If this article has caught your attention, you may be reaching that point in your life where you need to begin to plan for the distribution of your assets to the next generation. Too many Canadians assume estate planning is something for the elderly, and don’t take the time to think things out and deal with this difficult issue.

Few of us would consider age 40 as “old” but 40 is not too young to start thinking about how wealth, accumulated or accumulating, will be transferred to the next generation. With proper tax planning, assets can be transferred on a tax effective basis. In some situations, now may be the best time to start transferring wealth or future growth to the next generation, or to charities, even if retirement is still a long time away. The savings can be significant. The sooner you begin, the greater your flexibility. In addition to the distribution of your assets after you are gone, a good estate plan should also address your retirement income sources, the use of retirement savings plans, life insurance needs and your Will.

The key issues to focus on are as follows:
•    Will you have enough income for your retirement years?
•    Will your beneficiaries be in a position to handle assets responsibly?
•    If you have a family business, who will succeed you?
•    Can family members be involved now to reduce your tax bill?
•    Could you benefit from a family trust?
•    How will the income tax burden be dealt with should you suddenly pass away?

The above are just some of the tax issues that need to be addressed in conjunction with preparing an effective estate plan. Obviously, income tax matters should have a substantial impact on your plan. However, the broad issues involved are personal, can be emotionally charged, and usually require a great deal of careful thought and open discussion. It can be extremely satisfying when your estate plan comes together to meet your personal needs while enabling you and your family to minimize the amount of taxes paid.

Your estate plan should be designed, first and foremost, to direct your assets in order to accomplish your estate objectives. Minimization of tax will help maximize the assets available to meet these objectives. However you should never let tax issues alone override the goals you want to accomplish with your accumulated wealth.

A good estate plan should be prepared in conjunction with your lawyer, tax advisor, investment advisor and insurance advisor. All of these professionals play a role in your estate plan, but the most important role is played by you. You must determine your objectives of your estate plan. Ongoing discussions with your family should be undertaken to ensure that the plan that is put in place not only minimizes taxes and is structured properly from a legal perspective, but also meets your personal objectives of transferring assets to the appropriate family members, favourite charity or friends.
In order to properly implement an estate plan, it will be necessary for you to have some understanding of the tax issues arising on death and how to minimize them.

The most common “tax” that arises on death is not really a tax but a fee. These are probate fees. In Ontario, probate fees are calculated as $5 per $1,000 on the first $50,000 of assets in your estate; this increase to $15 per $1,000 of assets over the $50,000 level. While the probate fees are not significant on small estates, they can be fairly substantial on larger estates. For example, if your estate totals $1,000,000, the probate fees are $14,500.

There are a number of ways of reducing or eliminating probate fees. Some of these are as follows;

•    Preparation of multiple Wills. This will allow you to segregate those assets for which you will not need “Letters of Probate” from those for which you will need “Letters of  Probate”. Only the Will addressing assets requiring probate would then be probated, and subject to the probate fees. For example, shares of private companies could be excluded from the “probate will”.
•    Hold joint title with your beneficiary. On your death, title will transfer without the need for probate. The transfer of a property from sole ownership to joint ownership may be considered a disposition for income tax purposes, having adverse results. Income tax and legal issues should be reviewed before re-registering title.
•    Transfer of property outside your Will. As an example, the named beneficiary of your life insurance policy or RRSP receives this property outside the Will, resulting in this asset not being subject to probate. Keep in mind that your estate will still have to pay the taxes related to these assets despite the fact that the assets may have passed to someone other than your estate. Life insurance proceeds received on death are generally not subject to income taxes.
•    Transfer assets during your lifetime, but note that this will generally result in a disposition for income tax purposes. This works well with assets with no inherent gain on them (i.e.- cash).
•    Establish trusts during your lifetime. Assets transferred to a Trust do not form part of your estate and are not subject to probate. A Trust can serve many other useful tax and estate planning functions. However, the transfer of assets to a Trust generally results in the disposition of the assets for tax purposes which could trigger any previous unrealized gain. The Income Tax Act provides for Alter Ego and Joint Spousal Trusts that are specifically designed to avoid having to pay probate fees. In addition, assets can be transferred to these types of trusts tax free. There are many issues associated with the use of Trusts and a detailed discussion with your tax advisors is recommended before implementing them.

In addition to probate fees, there may be income taxes arising on death. At the time of death, an individual is deemed to dispose of their assets at fair market value. This deemed disposition triggers any taxes inherent in the property. The required disposal at fair value is subject to a number of exceptions, the most common which are as follows:
•    Property transferred to a surviving spouse is deemed disposed of at cost. This defers the tax until the death of the surviving spouse.
•    Property transferred to a “qualifying spousal trust” also transfers at cost. To qualify for such treatment, the Trust must provide that the spouse is entitled to all Trust income throughout his or her life and that no one other than the spouse may receive benefits of the Trust capital property during the spouse’s life. Utilization of a spousal trust defers the inherent tax on the assets until the death of the surviving spouse.
•    Many assets used in a farming business can also be transferred at cost, provided they are transferred to children or grandchildren. The deceased, his or her spouse or any of the children must have used the assets in a farming business to qualify for the tax free transfer. This essentially defers the tax until such time as your children sell the property.

Like many other assets, an individual is deemed to dispose of his/her RRSP on death. The full value of the amounts in the RRSP are included in the income of the deceased. There are provisions to allow your RRSP funds to transfer to a surviving spouse or financially dependent child. In the case of a child, the child must be disabled or under the age of 18 to qualify.

In their estate plan, many people consider directing some portion of their accumulated wealth to charitable purposes subsequent to their death. Under the Canadian income tax system considerable tax relief is available to Canadians who make charitable contributions. Of course, even after any tax savings, you still have less cash in your estate after the donation. As such, donations should not be made solely for income tax purposes.
One way to minimize tax and make a significant donation to charity would be to gift appreciated investments, such as stocks in public companies. If public company stocks are donated to a charity then the capital gain that would normally be applicable on the disposition of the stock is eliminated. In addition, a full tax credit is available for the donation. The current tax credit is approximately 46% of the value of the donation for donations over $200. The ultimate benefit of the combination of the donation credit and the elimination of the capital gain on the asset depends on the cost base of the asset. However, this amount can be as high as 71%. In other words, a donation of public company stock worth $100 could result in a net cost to the donor of as little as $29. This essentially means that the tax authorities are funding 71% of the donation.

Note that donations of stock can occur during your lifetime as well. If you have sufficient assets to allow you to live comfortably for the rest of your life and to satisfy your objectives with respect to passing assets to family members. Then, you may wish to consider making donations now, rather than waiting until death. This will give you the satisfaction of seeing your donation at work and can also result in better tax planning with respect to the utilization of the donation credits against other income. If this is an area that you are interested in then you should discuss it directly with your tax advisor.
The term “Family Trust” has received considerable attention from both the media and the government in the recent past. Yet the average Canadian doesn’t really understand what a Trust is, much less how they can derive income tax benefits from them. Use of trusts, whether created on your death or during your lifetime, can result in significant tax savings.
A Trust is essentially a means by which assets of one person (the “settlor”) can be transferred to one or more other persons (the “beneficiaries”), but remain under the control of a third person or group of persons (the “Trustee”). One common example, is a Trust established by deceased parents for their minor children. The settlor (the deceased parent) transfers his or her accumulated wealth to a Trust. The beneficiaries (minor children) are to benefit from this wealth, however, as minor children, they are not capable of managing the funds. As such, the parent names a Trustee to manage the funds for the children until such time as they are able to manage the funds on their own.
A Trust enables you to transfer wealth to another person without necessarily giving up control of the funds. In setting up the terms of a Trust, you have a great deal of flexibility. For example, you can name the Trustee, you can mandate that the assets be divided equally amongst your children, in different proportions or even provide your Trustee with discretion to allocate the Trust funds amongst your beneficiaries as he/she sees fit.
Establishing a Discretionary Trust would allow your Trustees to distribute assets to children in lower tax brackets. This decision can be changed every year. For example, if you had a Trust with all of your children as beneficiaries, then the income could be allocated to the children who are still in school since they probably have little or no income. This would fund school tuition and could reduce or eliminate any tax on the income received. As your children move through the life cycle, the Trustee could shift the income to other children. At some point, once all of your children are working and move into higher tax brackets, the Trust could be wound up and the capital could be distributed to them directly. This is just one use of Trusts. Their flexibility allows them to be used in many different estate planning situations that help meet tax, legal and family planning objectives.
Once you have designed an estate plan that meets your objectives, you will then need to have the plan implemented. Implementation will involve careful drafting of documentation by your legal counsel in conjunction with your other professional advisors. Once the plan has been implemented, it should be monitored on a regular basis to ensure that it continues to meet your family’s objectives. Changes to the plan can be made on a regular basis. As a minimum, most professional advisors suggest that an estate plan be reviewed every 3 years.
Do not wait until you are retired or suffering a serious illness before entering into an estate plan. The proper structuring of a plan can take many months and a great deal of thought. It would be unwise for you to go through this process at a time when you have the added burden of health related issues. Again, 40 is not too early to develop an estate plan.
For further advice or assistance with these or any other financial issues, please contact a Millards representative at (519) 759-3511.