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.
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.
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.