Estate Planning Checklist (Part 1)
October 20, 2014 – Personal Income Tax
Do you want to give some of your estate away today during your lifetime to family, friends, and/or charity? – Yes/No
Gifting Your Estate During Your Lifetime – Pros
You get to see your gift enjoyed.
Gifting money to young adult children (over the age of 18) lets them invest and pay tax on their returns at lower tax rates if they’re in a lower tax bracket than yours.
The reason I qualify the second bullet with young adult children “over 18” is because if you gift money to your minor children (18 and under) the income or dividends earned on the investment are attributed back to you and get taxed in your personal taxes (capital gains, however, do not get attributed back to you but get taxed in the minor’s personal taxes).
Gifting money to young adult children to pay down their debts is a guaranteed rate of return, which is the interest on their debt.
You could save the estate administration tax or probate on the gifted money as it’s not part of your estate (probate is the process for validating your will requested by third parties before they transfer any assets according to your wishes, and a probate fee is charged which in Ontario is $5 per $1,000 for the first $50,000, $15 per $1,000 thereafter).
Gifting Your Estate During Your Lifetime – Cons
Will you run out of money and need it back? – do the math or hire a financial planner.
There may be those that would contest the money that was gifted after you die – ensure to document the money gifted with your executor (person authorized to administer your estate after you die, who gathers up your assets, pays your debts including taxes on death, and distributes what remains of your estate to your beneficiaries).
Have You Considered the Following Ways to Distribute Your Estate after Your Death?
By having a signed will? Yes/No
If you die without a will, the law steps in to determine who gets what.
By designating beneficiaries for all your registered investments RRSP/RRIF, Tax-Free Savings Account, Pension Plan, and life insurance policy? Yes/No
There is no probate fee on the value of these assets
By owning assets jointly which pass by survivorship to the other joint owner(s) if you predecease them? Yes/No
There is no probate fee on the value of these assets.
However, be careful not to transfer part of your investment property that has grown in value solely in your name for the purposes of joint ownership to your children, as this would trigger a taxable capital gain (a deemed sale of the investment at fair market value) in your name which would be a greater tax hit than saving on the probate fees.
Therefore, jointly own any assets from the onset to prevent this
By leaving your assets by way of a trust to others who are beneficiaries of the trust? Yes/No
There is no probate fee on the value of these assets.
A trust is a private document and remains confidential, whereas a will becomes a public document if it is probated, disclosing the value of the estate as well to the public.
A “trust” is exactly that, trusting a trustee with legal ownership of the trust assets for the benefit of beneficiaries who have beneficial ownership, who may be unable to manage or control distributions of the trust assets (for example, spacing a minor’s inheritance over time rather than the minor inheriting a lump sum, providing a spouse with the means to manage a complicated estate by trusting it to experts, preserving your estate assets for your children in the event your spouse remarries, providing lifetime income for dependents with special needs).
Assets held in a trust are protected as they are owned by the trust and are not accessible to creditors of an individual.
Income taxes can be saved by splitting income with lower-income beneficiaries by allocating income of the trust to them.
There are two types of trusts: living trusts created during one’s lifetime, and testamentary trusts created at the time of one’s death through proper wording in one’s will.
You can use a trust to be eligible for means tested provincial disability support programs, as the assets are not in the disabled’s name, but owned by the trust (“Henson trust”).
By a partnership or shareholder agreement? Yes/No
Your interest in a partnership or corporation is distributed according to the agreement.
Having a secondary will to distribute your private corporation shares or partnership interest will avoid those assets from being probated, because it only takes one asset requiring probate to make all assets governed by the same will subject to probate fees.
Stay tuned….. My next newsletter will continue the Estate Planning Checklist and discuss the various uses of testamentary and living trusts. Notice to Reader Dean Constand CPA CGA publishes this newsletter for information purposes only. Feel free to distribute to colleagues and friends. Although the material has been carefully prepared, it is not a substitute for professional advice.