Estate Planning Strategies

Estate Planning Strategies

Reducing your estate costs

Advance planning can help cover or minimize estate costs you may not have considered.

When you die, your debts must be paid first – before any money or property you leave behind is passed on to your loved ones. There may also be funeral costs, legal fees and other administrative expenses in settling your estate. And there may be other estate costs, such as probate fees and taxes on investments, that you may not have considered. 

3 common estate costs

1. Probate fees

When you die, your executor often needs proof (requested by financial institutions, government agencies and others) that they are the person authorized to represent your estate. Probate is the process that provides court certification of this fact. There can be a cost to this – and probate fees to settle your estate can be high depending on the province you live in. In Ontario, the fees (officially called an estate administration tax) equal almost 1.5% of your estate’s value.

2. Tax on capital gains
You’re deemed to dispose of all capital property at death. Your estate must cover the tax on any capital gains.

3. Tax on tax-sheltered savings plans
Registered plans such as RRSPs and RRIFs can be transferred tax-free to your spouse’s plan. If you don’t have a spouse, these savings are fully taxable at your death.

5 ways to manage estate costs 

1. Leave a valid will
If you die without a valid will, your estate gets settled according to the laws of your province, rather than according to your personal wishes. This can be a more complicated process, with higher legal fees and the potential for costly disputes.

2. Name beneficiaries for insurance and registered plans
When you buy life insurance or open an RRSP or other registered plan account, you can name a beneficiary to receive the money when you die. This means the money bypasses the estate process and is paid directly to that person. Because it does not form part of your estate, the money is not subject to probate fees and there is no delay in your beneficiaries receiving the money.

3. Jointly own property
Holding assets – such as a home or cottage – with another person is another strategy for reducing probate fees. Joint assets pass automatically to the surviving joint owner – and are generally not considered part of your estate and subject to probate fees.

However, there can be complications to joint ownership, especially if you co-own an asset with someone other than your spouse. For example: If you transfer half-ownership of an asset to an adult child – and they have a spouse who they later separate from – the spouse could have a claim on your child’s half of the asset.

If your child has financial problems or declares bankruptcy, their ownership in the asset could be subject to claims by creditors.

If the asset has increased in value, you may have to pay tax on any capital gains when you transfer your half ownership. This is because a transfer is considered a sale for tax purposes.

You can no longer deal freely with the asset and must make joint decisions in managing or selling it.

Professional advice is essential

Joint ownership arrangements can be complicated. Get expert legal and tax advice before entering into one of these arrangements.

4. Preplan and prepay your funeral
Preplanning and prepaying your funeral doesn’t necessarily save you money, but it does remove a key expense that your family or estate must cover upon your death. When you prepay, the money goes into a trust account or insurance fund until your funeral.

You gain certainty over costs because you choose the type of funeral you want in advance. And your family is saved the difficult job of making decisions during a time of grief.

5. Buy permanent life insurance

Life insurance proceeds can be paid to your estate to cover estate costs or left directly to a beneficiary to provide additional amounts to a particular person. The proceeds are always paid tax-free.

Consider a permanent insurance policy for estate planning purposes. Permanent insurance covers you for life, no matter how long you might live. Term insurance does not.

Probate fees and life insurance

When you name a beneficiary for your insurance proceeds, the money is paid directly to your beneficiary. It does not form part of your estate and is not subject to probate fees. You can also use insurance to cover estate costs. To do this, name your estate as the beneficiary. Your estate will pay probate fees on the insurance proceeds, but it gives your estate the cash to pay debts, taxes or other obligations. This can avoid the sale of estate assets – such as a home or cottage – that beneficiaries may want to keep in the family.

Life insurance can help cover estate costs

Taking out a life insurance policy can help cover the cost of capital gains taxes. Read Jane’s story to find out how.

Using trusts in estate planning

You can establish a trust that takes effect during your lifetime or upon your death. Either way, trusts can be used to accomplish a number of estate planning goals. ?

While trust strategies can be complex, the concept of a trust is relatively straightforward. A trust is created when you transfer ownership of your assets to a trustee (either an individual or a trust company) with instructions for them to use those assets for the benefit of a beneficiary.

2 main types of trust

1. Testamentary trust
A testamentary trust is created in your will and takes effect upon your death. The assets relating to a testamentary trust form part of your estate, so they are subject to any estate fees or taxes that apply. The trust can be changed at any time before your death by simply having a new will prepared.

2. Living trust
When you establish a living trust (also known as an inter vivos trust), property ownership is passed immediately to your beneficiaries. You can add more property to the trust over time. Because the transfer of ownership is during your lifetime, the trust assets do not form part of your estate and are not subject to probate.

The decision on whether to set up a living trust or a testamentary trust depends on many factors, including your need for the assets during your lifetime. A lawyer or other professional adviser can advise you on the best strategy for your specific estate planning needs and goals.

7 common uses for trusts

Whether it’s best to establish a trust during your lifetime or upon your death will depend on the intended use and your personal situation.

1. You have children from a previous marriage
If you remarry, a trust can provide support for your spouse during their lifetime, while ensuring that your children from a previous marriage eventually inherit any remaining assets.

2. Your spouse lacks financial expertise
If your spouse needs help with money management after you die, a testamentary trust allows a qualified trustee to manage the trust assets on behalf of your spouse.

3. Your spouse or child is disabled
A trust can be used to ensure a disabled spouse or child receives an appropriate level of care and has sufficient assets to maintain this care after you die.

4. You want to provide a gift to minors
You can use a trust to provide income to minor beneficiaries (for example, children or grandchildren) in their younger years and to pay out the capital when they reach a specified age.

5. You want income taxed at a lower rate
Both types of trusts offer potential tax benefits, depending on the situation. Income earned in a living trust is taxed at the highest marginal tax rate, but any trust income that is distributed to adult beneficiaries is taxed in their hands. So if your beneficiaries are in a lower tax bracket, the investment income can be taxed at their lower rate.

Income earned in a testamentary trust is taxed at the same graduated marginal rates that apply to individuals. So if the trust beneficiaries have a high marginal tax rate, the income can be taxed in the trust at the trust’s lower rate, then paid out to the beneficiaries after this tax is paid by the trust.

6. You want to provide a future gift to charity
You can use a trust to provide trust income to your beneficiaries for their lifetime. Upon their death, the remaining money in the trust is donated to the charity you’ve specified.

7. You want to bypass probate
With a living trust (but not a testamentary trust), you bypass probate for any assets held in the trust, and gain the certainty of knowing that assets are transferred and distributed as you intended. This also offers greater privacy for trust assets, as probate is a public process and anyone can access these records.

Get professional advice in setting up a trust
Trusts are sophisticated arrangements that can involve a number of tax and estate planning issues. A trust must be properly structured to achieve your estate planning goals. Get professional advice before taking action.

Estate planning if you own a business

Get expert help for estate planning when a business is involved, as the issues can be complex. ?

If you are a business owner, your estate plan should cover both your personal and business assets. Estate planning for business owners is more complicated because it needs to address issues, such as:

  • larger and more complex estates,
  • business succession, and
  • complicated tax issues.

7 estate questions for business owners

  • Do you have a buy-sell agreement with any co-owners of your business?
  • Is the buy-sell agreement funded by life insurance?
  • Do you have an emergency plan if you are incapacitated or die before transferring your ownership interest?
  • Have you appointed a successor or established a process for selecting a successor for your business?
  • If you are leaving the business to one family member, have you made arrangements to leave other family members assets of equal value?
  • If your business is a qualified small business corporation, have you taken steps to take advantage of your $800,000 lifetime capital gains exemption on your shares of the business?
  • Have you taken other steps to minimize the potential tax liability related to your business that your heirs or estate may face upon your death?
  • If you answered “no” to any of these questions, you may need to address a potential estate planning issue.?

Professional advice is essential

There are many ways to address estate and succession plan issues involving a business – and the strategies are complex. Get professional advice from your lawyer, accountant or other business adviser before taking any action.

Planning example: estate freeze

Your estate may be saddled with a large capital gains tax bill if your business has grown in value over the years. This could leave your family and estate with a potentially large financial burden.

An estate freeze – where the value of your business interests is frozen as of a certain date – is a common strategy to address this issue. There are many ways to do an estate freeze, but it often work as follows:

  • Business shares are restructured so that the shares with future growth potential are transferred to someone else, typically your children. This means that the future growth is taxed in their hands, usually far in the future.
  • You receive a new class of shares that allows you to maintain control of the business. However, the share value is frozen so that your estate is only responsible for capital gains accrued to the transfer date – and not any future gains.
  • By freezing the tax liability now, your estate won’t face a potentially much higher tax liability in the future after your death. Any subsequent growth becomes part of the estate of the new owners.