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Protect your heirs from the taxman - Part 2
As mentioned in last month’s article, the first two steps in protecting your assets from the taxman are to understand where the tax burden lies and to know the tax consequences of your assets.
To minimize estate taxes, you must plan ahead. A key element of estate planning is the Will. A Will allows you to provide for an orderly distribution of your assets in accordance with your decisions in a way that minimizes the tax burden on your estate and beneficiaries. Making sure the Will arranges your affairs to minimize taxes on death forms the balance of this article.
1. Name your beneficiaries on your life insurance policies wherever possible and practical.
2. Make sure you take advantage of any spousal tax rollover that may apply. This is particularly important relating to RRSP's, which can be rolled over directly to the spouse.
3. In second marriages, in particular, consider the use of spousal trusts. Spousal trusts can be used where an individual would leave assets to their current spouse who would have use of them while they were still alive. When their spouse passes away, those assets would go to the beneficiaries who are often the children of previous marriages.
4. Family trusts still have some value. An asset placed within the trust can be sheltered for up to 21 years. However, remember that to transfer assets into a trust you first must dispose of them at fair market value.
5. Gift assets to adult children while you are alive (provided you have enough to live on).
6. Trigger tax on your investments as you go instead of deferring taxes until death. This is particularly important when individuals have large increases in value of assets and large RRSP amounts. Perhaps turning over your investments and triggering the gain over a period of years will be less expense than the tax, which would be incurred in the year of death. Likewise there are no rules to say you can’t take out more than the minimum amount out of your RRIF or de-register part of your RRSP prior to age 69.
7. Consider charitable bequests that can be left either in the will itself or as part of an ownership in insurance policies. There are a wide variety ways to give to a charity from charitable trust where you get the use of the assets while you are alive and the deduction to charity as well to giving to charity part of your RRSP, to gifting shares to a charity. Don’t forget that a charitable donation receipt can be issued for gifts in kind - perhaps that old piece of junk that grandpa gave to you is really worth lots of money to a museum.
8. Don’t forget about tax losses incurred in past years. You may have incurred a capital loss that you could not use because you had no capital gains. In the year of death these capital losses can be applied to your other income in the year of death and in the prior years.
9. Make sure you have a tax expert prepare the final deceased return. There are many deductions and special elections that can be filed in the final tax return. Make sure you get expert advice and make sure that you have a clearance certificate before all assets are distributed.
10. Plan for the succession of your business. Estate freeze - if you are an incorporated company or a business that has accumulated significant wealth you may want to crystallize the value of your shares in the company by doing an estate freeze with your children. Typically this will mean that any further growth in the company will attribute to the children, not the parents. This fixes or freezes the value of the shares owned by the parents at a set amount and the tax implications are a known amount.
11. Universal Life Products are an interesting way to save some taxes if you have already utilized your RRSP deductions because the cash surrender value of the policies accumulates tax-free. Such a fund can be borrowed against, and on death, the loan can be repaid out of the proceeds of the death benefit. To date this scheme has not been attacked by Revenue Canada.
12. Forgiveness of certain loans made to family members. You may have made a loan to your family during your lifetime.
13. Finally, if you know that your estate is going to be hit with a large tax payment at date of death, consider life insurance to replace the value of your estate deteriorated by the taxman. Permanent last to die life insurance should form a cornerstone of your financial planning. Life insurance can provide replacement income for your dependants, provide a fund for emergency expenses, pay for final expenses, assist in funding the succession for a business in a closely-held corporation, fund capital gains tax liability that arises on death and can allow you to accumulate funds on a tax-sheltered basis to supplement retirement income. Insurance proceeds received on the death of the life insured are not taxable.
Joyce Smith is president of JA Smith & Associates Inc. Certified General Accountants and Certified Financial Planners. The firm offers financial and tax planning advice for both individuals and business.
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