A will is the best way to protect and transfer your assets, according to Chartered Accountant Jamie Golombek, CIBC Private Wealth Management in Toronto.
That is, if you even have a will. Many Canadians don’t – and even if they do, it is often out-of-date with family circumstances.
“A will is the linchpin of any estate plan, and it can be simple or complex depending on the situation. It is a legal document that obliges your representative or executor to follow your instructions regarding how you want your estate distributed. It covers two key areas – the distribution of your property and assets, and the care or guardianship of any minor children.”
Team Approach
Professional advice is critical in designing a will.
Chartered Accountant Vinay Khosla, Tax Principal with Fuller Landau LLP in Toronto, recommends a team-based, multidisciplinary approach.
“Consult a team of professionals, including a Chartered Accountant, lawyer, insurance agent and investment adviser, who will work with you to determine how to accomplish your objectives in the most effective way.
“While your will must be legally effective and able to stand up to a court challenge if necessary, it should also be tax-effective. Too simplistic an approach can create serious tax problems, particularly if you own shares in a private corporation. The biggest mistake people make is assuming their estate will owe no tax by transferring their capital property to their spouse upon their death, on a tax-deferred basis.”
If both spouses die simultaneously, legislation stipulates that at the death of the second spouse, all capital property is deemed to be disposed of at fair market value. Even though the estate may not have cash sitting in its bank account, on the death of the second spouse, the estate must still pay taxes on any unrealized capital gains, such as shares in a company. If that company is private, the estate may face liquidity problems.
Tax Strategies
“To plan for these issues, first determine the extent of your tax liabilities on death,” continues Khosla.
“Your CA will help you review your assets and quantify both the income tax implications and probate fees payable on death. With a number to work with, you can then begin your planning.”
Depending on the size of the estate, there are various strategies, including purchasing life insurance to fund the liability. Another strategy involves implementing a corporate reorganization known as an estate freeze, which allows you to effectively freeze the capital gain at the effective date of the freeze, passing the assets’ future growth (and taxes on that growth) to the next generation.
Testamentary Trusts
Golombek explains that a will provides the unique opportunity to set up a testamentary trust – a type of trust that is created upon death, through the will.
“A testamentary trust is the number one missed opportunity in estate and tax planning. One advantage is that it protects inheritances. In many situations, the estate is left to the surviving spouse – which can compromise children’s inheritances if the surviving spouse then remarries, subsequently dies, and leaves the estate to the second spouse.
“A testamentary spousal trust avoids this outcome: some or all of the property is left to the surviving spouse in the trust; the spouse has access to the income from this property and, in some circumstances, the capital, and the assets transfer to the children upon death of the surviving spouse.”
Another advantage is that a testamentary trust as a separate taxpayer provides for post-mortem tax planning and savings.
“With a trust, the surviving spouse has full access to the assets, but any income from these assets can be taxed inside the trust, at the graduated tax rates. For example, if an income of $123,000 is left to a high-income spouse, it is taxed in the spouse’s hands at the top personal tax rate of 46.4 per cent. However, if it is taxed inside the trust and paid out as tax-free capital, the tax bill will be significantly less – about $16,000 less using 2008 rates.”
“A word to the wise,” says Khosla, “‘Don’t wind up the trust. The assets must stay in the estate to reap the full tax benefits.”
Brought to you by the Institute of Chartered Accountants of Ontario
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
