The tax and probate aspects of your estate plan can have huge implications on your heirs. It’s always wise to seek professional legal and accounting advice to ensure the best implementation of your estate plan.
In estate planning, the term ‘taxes and probate’ gets thrown around a lot. To understand the strategies behind a solid estate plan it’s important to fully grasp what these terms mean and how they are applied.
Let’s start on the bright side; some things are not taxable. RRSPs and RRIFs for example, can be rolled over to your spouse without any immediate tax implications. Proceeds from life insurance are also not taxable, so a $100,000 life insurance policy that names your daughter as the beneficiary would translate to $100,000 tax-free money that she can use as she sees fit. And finally, proceeds from the sale of your primary residence are also not taxable.
But most things do incur taxes. For instance, RRSPs and RRIFs cannot be transferred to your adult children or other beneficiaries (other than your spouse) without tax implications. So if you were planning on leaving $100,000 of your RRSPs to your adult son, your RRSP would be taxed on your final return and the after-tax amount would go to your son. (You can see from these two examples how two equal gifts of $100,000 have remarkably different tax implications for the heirs.)
Likewise, everything else in your estate—vehicles, cottages, income properties, investments or other savings, art, jewellery, and any other valuables—can all create capital gains that your estate is accountable for. The estate is responsible to pay any taxes owing before the heirs can lay claim to the rest. (See this article for more on estate planning and wills.)
Right alongside taxes are probate fees, which can be charged based on the value of the overall estate. Probate is the process of authenticating and administering the estate through the courts. Along with the fees associated with this process, probate can also significantly delay the distribution of assets. It also creates the potential for the value of the estate to become public, which many families would rather avoid.
|Issuing grant estate not exceeding $10,000||$85.60|
|Issuing grant estate exceeding $10,000 but not exceeding $25,000||$215.20|
|Issuing grant estate exceeding $25,000 but not exceeding $50,000||$358.15|
|Issuing grant estate exceeding $50,000 but not exceeding $100,000||$1,002.65|
|Issuing grant estate exceeding $100,000||$1,002.65|
|Plus for each additional $1,000 or fraction thereof in excess of $100,000||$16.95|
Although taxes and probate fees can be inevitable, there are strategies for reducing the amounts paid, and making sure that more of what you worked so hard for is enjoyed by your family or others that you care about.
One approach is to hold assets jointly with your spouse. This can reduce the size of the estate that is left behind, and decrease the taxes and probate fees. But when the surviving spouse dies, whatever assets remain will still need to be addressed.
Another approach is to give away assets earlier, so they are not in your estate when you die. This reduces the overall value of your estate, but may create tax implications at the time of transfer.
Common, but slightly more complex strategies involve the creation of trusts. There are two types of trusts that are used most often: alter ego trusts, which help to ensure privacy around the value of the estate; and testamentary trusts, which provide substantial tax and probate advantages. These are sophisticated legal structures that should only be approached with careful consideration and input from a tax professional.
Another strategy to reduce overall tax bills for the estate is to donate to charity. Normally, you pay tax on 50% of any capital gains that occur when securities such as stocks or mutual funds appreciate in value. But if you give the securities directly to a charity, you pay no capital gains. For example, if you have stocks that have increased in value from $20,000 to $100,000 over the time of your investment, you would incur a capital gain of $80,000. However, if you donated the securities directly to a charity, you avoid the capital gain, and your estate receives a tax receipt for the donated amount of $100,000.
Setting up trusts and implementing other strategies requires careful consideration of a range of legal and financial issues. Depending on the value of the estate, the effort is well worth it to ensure that as much of your money as possible is going to the people and causes you care about.