Questions and concerns surrounding Estate planning have definitely been topic of conversation as of late. While isolating, we may have had more time to check off some of that dreaded to-do list we have been putting off. Also, in these uncertain times, taking care of our loved ones is on our minds.
When I address estates with clients I have 4 objectives:
- Reduce income taxation where possible
- Reduce estate administration or probate fees (1.5% of the estate value) where possible
- Promote ease of asset transfer. Where it makes sense I try to pass assets directly to beneficiaries rather than through the estate.
- Preserve any special requests or considerations that have been made in your Will.
Death and Taxation
When considering taxation, it is important to understand the sequence of passing. On the first death of any married couple, the assets will typically transfer to the surviving spouse easily without taxes or probate through a spousal rollover. In general, on the second death, taxes and probate will need to be addressed. Any RSP/RIF balances at the time of the second death will be taxable on deceased's final return. You want to have a plan to have these balances drawn down by the time you are in your mid 80s to reduce the risk of taxation.
Should your estate need to be probated, any assets in the estate are subject to a 1.5% probate fee. One option may be to move assets, sensibly, to beneficiaries directly to help reduce probate fees. Typically tax costs in an estate situation are a much more significant concern than probate.
Non- Investment Properties
Any gain on the value of your primary residence at the time of death (again, typically the second death) is not taxable. Any properties deemed to be non primary will see gains subject to taxation as a capital gain meaning 50% of the gain will be taxable.
You can put your children (for example) on as joint owners of assets such as your home, properties and non registered investment accounts. There are complexities in doing this however, joint ownership means you may pass control to your children so if they were to be subject to creditor collection or a marital breakdown then unintended individuals could have claims to your assets even while you are still alive. I always suggest you tread carefully when adding others as joint owners. Sometimes paying some probate fees is insurance that assets are dealt with per your wishes as outlined in your Will.
Registered Plans RSP/RIFs and TFSAs
You can use contingent beneficiaries to move assets directly to the "next in line" beneficiary should both husband and wife pass. This ensures ease of asset transfer and reduces probate. This does not reduce any taxes due on RSPs as the estate is still responsible for the taxes on the RSP balance as at the date of death.
Certificate Form Investments
Certificate form investments are those investments that you hold a stock certificate for and are normally found in safety deposit boxes and sock drawers. In general, managing Certificate Form investments in an estate is a disaster. There are reams of paperwork required to have names changed and ownership transferred. I typically recommend you electronicallyregister the certificates in an investment account to make life easier for your Executor.
Assets passing through the estate or directly to children
Keep in mind that any assets passing directly to your heirs and not through the estate are not subject to your Will and any conditions/provisos the Will may have indicated. If you do have any special request in your Will i.e. assets to be held in trust or donations to charities, these will not apply to those assets that bypass the estate. As an example: if you want to give 10% of the estate to a charity but pass the bulk of assets you owned at the time of death to your other heirs via named beneficiary or joint ownership, the estate will be smaller than you may have thought and the charitable donation will also be less than you may have intended.
Where to begin...
There is a lot to consider when making a plan of this importance. Talking to your financial advisor is a crucial step. Together, through information gathering and discussions, they will help you build a Wealth Plan that ensures a more accurate understanding of estate concerns such as:
- Taxation concerns driven by your RSP balances or secondary properties
- Naming beneficiaries and contingent beneficiaries to your RSPs and TFSA accounts
- Utilizing the proper savings vehicle and maximizing registered plan contributions when it makes sense
- Moving assets from non-registered accounts to TFSA accounts where there is room to do so
- Registering, electronically, any certificate form investments