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Tax Considerations in Estate Planning

-Estate Treatment of RIFs/RRSOs
-Real Estate
-Second Properties
-Charitable Gift Funds & Effect on -Taxes
-Issues for Business Owners, & more

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Tax Considerations in Estate Planning

  1. 1. 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. 2
  2. 2. 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)
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. Dependent children RRSP/ RRIF For financially dependent children: May be taxed in childs 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
  7. 7. 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?
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. Vacation PropertyWhat happens if the property will not be soldon 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
  14. 14. 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?
  15. 15. 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)
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. Charitable Gifts Special rules also available if you gift cultural property or ecologically sensitive land
  25. 25. 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
  26. 26. 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
  27. 27. 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?
  28. 28. 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?
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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?
  34. 34. 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
  35. 35. 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
  36. 36. 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
  37. 37. 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
  38. 38. 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.
  39. 39. 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)
  40. 40. 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
  41. 41. 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
  42. 42. Questions? 43