close eye on your life-insurance forms: As part of your retirement planning, you should periodically check the form that names or changes the beneficiaries of your life-insurance policies. Often, you’ll name a primary beneficiary (generally your spouse), and a secondary beneficiary (often your children) if the primary is incapacitated or dies at the same time as you.

We once came across a case where the insurance agent mixed up the primary and secondary beneficiaries. As a result, instead of going to the bereaved spouse, the form said the eldest child was to receive the proceeds of the policy.

Happily, the eldest child recognized the mistake and immediately agreed to sign the cheque over to the surviving parent, for whom it was obviously intended. But if the child had refused to sign the cheque over, the surviving parent would have had no recourse. The insurance company would have had to follow the instructions on the form.

Of course, most children will do the right thing in a case like that. But you have nothing to gain by putting them to the test. Many families have been torn apart irrevocably for smaller amounts than the payout on the average Canadian life-insurance policy. That’s why you’ll always want to take a moment and be sure the form is correctly filled out before you sign and use our estate planning tips to ensure a smooth financial transition.

Ensuring you have money to leave

Estate planning tips only help if you have assets to leave to your heirs. Of course your initial goals should be saving for retirement. Let’s take a moment to and review your retirement saving goals.

Let’s say you’re 50 and you want to retire at 65. You have $200,000 in your RRSP, and you expect to add $15,000 in each of the next 15 years. To determine if this is enough to retire on, you need to make assumptions about investment returns and income needs.

What you can expect. Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For purposes of this retirement plan, we’ll assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.

You can run the calculation yourself using one of the many compound-return calculators available online. For example, you can find a comprehensive compound-return calculator at the Bank of Canada’s web site.

What other estate planning tips have you used to help your heirs? Have you looked into trusts? Share your experience with us.