Estate Planning Strategies

Estate Planning Strategies

Estate planning involves organizing your affairs to minimize and, where possible, defer the taxes payable on your death. Some strategies are relatively easy to implement, while others are more complex and are best undertaken with the assistance of a lawyer and tax accountant.

Some well-known estate planning strategies are as follows:

  • creating dual wills;
  • implementing an estate freeze;
  • organizing your affairs such that assets are jointly owned with your spouse or other close family member;
  • naming beneficiaries for RRSPs and insurance policies; and
  • transferring assets out of the estate.

Dual wills

Certain assets, such as personal property and shares and loans receivable in private corporations do not require probate to transfer them to your beneficiaries. Other assets, such as real estate and funds held in a financial institution, typically do require probate. The assets that do require probate can be dealt with in one will and probate fees paid only on the value of those assets. The assets not requiring probate can be dealt with in a separate will. As no probate of this separate will is required, no probate fees are payable on the assets dealt with under that will.

In Ontario, the use of dual wills to reduce probate fees is an acceptable practice and is worthwhile considering, particularly if you own shares in a private company.

Estate Freeze

An estate freeze is a series of transactions undertaken today, with the result that any future increase in the value of such assets is not taxed in the hands of the estate, but in the hands of the beneficiaries at such time as they dispose of the assets. In this way, the estate freeze saves taxes by postponing them.

For example, assume that X owns shares of Holdco, which have a total fair market value of $1,000,000. X decides this value and the value of his other assets are sufficient for his needs until he dies. Assume also that the value of Holdco will increase by $200,000 between now and the time X will die. X will pay tax of about $46,000 on the $200,000 growth, and yet he does not need it (i.e. he has enough with the current value of his Holdco shares).

Using an estate freeze X can avoid this unnecessary tax. To do so so, X exchanges his Common Shares for Special Shares in the capital of Holdco with a total redemption amount of $1,000,000. X can make this exchange without paying taxes. X’s son will then subscribe for new Common Shares of Holdco. As a result of this “freeze”, X at death will own Holdco Special Shares with a total redemption amount and fair market value of $1,000,000 (the value of his shares will not increase from now until he dies). The $200,000 of growth, which X does not need, will accrue to the Common Shares owned by the son. The gain in the son’s Common Shares will not be realized (and tax need not be paid on it) until he dies or sells the shares.

The Canada Revenue Agency has issued several rulings on estate freezes, and the maneuver is an accepted estate planning technique.

Spousal Trusts

Spousal Trusts are used for a variety of reasons, including

  • avoiding duplicate probate fees,
  • reducing taxes otherwise payable,
  • providing the deceased spouse with some control or direction of how their assets are dealt with by the surviving spouse.

Avoiding Duplicate Probate Fees. When assets are held in sole ownership and then left to a surviving spouse, probate fees are paid on the first death. Then when the surviving spouse dies, probate fees are paid again on the same asset when it is left to the children. Creating a spousal trust and transferring assets to the trust will avoid payment of probate fees twice on the same assets. Also effective for this purpose are holding assets jointly or designating the surviving spouse as beneficiary.

Reducing Taxes. Spousal Trusts create a second taxable entity, the Estate, that has an income flow that is taxed at the graduated tax rates, separate from the income of the surviving spouse. Depending upon your circumstances, this technique can save up to $8,000 to $10,000 per year. However, to determine if a Spousal Trust makes sense, the taxes paid on the two income streams must be compared to the tax which would have been paid by the surviving spouse had all the assets been left outright and tax been paid on the combined income in that spouse’s hands. Note, for this strategy to be effective the surviving spouse must receive all of the income from the Trust and no one else can take from the Trust during the spouse’s lifetime.

Control Post-Death. Spousal Trusts are often used to give the deceased spouse some additional control over the assets they have left in their Estate. Many people like the idea that the property is somewhat protected from the remarriage of the surviving spouse. If assets are left outright to the surviving spouse, they can remarry, revoking their existing will or making a new will which leaves a new spouse as primary beneficiary to the exclusion of the children. You can make provision in your will for the distribution of the monies remaining in the Trust on the death of your surviving spouse.

How can you find out more information?

Whether any of the above discussed or other estate planning tools makes sense for you will largely depend on your circumstances and the nature of your estate. The tax savings derived from the implementation of the strategies must exceed the increased legal, accounting and administration costs of implementing the strategy. As well, poor estate planning may lead to costly litigation.

If you have questions or would like to discuss your estate planning options, contact Koby Smutylo for a free consultation at 613.869.5440 or koby@lawyercorporation.ca.
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