Estate planning and taxes
June 2, 2016
If you want to make sure that your family receives as much of your hard-earned wealth as possible, it pays to understand the ins and outs of estate planning. Do the research now and set up a tax-conscious plan to guarantee prosperity for your family in the future.
What happens to your assets?
The first step to getting ahead of estate planning is learning how your various assets will be dealt with once you pass, and what laws govern them. So, here’s what happens to your:
- RRSPs/RRIFs – If your beneficiary is your spouse or dependent child (under 18 or deemed infirm) your remaining RRSP is transferred to theirs tax-free. Otherwise, the remainder of your RRSP is rolled over into your beneficiary’s income for the year and is subject to tax.
- Principal residence – If the property is held jointly, the deceased partner’s share of the property is transferred, with no probate fee (the cost for validating each asset in a will) and tax-free, to the living partner. Otherwise, the Canada Revenue Agency will deem it sold at fair market value, and the estate must pay capital gains tax on any increased value.
- Investments – The same rule as residences apply. If the investments are jointly held with your spouse, they will be transferred to the surviving partner without additional cost. Otherwise, again, any increase in value on the assets in the portfolio will be subject to capital gains tax.
What to do next
It’s important to plan your estate to avoid costly taxes. Implement these six strategies to leave your family as much of your estate as possible, rather than leaving them additional taxes.
- Create a valid will. The most important thing you can do to ensure your family’s future is to have everything in writing. Do not make any assumptions about who would receive what, and have your will looked over by a lawyer. Create a valid will to make probate easier and less likely to incur additional costs.
- Prepay your funeral. Funerals come with many unexpected costs, not to mention the emotional hardship of making the various necessary decisions. You can take that burden off your family’s shoulders by placing the money to cover facilities, vehicles, a final resting place, and other additional costs into a trust account (such as a TFSA). Another alternative is to purchase a specialized insurance that covers funerals and final expenses.
- Name beneficiaries on insurance and registered plans. This makes them immediately transferable to that beneficiary, without additional cost. Otherwise these plans will become part of your estate, and be subject to probate fees and processing times.
- Jointly own your residence(s). To further avoid probate fees, ensure that you list whomever you wish to inherit your property as a joint tenant (and not a tenant-in-common). Joint tenants pass the ownership of properties to the surviving tenant, without the property entering the estate and probate process.
- Buy insurance. Life insurance is an important method of providing your family support, but it can also be used to pay taxes. Permanent life insurance puts money into a tax-free investment that, when paid out, will help your family cover estate taxes.
- Give gifts. Consider giving an inheritance to your loved ones now, rather than after your death, as there is no tax on cash gifts given while you are still alive. Investments or property, on the other hand, are always subject to capital gains tax.
Donating to charity can also save your heirs money. Your gift will generate a charitable donation credit that can reduce taxes in the event of your death.
Beyond these strategies, an important next step is to get professionals involved. An estate lawyer will make your will legally binding, and a financial advisor can ensure that your legacy does not come with an unnecessary tax burden. To have an expert on your side and to discuss your options, contact SafeBridge today.