Some helpful tools to be used in your estate planning

In the past I spoke of putting pen to paper and start to create your desired plan. Just like an architect starts with an
empty sheet of paper, they too slowly build their whole structure — one line at a time.

In this article, I am going to talk about some of the available estate planning tools that Canadians have.

Did you know — a person is deemed to dispose of all capital property at fair market value immediately before death for income
tax purposes. The income from that property will be taxed as part of the deceased’s estate; the taxes will ultimately affect the size of the estate that is passed on to the beneficiaries. You may want to look at ways to pass property outside of the estate to reduce the value of your estate for probate fee/tax purposes.

If you own property jointly with another person, such as your spouse or common-law partner, that property will pass outside of your estate to the other owner. If it works into your plans you can try to arrange for your property to pass outside your will, and you will benefit from some savings.

Insurance and RRSP proceeds go to your designated beneficiary stated in the policy document at the time of death so they too will
pass outside of your estate, unless you make the estate your beneficiary. If your RRSP proceeds go to a person other than your spouse or common-law partner, those proceeds may be taxable.

Now-a-days, it is quite common to use multiple wills. This ensures that the will meets the legal requirements for probate in the jurisdiction where the assets are located. As another example, one will can be prepared for assets that will be probated and another will used for those assets that do not require probate. At death, only the will that deals with those assets that require probate is probated. The other assets pass free of probate fees/taxes. In some cases this can significantly reduce probate fees/taxes.

Probate Fees/Taxes by Province

Probate fees/taxes vary from province to province and are determined on the size of the estate. Currently, Quebec is the only province that does not impose a probate fee/tax.

Continuation of Your Company

As your estate and/or business grows and matures, so does its value. When you die, your business and your beneficiaries may not have enough funds on hand to pay the costs associated with your success. Paying capital gains taxes or business debt and funding buy-sell agreements are business planning priorities that increase in size as your business grows. You also want to assure customers and creditors that you have sufficient working capital to provide for the continuation of your company in the event of a death. Proper planning today w ill help you tomorrow. Hopefully your success creates a growing problem.

The following are different kinds of trusts, each of these have specific requirements that must be met. You should consult with a Chartered Accountant regarding the tax rules for setting up and maintaining all trust. Choosing the right types of trusts can assist you with obtaining your desired results.

Inter Vivos Trust
A person can pass property through a trust during his or her lifetime, which is known as an inter vivos trust, or through a trust created by a will at death. A trust that is created by a will at death is known as a testamentary trust. The tax implications vary, depending on when the property passes and to whom the property passes.

If you set up a trust for a related person under the age of 18, maybe a niece or nephew, any income from the trust will be taxed in your hands if the income is paid out of the trust, whereas the capital gains would be taxed in the hands of the beneficiary. Income left in the trust will be taxed in the trust.

Preferred Beneficiary
A trust may be entitled to a deduction in computing income, if a preferred beneficiary election is available. The beneficiary includes the amount in his or her income even though it has not been distributed by the trust. A preferred beneficiary can be the person who creates the inter vivos trust that person’s spouse/common-law partner or former spouse/common-law partner, or any of their children, grandchildren and great grandchildren and who are eligible for the tax credit for mental or physical impairment.
Inter Vivos trusts have something called The 21-Year Deemed Disposition Rule. While an inter vivos trust is treated as an individual for tax purposes, if the Income Tax Act did not set out a deemed disposition rule, a trust could continue to accumulate property for generations without being taxed. For this reason, the Income Tax Act requires a trust, except for certain commercial trusts, to be deemed to dispose of all of its capital property 21 years after its creation. Under the 21-year deemed disposition rule, the trust is taxed on the gain from its property and is deemed to re-acquire the property at fair market value, which becomes the new adjusted cost base of the trust.

Testamentary Trusts
Instead of leaving assets outright to beneficiaries, you can state in your will that you wish to have the assets administered by a trustee. This is a particularly important consideration if the beneficiaries are minors at the time of receiving their inheritance, as they might not have the experience to manage the “property”.

Testamentary trusts are taxed on accumulating income at graduated personal tax rates. After-Ego and Joint Spousal/Common-Law Partner Trusts and Self-Interest Trust The alter-ego, joint spousal/common-law partner and self-interest trusts are popular tax
planning vehicles in that you can transfer assets to these trusts on a completely tax deferred basis a “rollover”. While you must be at least 65 to establish an alter-ego or joint spousal/common-law partner trust, the self interest trust does not have an age restriction.

Alter-Ego Trust
A vital estate-planning vehicle, the alter-ego trust is one you establish for yourself. You can place all of the assets that you
accumulate in the alter-ego trust but, during your lifetime, you must be the only person entitled to receive the income and capital of the trust and the alter-ego trust is not subject to the 21-year deemed disposition rule. Rather, the taxes on the capital gains held by this trust are deferred until the date on which the taxpayer dies. After that, if the assets remain in the trust, the 21-year rule will apply every 21 years on the anniversary date of the taxpayer’s death.

Joint Partner Trust
Also an important estate planning vehicle, the joint spousal/common-law partner trust is similar to the alter-ego trust in that you must be at least 65 years of age in order to establish a joint spousal/common-law partner trust. As the creator of the trust, you can transfer property to the trust on a rollover basis. If it makes sense you can place all the assets that you accumulate in the joint spousal/ common-law partner trust but, during your lifetime, you and your spouse/common-law partner must be the only persons entitled to receive the income and capital from the trust.

A joint spousal/common-law partner trust is not subject to the 21-year rule. Capital gains on assets held by the trust are deferred until the date that the last of the taxpayer and his or her spouse/common-law partner has died. At that death, the trust can specify to whom the assets are to be transferred.

After that, if the assets remain in the trust, the 21-year rule will apply every 21 years on the anniversary date of the death of the later of the taxpayer and his or her spouse/ common-law partner.

A self-interest trust unlike the alter-ego and joint spousal/common-law partner trust, there is no requirement that the settlor/creator be at least 65 years of age. You can transfer property to the trust on a rollover basis, provided that the trust is established for your sole benefit. No other person or partnership can have any beneficial right under the trust.

It is important to note that the rollover is only permitted if no consideration is received on the transfer.

The transfer must be made by an individual to an inter vivos trust and the terms of the trust must provide that, until his or her death, this individual is the only person entitled to receive all of the income and capital of the trust. No other person can receive or otherwise obtain the use of any of the income or capital of the trust. Further, no person, other than the individual or partnership can have any absolute or contingent right as a beneficiary under the trust.

With a self-interest trust, the 21-year deemed disposition does apply every 21 years and thus the taxes on the capital gains of this trust are not deferred until such time that the settlor dies.

The rules for establishing and maintaining a trust are very complicated and specific requirements must be met. Please remember
that I am not a lawyer or an accountant. As there may be legal and taxation issues involved, it is recommended that you seek
professional advice first.

As an independent insurance broker, working primary in the corporate and professional market place we are very familiar with how to package the best products and know about all of the available coverage’s. I consider myself an educator and like to work with people that want to learn how they can plan for the future that they envision. I’d be pleased to discuss your estate, financial and tax planning with you. Everyone has different needs let me help you tailor it to yours.

Posted by Robyn Latchman