Winnipeg Free Press - PRINT EDITION

Cut down on probate fees, income tax on inheritance

A few methods to minimize the hit on beneficiaries

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AUNT Mildred wants to leave her $500,000 estate to her niece, Connie. They wonder if they can reduce the share of the estate taken by the government.

There are no estate taxes and succession duties in Canada. The government taxes inheritances through probate fees and income tax. They can reduce probate costs. It's also possible for Mildred to use a trust to help Connie save income tax.

Probate fees

After Mildred dies, Connie will learn that the financial institutions holding Mildred's accounts want proof of Connie's authority as executor. Without proof (called letters probate), they can refuse to release Mildred's money to Connie.

While costs may vary between provinces, in Saskatchewan, probating Mildred's will can cost up to two per cent of the $500,000 market value of her property. That $10,000 includes the court fee and the lawyer's fee for preparing the application.

To reduce probate costs, Mildred could use joint ownership and beneficiary designations so that most of her property bypasses her will -- especially as Connie is the only beneficiary.

What if Mildred wants to help Connie save income tax on her inheritance? Mildred could update her will to include a "testamentary trust" for Connie. For this income-splitting trust to work, Mildred should accept the two per cent cost of probate and ensure that all her property is governed by her will.

RRIF

The income tax liability arising from Mildred's $150,000 Registered Retirement Income Fund (RRIF) will be nearly $60,000. With the full $150,000 value of her RRIF reported on her final T1 tax return, Mildred's income would climb into the top tax bracket. Old Age Security will be clawed back, too.

To reduce probate costs, Mildred could designate Connie as RRIF beneficiary. Otherwise, leave "estate" as beneficiary to let the RRIF be held in trust.

The $60,000 tax on the RRIF can shrink as Mildred spends her RRIF savings before she dies.

GICs

Mildred has $90,000 in Guaranteed Investment Certificates (GICs). The principal amounts of the GICs are tax-paid dollars. Any interest accrued to the date of death is reportable on her T1 return. What if Mildred reduces probate costs by making Connie a joint co-owner of the GICs?

In that case, interest after death would become reportable by Connie. On the other hand, if the GICs stay in Mildred's name alone, the interest earned after death can be taxed (probably in the lowest bracket) on the first estate trust T3 return.

TFSA

Mildred's Tax-Free Savings Account (TFSA) has grown from her initial $5,000 deposit to $5,200 so far. None of the TFSA growth is taxable during Mildred's lifetime.

If she wants, Mildred can designate Connie as TFSA beneficiary to reduce probate costs. All provinces (except Quebec) have updated their regulations to allow residents to reduce probate costs by designating TFSA beneficiaries.

Once Mildred dies, investment income after death becomes taxable income. Who reports the income? If Mildred does not designate Connie as TFSA beneficiary, post-death earnings can be reported on Mildred's estate trust T3 tax return.

Condo

Mildred's condominium more than doubled in value to $250,000 since she acquired title. Because it's her principal residence, the capital gain is tax-exempt.

Mildred could change the condo title to joint ownership with Connie to avoid probate costs.

However, she really doesn't want to pay for the title transfer, as she might be moving to an assisted-living seniors' residence. Moreover, if she wants the sale's proceeds to be held in the testamentary trust for Connie, the $250,000 value should fall into her estate.

Terry McBride is a member of Advocis (The Financial Advisors Association of Canada). This article provides general information and should not be considered personal investment or tax-planning advice.

-- Canwest News Service

Republished from the Winnipeg Free Press print edition October 4, 2009 C7

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