When planning for the timely and tax-efficient disposition of an estate, there are two main approaches to take.
Whoops, apparently there are three. The third approach, taken by somewhere between 40 per cent and 50 per cent of Canadians, is to not bother with a plan and not even create a simple will. This approach has variously been called unwise, inefficient, expensive and stupid. All of those terms could apply.
In other words, do yourself and your family a favour and at least create a simple will that names an executor and outlines your wishes as to who gets your stuff. Without that, your family will have a ton of legal, investment and tax hassles to deal with, layered on top of their grief.
Now, back to the two wise approaches. One is to simplify the estate as much as possible by making use of beneficiary elections where available, and possibly joint ownership of bank and investment accounts and properties. When done with care, this is an excellent strategy.
RRSPs, RRIFs, TFSAs, life insurance policies, segregated funds (mutual funds issued by life insurance companies) and pension plans all allow you to name one or more beneficiaries, who will receive the transfer of this property directly on your death. The advantages include saving probate fees, simplifying the estate process, speeding up the payment and privacy.
The privacy aspect comes in because all estates are public documents, once provided to the court in an application for probate. Assets that pass by beneficiary election or joint ownership do not form part of the estate and are therefore private. Since they are not included in the listing of assets in the application for probate, probate fees do not apply.
Property and bank and investment accounts, including mutual funds, can be owned in joint title with right of survivorship (JTROS), which has the same advantages.
However, thought and care must be taken before using these strategies. For example, if you have two children, don't name one as the beneficiary of your RRIF and another as joint owner of your house. One asset is taxable, one is not; one is liquid and one is not. It's unlikely, in that event, both of your children will be treated equally.
Similarly, don't put all of your bank and investment accounts in the name of one child, assuming he or she will share those investments with your other children. Such a plan is fraught with peril.
Moving an account from your name into a joint name may also trigger capital gains and create other tax complications. This depends on whether or not you are actually gifting half the account, or if the new co-owner will simply be holding the other half "in trust" until you die. You have to be clear on your intentions and document them, after getting good tax advice.
Giving away assets can also reduce your estate and the resulting costs but, even more so than changing to joint ownership, this causes you to give up control and can end up leaving you short of money.
When gifting a property to a family member, always give it as an outright gift, and do not sell it to them for $1. This can create a situation of double taxation of the capital gain when they sell.
The more complicated approach to estate planning is the use of testamentary trusts. This often involves increasing the size of the estate in order to maximize the funding of these trusts.
Under the current income tax rules, trusts that are created by a person's will after they die have separate taxpayer status from the estate and from the beneficiaries of this trust. This means they could file their own tax return and benefit from the low and medium tax rate. This can sometimes save the beneficiary significant taxes each year as long as the money is invested.
However, the Department of Finance has served notice it may change the rules to only allow this special tax treatment for 36 months following the date of death. Hopefully, these rules will be finalized by year-end to allow for more definite estate planning.
David Christianson is a financial planner and adviser.
Next week, we will review the ways to potentially save tax in the first year after a person passes away. Until then, please stay healthy.