In life, there is no free lunch. Unfortunately, this principle applies to death as well. The most immediate and obvious cost of dying is the funeral or other arrangements relating to the disposal of the deceased’s body. While this can run to many thousands of dollars, it pales by comparison with the two main financial burdens of dying: probate fees and taxation. And while these two sets of fees can only rarely be avoided entirely, they can be minimized.
Probate is the process by which a court confirms that a deceased’s will is in fact that person’s last, valid will. Probate has the practical value of providing reassurance to banks and others holding assets of the deceased that they may deal with the executor named in the probated will according to the instructions set out in the will.
Probate is not always required. For example, probate may not be required if a deceased owned all of his or her assets jointly with another person, or the deceased’s assets are held by institutions that do not require probate.
Where probate is required, probate fees are not paid if the value of the estate is below $25,000. Between $25,000 and $50,000, probate fees are $6 for every $1,000, and above $50,000, the rate is 1.4 per cent.
Having assets pass outside the will can minimize probate fees. This result can be accomplished by numerous methods, including gifting assets during one’s lifetime, holding assets in joint tenancy with another person, or creating inter vivos trusts. Great caution and thoughtful planning are required, however, to ensure that the benefit of minimizing probate is not acquired at too great a cost.
For example, transferring property into joint names may trigger capital gains taxes or require the payment of property transfer taxes that offset the savings on probate. One also surrenders control by putting assets into joint tenancy: the joint owner’s co-operation likely will be required to deal with the asset, and the actions of the joint owner may jeopardize the asset.
Taxation - A Simplified Overview
Canada has no estate tax. However, the Income Tax Act brings into income for the deceased’s final year many kinds of accrued capital gains, accrued income and recapture of capital cost allowance.
Accrued capital gains are one of the most significant issues for an estate. A capital gain is the difference between the cost of an asset to its owner when it is bought and the price at which the owner disposes of it. If the asset is sold for less than it was bought, a capital loss results.
When a person dies, the Income Tax Act deems that a deceased sold for fair market value all of their assets just before death. Of course, the asset may not actually have been sold. Nonetheless, the deceased’s estate is responsible to pay the capital gains tax that results from this deemed disposition of the asset.
In order to minimize the effect of taxes on death, an individual can plan to defer the payment of taxes for as long as possible and can try to achieve tax savings.
Common deferral techniques include:
Spousal or common-law partner rollovers: property is transferred to one’s spouse or partner during lifetime or after death in order to defer the payment of the tax arising on death until the spouse or partner dies. Eligible property such as capital property can be rolled over on death to a spouse, common-law partner, spouse trust, or common-law partner trust. While alive, an individual can only rollover capital property to this same set of individuals and trusts.
Rollover of certain kinds of farm and fishing property to a child resident in Canada: noteworthy is that a child here may, in appropriate circumstances, include grandchildren and great-grandchildren.
Estate freezes: business or investment assets are transferred to a corporation or the capital of an existing corporation is reorganized so that future growth occurs in the hands of children or grandchildren.
Tax savings can be achieved by taking advantage of certain provisions in the Income Tax Act including:
The $750,000 lifetime capital gain exemptions: for example, shares in a small business corporation owned directly by an individual may qualify for this exemption if the necessary criteria are satisfied.
Testamentary trusts: trusts created in a will are taxed at the same graduated rates as the income of an individual. Income generated in such trusts thus will be taxed at the appropriate rate and resulting capital could be distributed tax free to beneficiaries. This arrangement is particularly useful where the beneficiary is earning income from other sources outside of the trust as well.
As with plans to save probate fees, individuals should carefully assess the benefits, costs and risks of any plan to save or defer taxes arising on death. These issues must be looked at in the total context of an individual’s estate plan and not simply in isolation. Experienced, professional advice, although perhaps costly in the short-term, may be the best investment of all.
This article is informational only. For personal advice, contact your legal professional.
NOVEMBER 2010 SENIOR LIVING MAGAZINE VANCOUVER ISLAND
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