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Estate Planning

Taxes can have a considerable impact on how much of your wealth you’ll pass on. With some allowances, your assets are deemed to be disposed of upon your death, leaving accumulated capital gains to be taxed in your estate. The tax hit can be substantial. 

Wills

A will can help you to advance the efforts of a charity you believe in or ensure that your family is cared for. A will is generally the front line of a good estate plan and without one, your affairs can become unnecessarily complex for your loved ones. For example, if you die without a will, someone will have to apply to the court to be appointed as the administrator of the estate. The administrator cannot begin to act on your behalf until the court gives permission. This process can be time consuming.  Further, your assets could be distributed according to provincial legislation, which may result in a loss of control and legal fees arising from estate issues.

However, in addition to a will, a well-thought-out estate plan can involve many additional aspects. For example, joint ownership, us of trusts, and estate freezes.

Joint ownership

Holding property and bank accounts in joint tenancy is an effective way to reduce probate fees. couples hold assets this way and on death the assets pass to the survivor on title with no probate fees and little hassle.

However, holding assets jointly has drawbacks that one should be aware of. Caution should be taken when considering this method of ownership with adult children. Joint assets are not subject to the provisions of the Will. If the joint tenancy is set up with one child, that child might not share the joint asset that passed to them on death with other children named in the will, even if that was your intention. 

Further, adding a child as a joint owner results in a disposition for tax purposes, even if no money changed hands. If the asset increased in value since it was purchased, the transfer could trigger taxable capital gains. The gains may be of no consequence if it is a principal residence. 

On the other hand, if it is a gain realized from an increase in the value of property – whether publicly traded shares, recreational property, or a revenue property – the result could significantly outweigh any probate savings.

What’s more is that property in joint tenancy is available to the creditors of the other joint tenant. Their creditors may register a judgment on the property, such that you would not be able to mortgage or sell the property if needed. Lastly, funds in a joint account can be withdrawn without the joint owners permission.

Use of trusts

Some may not be familiar with the fundamentals of the trust and consider it strictly a vehicle for the super wealthy.  This is not the case.  Passing along your assets to recipients through a trust instead of a will can allow you to avoid probate, reduce taxes, and reduce the possibility of legal disputes. 

There are many different approaches to the categorization of trusts.   One common method is to distinguish an inter vivos trust (a living trust), and a testamentary trust. Living trusts are established during the life of a settlor (the individual transferring property to the trustee). A testamentary trust arises on death and is commonly set up through a will.

A trust is not a separate legal entity (such as a corporation), but rather a relationship between trustee and beneficiary. The trustee holds legal title to the trust property for the benefit of the beneficiary. The trustee manages and controls the trust property in accordance with the terms of the trust and his or her duties as trustee.

Estate freeze

You may decide to freeze the growth of some or all net assets. The family business is a common candidate. The expected future growth on the selected assets can then be passed to the benefit of other family members. This objective can defer all or portion of the income tax liability that would otherwise arise on the death of the freezor.

With a properly executed estate freeze, an income tax savings objective can be achieved.  Every individual is entitled to a Lifetime Capital Gains Exemption, which at the time of writing can shield up to $883,384 of capital gains on the sale of shares of certain types of corporations. If the key shareholder’s shares are frozen and new shareholders are introduced as part of the estate freeze, the number of capital gains exemptions on a share sale could be multiplied. The result may be very significant.

Conclusion

Comprehensive estate planning provides many important benefits during your lifetime and organizes the disposition assets in an orderly manner after your death. We can help get you started by answering questions you may have about the basic components of a comprehensive estate plan.