tax considerations in estate planning
DESCRIPTION
-Estate Treatment of RIFs/RRSOs-Real Estate-Second Properties-Charitable Gift Funds & Effect on -Taxes -Issues for Business Owners, & moreTRANSCRIPT
The information contained herein is of a general nature and is not intended
to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there
can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one
should act on such information without appropriate professional advice
after a thorough examination of the particular situation.
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Estate Planning Update
� What happens on death
� Treatment of RRSP’s and RRIF’s
� Principal residence and vacation properties
� US property
� Charitable gifts and effect on income taxes
� Issues affecting business owners
� Probate Fees and other issues (Additional considerations will apply to US Citizens)
Taxation on death – general rules
� Deemed disposition of all assets – capital
gains and losses realized
� Capital gains on private corporation shares
realized
� Balance of RRSP’s and RRIF’s are brought into
income
General rules - exceptions
� Assets transferred to spouse/spousal trust
� If transfer to spousal trust – assets must vest
indefeasibly
� RRSP’s RRIF’s transferred to financially
dependent child
Assets transferred to spouse
� RRSP’s and RRIF’s may be transferred to a
spousal RRSP/RRIF without tax
� Capital property may be transferred to a
spouse at cost therefore avoiding the
realization of capital gains
� May realize a portion of the capital gains if
this is beneficial
Dependent children
� RRSP/ RRIF
�For financially dependent children:
� May be taxed in child's hands; or
� Used to purchase annuity to age 18
�For child dependent because of mental or
physical impairment:
� May be transferred to RRSP/ RRIF
� May be used to purchase annuity
Dependent children
� Ensure all non tax implications have been
considered:
�Who will control funds
�What may funds be used for
�Effect of funds on income of mentally/ physically
impaired child
�Would it be better to hold funds in trust?
Principal Residence
� Includes, among other things, a house,
condominium, share in a co-operative
housing corporation
� Also includes land around house (but
normally only up to ½ hectare-approx. 1.2
acres)
�Land in excess of above included in limited cases
Principal Residence
� You, your spouse or child must have
“ordinarily inhabited” the residence
�For this reason it will include a cottage or
vacation property
� Since 1982 a family unit may only claim one
principal residence per year
�Special rules if owned multiple properties pre
1982
Principal Residence
� Generally, gain on principal residence not
subject to tax
� If multiple properties, don’t need to decide
until year of sale/death
� Can’t use exemption on property you rent
Vacation Property
� Vacation property may qualify as principal
residence
� Must decide which property to claim as
principal residence
� Only 1 property per family unit may be
claimed
� Exemption claimed on yearly basis
Vacation Property
� Generally claim principal residence
exemption on property with higher gain
� Be careful – you may have claimed principal
residence exemption in prior year
� Property not eligible as principal residence
will be subject to tax on death
Vacation Property
� What happens if the property will not be sold
on your death?
�Underlying capital gain still subject to tax
�Estate will be liable for tax
�Keep receipts for any renovations/ improvements
�Consider life insurance to fund tax liability
Vacation Property
� Will your estate be properly equalized?
�One child receives vacation property
�One child receives cash
�Estate responsible for tax liability so part of cash
will be used to pay tax liability
� Is this what you want?
US Property
� Same rules as Cdn. vacation property but
with additional complexities
� If you rent your US property you will have to file
US tax returns
� If returns are not filed, you or your estate may be
subject to taxes and penalties
�US Estate tax may be an issue (this is an area in
flux-professional advice should be sought)
US Property
� New US rules for 2010 – 2012� Generally no US Estate tax liability of total estate is <
$5 million US
� US property includes, among other things, US real
estate and shares of US corporations (even if in RRSP)
� The maximum US estate tax rate is currently 35% of
the value of property
US Property
� Sale of US property could result in capital
gain
� Gain may be on both increased value and
exchange gain
� Withholding tax of 10% on gross proceeds
� Must file US tax return
Vacation Property
� Non-tax issues affecting vacation property
�How will the property be maintained
�Will the vacation property be to big a financial burden
� Do your children have similar financial means to take
care of maintenance
� Should the property be transferred during your life
�Will the children be able to share the use and
management of the vacation property
Vacation Property
� Non-tax issues (cont’d)
�Consider the value of other assets
�Consider setting aside a trust fund for
maintenance
� Is a right of first refusal more appropriate?
�Discuss alternatives and choices with children –
make sure you know what they wish
Charitable Gifts
� General rules:� The first $200 of donations for the year earns a tax
credit at a rate of approx. 24%
� Gifts in excess of $200 earn a credit at a rate of 46%
� Maximum donations you can claim in a year – 75% of
your net income
� Annual limit in year of death & prior year – 100% of
net income
Charitable Gifts
� A charitable gift made in your will is treated
as if it were made in your final year before
your death
� Any donation not claimed in the year of
death can be carried back one year
� Administratively, any donation not claimed
above can be transferred to a spouse
Charitable Gifts
� Planning opportunities:
�Name a charity as beneficiary of RRSP/RRIF
� Value of RRSP/RRIF included in income but offset by
credit for donation
� Avoid probate on value of RRSP/RRIF
Charitable Gifts
� Gift of marketable securities
�Normally – capital gain included in income in
year of death
�Gift of publically traded securities will result in no
capital gain but you will still get benefit of
charitable credit
�Will save money vs. donating cash
�Can also do this during your lifetime
Charitable Gifts
� Special rules also available if you gift cultural
property or ecologically sensitive land
Charitable Gifts
� Have you thought about making gifts during
your lifetime?
� Enjoy the tax benefits now.
� Be in a position to see the benefit received
from your gifts
� Endowments can provide for an ongoing
benefit that you can remain involved with
Issues affecting business owners
� Deemed disposition of shares of private
corporations (resulting capital gain subject to
income tax)
� Shares to spouse must vest indefeasibly
� If shares not transferred to spouse, estate
could have significant tax liability but no cash
Issues affecting business owners
� Use of available capital gains exemption
� Use of available capital gains exemption by
spouse
� What shares qualify for capital gains
exemption?
Issues affecting business owners
� Capital gains exemption
�Shares of qualified small business corp.; family
farm corp. or partnership; qualified farm property
�90% of assets used in active business
�50% of assets used in active business throughout
prior two years
�Are you structured to claim exemption?
Issues affecting business owners
� If you have time to plan and know who will
succeed you in the business:
�Consider an estate freeze
�The value of your business id frozen at today’s
value
�Future growth is passed to the next generation/
existing management group
Estate Freeze (cont’d)
� Gain on death cannot exceed today’s value
� Draw down equity during your lifetime to
fund lifestyle/retirement and reduce ultimate
capital gain
� Must always ensure there is sufficient capital
to last your lifetime
Issues affecting business owners
� Life insurance alternative� Premiums paid by company at relatively low tax rate
(premiums are not deductible)
� Insurance proceeds flow into the company tax free
� Can be paid out of the company without tax to pay for
tax liability on capital gain
� Life insurance can also fund buy/sell agreement
Consider the use of trusts
� Are you going to leave education funds for
your grandchildren?� If you leave the funds to your children to invest for your
grandchildren – the income will be taxed at their
marginal rate of tax (up to 46%)
� If you leave it in trust for the grandchildren, the tax rate
will be much lower
� Parents can be given the ability to encroach on capital for
a variety of reasons
Consider the use of trusts
� You could set up a trust for each grandchild
� Tax returns would be required for each trust
on an annual basis
� Is the extra administration worth the tax
savings?
Probate Fees
� Probate fees are charged by the courts to
grant letters probate
� Confirm deceased’s will is valid and executor
has authority to administer estate
� Amount of fees vary by Province
� Ontario - $5 per $1,000 up to $50,000
- $15 per $1,000 above $50,000
Probate fees - continued
� If assets pass outside will or will not subject
to probate, probate fees can be avoided
� Examples:
�RRSP’s/ RRIF’s passing directly to beneficiary
under terms of plan
�Named beneficiary under insurance policy
Probate fees - continued
� Examples – continued
�Assets held in joint ownership
�Will not subject to probate – e.g. second will
dealing with private company shares
� Professional advice needed when planning
to reduce probate fees – unintended
problems may arise
Probate fees - problems
� Example 1
�Estate of $400,000 consists of principal residence
worth $200,000 and RRSP worth $200,000
�1 child wants to retain house
�Will leaves house to 1 child and other child
named direct beneficiary of RRSP
Probate fees
� Result of example 1
�RRSP goes directly to second child – value
$200,000
�Estate is taxed on value of RRSP – estimated tax -
$57,000
�Only asset of estate is house – house must be
sold to pay tax and child ends up receiving
$143,000 and no house.
Probate Fees
� Example 2
� Individual has two children. One child is more
financially responsible than the other child
� In order to avoid probate, assets are put into joint
ownership with the financially responsible child
(child 2)
Probate Fees
� Example 2 – result� On death of parent – assets automatically transfer to child 2 as
a result of joint ownership
� Child two decides not to share assets with child 1
� Child 1 forced to go to court to try to enforce claim on assets
� Won’t happen with your children? – Unfortunately, there are
many examples where this is not the case
� Probate fees do not represent a large amount – plan with
caution- the cost may well exceed the savings
Consider impact of choices
� Everyone needs to have a will
� Who is responsible for tax liability on death
� How are assets being allocated
� Are beneficiaries receiving appropriate portion of
assets after all debts and taxes are paid
� Does the Will minimize any contentious issues
among family members
Questions?
�
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