Do you know that the Government could inherit 50% of your Estate?

When a family wants to preserve the wealth they have accumulated it is essential to take steps to pay the taxes or limit the taxes that will be paid when the last of the parents passes away. When a spouse inherits assets that are in joint ownership or registered assets such as RRSP’S or RRIF’S they pass to the spouse tax free.

When assets pass from the Parents to the children or grandchildren they become fully taxable in the year of death at the highest tax rate which can be 43.7% and if Probate is also payable this could add an additional 5%.

The solution is to find a way to make up the money that is lost to taxes or limit the taxes that are paid or a combination of these strategies.

Joint last to die insurance policies are one way to replace the money that is paid out in tax. Insurance can be funded by the Parents or by the beneficiaries and can be a cost effective solution.

Establishing trusts or doing an estate freeze are additional solutions for reducing Estate taxes.

Testamentary Trusts

A testamentary trust is created in your will and can result in tax savings. A trust is taxed as a separate individual so that rather than the assets being taxed at the beneficiaries tax rate they are taxed at a lower preferred rate. The trust then pays the tax and distributes the money from the estate tax free to the beneficiaries. If the beneficiary is, for example, in a 35% tax bracket whereas the trust tax rate is 10% the result is significant tax savings.

Testamentary trusts can be used to administer assets of an estate for beneficiaries that are minors or are incapable of administering the assets themselves.

Estate Freeze

An estate freeze is an estate planning strategy undertaken to minimize the tax liability when the estate  passes to children or grandchildren. An estate freeze will restructure the beneficial ownership of certain types of assets such as real estate, or shares of a private corporation. The result of an estate freeze is that the existing equity has its value for tax purposes  fixed, and the benefit of future growth is transferred by way of shares or a trust into the hands of the named beneficiaries. An estate freeze usually limits the value of the parents estate to the value at the date the freeze is implemented

Estate freezes are done to avoid taxes, primarily capital gains taxes that apply on the transfer of assets to beneficiaries. Tax liability is determined by fair market value of property at time of death. By implementing a freeze beforehand, the value of one’s estate that is subject to tax is reduced and the value of assets received by beneficiaries is maximized.

Estate freezes also have other advantages that should be discussed with a lawyer that specializes in this area of law.

There are costs that you need to consider, involved with establishing Trusts, Estate Freezes, and insurance to pay tax liabilities, and you need to determine if this is the right solution for your situation. A financial advisor that will take your information, analyze the situation, and take the lead to direct you the other appropriate professionals is the best place to start the process of estate planning.
 
 


Comments

You can’t take it with you! Chances are high that something will be left behind. This outline addresses some of the major issues of estate planning, as well as a few lesser known items. It should lead you to seek skilled advice. Without such advice the likelihood of making the most of what you have or can have is seriously reduced. Two pages can not do justice to such an extensive subject, but this information should help lead you to the pursuit of a better estate plan for your family.

Wealth transfer

Some people, having been left an estate, feel a desire to leave a meaningful inheritance behind themselves. Others, wishing they had been left one, feel the same. Some people, would like to be able to spend their last dollar on the day they pass away, but leave a sizable estate through an untimely demise. Wealthy types can fail to leave anything, while not so wealthy ones can still leave great wealth behind through the use of life insurance.

Whatever your own thoughts are on this, this outline is intended for anyone who:

 doesn’t want to leave behind a hassle, family feud, or any detriment to family/friends;
 prefers not to leave excess money behind for the tax department;
 expects to receive or leave an inheritance that would be meaningful.

Wills

You need to have one. The easiest way to leave a hassle behind is to not leave a will. What happens to your stuff (the estate) is one thing. Leaving behind a lack of direction and perhaps even an argument or two amongst family members who disagree (forever) on what to do with the funeral or other arrangements is easily avoided for little cost.

It needs to be updated. Bring in new ideas, account for changes in family circumstances, and improve the amount of direction about funeral arrangements and/or reasons for specific (unequal) bequests. Eliminate possible doubts, and poorly worded language.


The Wills Variation Act

In B.C., Section 2 of The Wills Variation Act states:
“ Despite any law or statute to the contrary, if a testator dies leaving a will that does not, in the court's opinion, make adequate provision for the proper maintenance and support of the testator's wife, husband or children, the court may, in its discretion, in an action by or on behalf of the wife, husband or children, order that the provision that it thinks adequate, just and equitable in the circumstances be made out of the testator's estate for the wife, husband or children.”
Note: Any distributions in a will can lead a child (sometimes influenced by their spouse), or spouse to sue the estate for a ‘fair’ settlement. When a reasonable explanation (complete with details) is not provided in the will for such a distribution, the Probate judge will most likely vary the will to provide for the wholly or partially disinherited person. This process, aside from leaving behind a feuding family, costs a lot of money in legal fees.
With a well thought out plan on what to distribute through the probate process (including what to write in the will), and what to pass on outside the estate – through insurance products, named beneficiaries or joint title – this unfortunate likelihood can be avoided.

Testamentary Trusts

One less well known aspect of estate planning includes the use of trusts, including testamentary trusts. A testamentary trust is created by the will when, instead of leaving an inheritance directly to a beneficiary, the funds are left “in trust” for that person to be managed according to the terms set out in the will.

The terms can be restrictive, such as specifying exactly when and what can be received, or naming a third party as trustee (who will charge fees). Or, the terms can be quite unrestrictive and name a beneficiary as trustee for him/herself and his/her children. Depending on the language used to create the trust, a trust may last beyond the life of the initial beneficiary, and produce significant tax savings and creditor protection for the beneficiary and his/her children.

For example, with proceeds from a house, a $300,000 testamentary trust is created for a single beneficiary who earns $67,000 per year. The trust invests the money in a term deposit at 5%. If the beneficiary inherited this directly, the $15,000 income would be taxed $5619. The trust will be taxed only $3300. The $2319 annual after tax savings, will soon pay back any additional legal, accounting and probate costs incurred to arrange assets to fund the trust. (A directly inherited 5% term deposit would need to be $376,915 to produce the same after tax income).

Life Insurance

Life Insurance proceeds are paid directly to named beneficiaries, avoiding the probate process and probate fees. Life insurance (or annuities) can be used to make an unequal distribution of an estate that will not be challenged through the Wills Variation Act; to prepay final expenses or relieve capit

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Dave Lee
09/23/2011 18:56

Great advice! The hassle and expense of no will was illustrated by a call from someone a couple of days ago. Significant assets and property were left without a will. The lawyers rate is $325 per hour to get the estate settled. The party in question had spent $44,000 and still have a long way to go before this is settled.

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