Estate Taxes Minimizing and Maximizing Techniques

To ease the income taxes on your estate and protect your heirs, you must plan ahead and have a will, which ensures that your wishes will be carried out.

We have summarized a checklist of other financial issues to consider as you plan for your heirs:

  • Life Insurance
    Name beneficiaries on your life insurance policies wherever possible and practical.
  • Spousal Rollovers
    These are particularly important to have with Registered Retirement Savings Plans (RRSP) and Registered Retirement Income Funds (RRIF).  Without proper planning, nearly half of the value of your registered assets in your estate will go to taxes.  With a rollover, those assets pass tax-free to the surviving spouse or common-law partner.  On the death of that spouse, Canada Revenue Agency (CRA) will consider the entire value of the RRSP or RRIF to be taxable income.
  • Spousal Trusts
    These trusts, which fall under the category of testamentary trusts and work extremely well in second marriages.  The trust lets you leave assets to your current spouse or partner.  When that person dies, the assets can then pass on to beneficiaries who may be the children of a previous marriage.
  • Family Trusts
    An asset placed within the trust can be sheltered for as long as 21 years.  However, to transfer assets into a trust you must first dispose of them at fair market value.
  • Business Interests
    It is very important to plan for the succession of your business.  For example, if you own an incorporated company or a business that has accumulated significant wealth, arranging an estate freeze with your children will mean that any further growth in the company will be attributed to them.  This freezes the value of the shares owned by the parents so the income tax implications are known in advance.
  • Gifts
    You can gift assets to adult children while you’re alive tax free, providing you have sufficient capital to live on.
  • Charitable Gifts
    Charitable bequests can be outlined in a will or be a part of your insurance policies.  There are several ways to continue benefiting from the use of the assets while receiving a charitable deduction.  For example, you could purchase an annuity from a charity, which will provide you with fixed annual payments for the rest of your life.  You should also review charitable insured annuities.
  • Income Taxes
    Instead of deferring income taxes until death, it may be advantageous to trigger them on your investments, particularly if you have a large gain in asset values and large RRSP amounts.  Cashing in your investments and triggering the gain over several years could result in substantial income tax savings.  You can also withdraw more than the minimum from your RRIF or de-register part of your RRSP before you reach the age of 71.
  • Universal Life Insurance Products
    If you already used your RRSP deduction, these products generally save income taxes due to the cash surrender value that accumulates tax-free.  You can also borrow against the funds and the loan can be repaid out of the death benefit.
  • Asset Transfers
    During your lifetime, it may be advantageous to transfer assets to beneficiaries, but you should keep in mind your marginal income tax rate and the tax costs of transferring these assets.
  • Tax Losses
    You may have incurred capital losses in previous years that you couldn’t use because you had no capital gains.  These losses can be applied to your other income in the year of death and in the years prior to death.  Any post-death decreases in the value of an RRSP or RRIF can be carried back and deducted against the year of death income inclusion.

In addition, if you know your estate is going to be incurring large levies, life insurance can replace the amount of money that income taxes erode.  Permanent “last to die” life insurance should form a cornerstone of your financial planning.  It can provide income for your dependants and a fund for emergency expenses. It can also pay for final costs, help finance business successions, pay capital gains taxes and let you accumulate tax-sheltered funds to supplement retirement income. Insurance proceeds are generally not taxable.

Also, make sure you obtain expert advice and have an income tax expert prepare a deceased person’s final return.  There are many deductions and special elections that can be filed with the return.  Be sure you obtain a clearance certificate from Canada Revenue Agency before all assets are distributed.

Executor Powers

Your will should grant executors and trustees broad authority to make or join in any election, designation, or allocation under tax law. The following clauses should also be considered.

  1. forgiveness of certain loans made to family members;
  2. discretionary power permitting trustees to determine which assets form the trust property of a spousal trust;
  3. A reminder to your executors that if you have not made your maximum RRSP contribution, your estate should make one to your spouse’s RRSP before the deadline.

Conclusion

If you have any questions regarding the above or any other tax issues, please contact Joseph A. Truscott at 905 528-0234 x. 224 or e-mail Joe at: joetruscott@josephtruscott.com.