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Financial planning tips

October 14, 2014

Death and taxes: Reducing your estate costs

Nothing is certain in this world except for death and taxes. Benjamin Franklin’s famous words ring especially true when it comes to estate planning.

Canada doesn’t levy an estate or inheritance tax, but income taxes can be quite significant the year you die.

“When people die, they are deemed to have sold everything they own. If their assets have increased in value, there is a capital gain,” says Derek de Gannes, Chartered Professional Accountant and Tax Partner at CW Partners LLP in Toronto. This is important to know, because capital gains are subject to tax.

How to avoid or defer capital gains taxes

If assets are passed on to a spouse, the capital gains can be deferred to a later date. Or you could opt to leave appreciated securities to a registered charity — if the securities qualify, you won’t have to pay capital gains tax on them.

“There are people who give and support charities throughout their lifetime but may forget about continuing to do so when it comes to their estate plan,” says Jasmine Sweatman, Managing Partner at Sweatman Law, an Oakville, Ont. firm that provides customized legal services in the areas of estates, trusts and powers of attorney. “Giving to charity is a powerful way to continue that legacy with the added benefit of a tax credit.”

For many Canadians, the main assets they own that can be a tax liability for their estate are their registered assets: an RRSP (Registered Retirement Savings Plan) or RRIF (Registered Retirement Income Fund). One way to help cover the tax bill can be via a life insurance policy payable to the beneficiaries.

How to reduce probate fees and the estate administration tax

Other tax-related costs that arise at death are probate fees and the estate administration tax, which is based on the value of the estate and is charged by some provinces to validate wills. One way to reduce these taxes is to designate beneficiaries for registered assets and life insurance policies, thus allowing these assets to bypass your estate and go directly to your heirs.

“The most important thing is to ensure you have a proper will drafted by a professional that accurately captures your intentions,” says Angela Casey, a lawyer at de Vries Litigation in Toronto.

Expert estate planning checklist:

  • Plan to make a plan. When it comes to estate planning, many Canadians put it off. “Don’t wait until you’re in a crisis — it’s important to plan to make an estate plan and follow through,” says Sweatman.
  • Communicate. Tell your beneficiaries about your plans for your estate and your intentions for distributing your assets. Ask the person you want to be your executor before signing him or her up for the job. “You’d be surprised how many times people don’t know what to expect,” says Casey. “If families don’t talk about this stuff in advance, it could lead to litigation.”
  • Make sure your will is up to date. An unbelievable number of Canadians still don’t have a will, says de Gannes. “Your will is a key document — without it, your estate is left in limbo,” he adds. “There are also a lot of people who have wills that may not be current or may have been created in another jurisdiction like the U.S. and aren’t valid for Canadian purposes.”
  • Consult the professionals. Seek a qualified, experienced professional to help you set out an estate plan. “A common problem I see in my practice is people failing to spend the money on a proper will and estate plan and then their heirs having to spend multiple times that on legal fees afterwards,” says Casey. “It’s an example of being penny wise and pound foolish: People don’t want to spend money on a proper plan and think they will save a few pennies by doing it themselves, but ultimately their estate incurs more legal fees when there are problems interpreting the will.” Seeking professional advice can also help you ensure your estate plan is tax effective and an accurate reflection of your intentions.Learn more about estate and financial planning services.

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