By Margo Pfeiff
Reader’s Digest
April 2005 Issue
IN SPRING 2004, my 79-year old mother was scheduled to undergo heart-valve surgery. She was concerned that should complications arise, my father, who is legally blind and suffers memory loss, would be unable to handle the family assets. They both have wills splitting their estate between my sister and me, but when she that after their deaths their legacy would be subject to fees and taxes she took me aside at lunch one day. “Is there some way we can settle things up so our money goes to you girls and not the government?”
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, “Just as important as making a will is keeping it up to date.”
My parents are not wealthy and worked hard for their home and assets. They had become alarmed after hearing tales from the offspring of friends who had passed away – about tax bills that could have been avoided and how the government splits up estates in ways that would have outraged the deceased.
Like many people, my folks thought the estate planning was a tool only for the wealthy. In fact, it can be a relatively straightforward process for anyone who wants to keep hard-earned money out of government coffers and to pass on inheritances smoothly and quickly.
This is a growing concern as baby boomers age and the money their parents leave them becomes the biggest intergenerational transfer of wealth in history. The Canadian Wealth Management Market Report, published in 2004 by Capgemini Ernst & Young Canada, says that 1.7 million Canadians age 70 and over have combined assets of $567 billion, not including primary residences So, what do you do to make sure it falls into the right hands?
Make a will.
“Because everyone’s situation is unique, see a professional to get as much information as possible,” says Gaston Cantin, a senior will consultant with RBC Investments in Montreal. “Then write a will. That’s the most important step.” According to a 2002 Leger poll, 50 percent of Canadians do not have a will. Dying without one means dying “interstate” – permitting the government to step in and split up the estate according to provincial law. “Without a will you have no say over who your beneficiaries or executor will be. And you can’t choose a guardian for your children,” says Cantin. “You have no control at all.”
“Just as important as making a will is keeping it up to date,” says Adrian Mastracci, president of Vancouver’s KCM Wealth Management Inc. “Marrying, having kids, getting separated, getting divorced, may all null an void your present will.”
While you’re making a will, be sure to sign a power-of-attorney document naming someone you trust to make decisions regarding your care and assets should you become incapacitated. Without power of attorney, the public trustee is in charge and may make decisions at odds with what your family thinks is best for you. Power of attorney is only valid while you are alive; after death, the will takes over.
Can a do-it-yourself will bought at a stationary shop or downloaded online work? Yes, if properly executed and if your estate is simple. But it is limited when it comes to more complex matters like guardianship for you children or trusts for your dependents.
Reduce those taxes and fees.
In Canada there is officially no death tax but something similar called probate, the process by which courts certify that the deceased’s will is valid and determines the value of assets. For this, the estate must pay the courts a probate fee based on a percentage of the gross value of the estate – and the price tag can be hefty, especially in British Columbia, Ontario and Nova Scotia. Quebec has no probate on notarized wills.
Rates vary throughout Canada, but in Ontario, probate fees are $250 on the first $50,000 and 1.5 percent on the balance. For an estate valued at $625,000 that means a probate cost of $8,875. On top of probate fees there are capital gains, which can be an even bigger tax hit. But with some advance planning, there may be ways to defer or reduce capital gains. And since probate fees are based on the value of the estate, they can be diminished by placing as much property as possible outside the estate.
Name a beneficiary.
If you name your “estate” as the beneficiary on your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), those funds will both incur probate fees and be taxed as income on your death. However, if you name your spouse as beneficiary on these accounts, the money will pass directly to them and not through your estate, eliminating probate. The money will not incur income tax until the death of the second spouse.
In Quebec, only the will – and not the beneficiaries named in RRSPs or RRIFs – is followed.
Make a joint tenancy.
Everywhere except in Quebec, spouses (including common-law and same-sex partners) can register residential property in both their names – joint tenancy – to ensure the tile passes on automatically without incurring probate fees. After one spouse dies or becomes unfit to make decisions, jointly registering the family home with one or more of your children will carry on the probate-free process. But it can open the door to children being taxed on the home. “Beware of the ramifications,” warns Mastracci. “There are worse things than paying probate.”
By handing partial ownership of your home to someone else, you alone can not longer make unilateral decisions like taking a mortgage or selling. In the case of joint ownership with an offspring, your home may be exposed to your son or daughter’s creditors or their spouses in the case of divorce. And if there are other offspring not included in the joint tenancy, it’s not uncommon for squabbling to break out regarding ownership after death.
You can also set up joint tenancy with rights of survivorship of other assets such as mutual funds, stocks and bonds. The assets then pass on to the survivor without probate, but they do incur capital gains. To avoid that big tax hit all at once on death, you might want to consider them over time to spread out the taxes. RRSPs and RRIFs cannot be jointly owned.
Give assets away.
You can also avoid or reduce probate and even capital gains taxes by giving away assets while you are still alive. Sandra Foster, Toronto-bases author of You can’t Take it With You, believes it’s a good way for people to get their lives in order. “Dying is a part of living, and for some people giving things away helps them prepare for their own death,” she says. You reduce the value of your estate and at the same time live to see your family and friends enjoy the proceeds. “But be careful about giving assets away just to reduce taxes, “ she warns. “I’ve seen families give so generously to their children that their spouse was left destitute.” She adds a warning: Giving away assets with capital gains may trigger taxes, so check for repercussions first.
By donating to a registered charity you’re not only doing good by helping out the organization of your choice, but you also receive a nonrefundable tax credit to reduce your tax bill. Donations can be made while you are alive or deferred until after your death, when the credits will reduce taxes due on your final – “terminal” – tax return. Since the federal budget of 2000, anywhere but in Quebec, a registered charity can be the beneficiary of your RRSP.
The family cottage is often an important part of an estate, but many people are unaware that a change to the tax laws in 1981 no longer makes it possible for spouses to declare both their home and cottage as principal residences. That means that whether you leave the cottage to your children in your will or gift it to them while you’re alive, capital gains taxes on 50 percent of the value the property has increased since purchase will have to be paid even if the cottage is not sold.
If you want to keep the cottage in the family, consider buying insurance to cover the cost of the capital gains. Or determine whether your home or cottage has gained the most in value and designate the highest to be your primary residence.
Set up a trust.
“If you have young children,” says Foster, “you might want to set up a testamentary trust so that they’re taken care of until the age of majority.” Assets and property are placed into the trust with instructions on how they are to be managed on the minor’s behalf by the chosen trustee until a designated birthday on or past the age of majority. “They are a good idea as they can also generate income for the child, which is taxed on the child’s lower rate,” says Foster.
But there are costs in setting up and administering a trust. Trusts can also be set up for the family cottage, for charities or for tax purposes. But in the end it will be impossible to avoid paying some money to the government: In recent years probate fees have increased, personal capital-gains exemptions have been eliminated and the tax rate on trusts has been upped. That makes it all the more important to plan your estate properly.
AFTER discussions with a lawyer, my parents decided to transfer the title of their condominium to me. I then paid my sister half the appraised value of the property. I had long felt I had missed out on investing in the real estate market and was happy to hold title to the apartment, which my parents still occupy.
Settling these matters has visibly taken a weight off my parent’s shoulders. They are proud that their teenaged grandchildren will now have the opportunity to attend university and are busily involved in plans for the new house my sister is building with her half of the inheritance to replace her current tiny home.
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