As we write this, there is optimism in the air. People are beginning to gather again, and lockdown restrictions are fading one day at a time. At a time like this, it's hard contemplating End of Life tax planning.
However, if the pandemic has taught us anything, it is that life can take a turn on a dime, and that our elders are especially vulnerable.
Not to mention that it won’t get any easier. Our population is only getting older, and it’s time we prioritize some basic End of Life tax planning for our aging population.
Now if you combine “death” and “taxes,” you have a subject that most would likely want to avoid like a plague (or a virus!).
However, our goal today is to highlight that there are some basic steps that everyone can, and should, take — perhaps with the help of a knowledgeable professional — that will really put you ahead of the curve as far as End of Life tax planning is concerned.
Create a team
This may come off as a surprise being the first one, but you should know that End of Life tax planning is a team sport. The trauma of death can be numbing to near and dear ones, and the last thing you want to deal with at that time is the complexities around legal, accounting, and financial paperwork.
Here are a few of the professionals you may want in your corner during the Aging & End of Life Planning process:
- Estate Planner/Legacy Coordinator: Putting together an effective team starts with finding an excellent Estate Planner (or Legacy Coordinator, as they're called here at Viive). An Estate Planning professional, more than providing technical expertise, acts as an extension of your family. They need to understand your financial history, family dynamics, and future goals from the inside, while being well connected with external professionals to make your Estate Plan work. We are proud to be a Trusted Partner at Viive Planning and support the holistic Aging & End of Life Planning that they do with their clients.
- Lawyer: Many professions involve a variety of specializations, and law is no different. You don’t want a real estate lawyer (no disrespect!) to put together your Last Will & Testament. An experienced lawyer listens to your needs and how you wish to distribute your estate, and then adapts the federal and provincial laws to put together legal documentation that is on side with the rules (while also carrying out your intentions).
- Accountant (That’s us!): There are specific tax-fling requirements after the death of a taxpayer, and an experienced accounting firm can make the process smooth and less “taxing” for you and your family. More importantly, engaging good tax planning experts early on can result in significant tax savings at the time of death.
- Financial Planner/Advisor: Experienced financial planners adapt your investment portfolio risk to suit your life stage and your financial objectives. You want to work with a financial planner who wants to ensure your portfolio matches your risk profile, minimizes investment fees, and is set up for a tax efficient exit at the time of death.
- Insurance Broker: Finally, having an excellent insurance broker by your side is paramount to the financial health of your loved ones after death. To make this relationship work, you should have a detailed and current list of your assets, liabilities, and income streams so that your insurance broker can determine your family’s needs, if/when a major income stream stops after your death.
While there are several other professionals who may offer valuable contributions here (such as real estate and mortgage agents, counsellors, and more), the key professionals above form the core team to help you achieve your Estate Planning goals.
Create a Will
A Last Will & Testament is simply a document that states your wishes regarding how your estate (accumulated assets) should be distributed after all tax and legal obligations are taken care of.
In the Will, you will also appoint the Executor of your Estate, whose responsibilities include:
- Arranging the burial
- Locating copies of key legal documents (including your Last Will & Testament)
- Collecting any estate assets
- Contacting beneficiaries
- Arranging for tax filings for the deceased and the estate
- Making payment of debts
- Setting aside trust funds
- Distributing the remaining funds to the persons entitled
A person who dies without a Will is said to have died “intestate.” If this is the case, then the estate distribution is determined based on provincial laws.
For example: if a person in Ontario dies intestate leaving a spouse and one child, with an estate valued at $1 million, the provincial laws dictate that the spouse would get $200,000 plus one half of excess over $200,000 (i.e. $400,000), and the child would get the other one-half of excess over $200,000.
Now, this is something that may be perfectly fine with you — or maybe not! That is the purpose of the Will: it lets you decide how your assets should be distributed.
You may want a significant portion to go to charity, or perhaps setting up a trust fund for the education of your grandkids, and so on.
This is where it is extremely important working with an estate lawyer, who not only can put together a customized Will for you, but can also help you avoid the pitfalls of an ineffective Will.
Create joint accounts
The government of Ontario requires us to pay probate taxes and fees (also known as estate administration tax) when we die with assets in our estate.
You can use this calculator to calculate your probate tax in Ontario. This fee is generally:
- No tax for assets up to $50,000; and
- $15 on every $1,000 of assets over $50,000.
One of the ways to avoid assets going into your estate and being subject to probate tax is adding joint owners to the accounts you own. This can include bank accounts, real estate, and more. Needless to say, you would only do this with people that you completely trust, such as your kids.
Recent court cases have demonstrated the importance of documenting your intentions in writing, whether the purpose of adding a joint owner is for the beneficiary (such as a child) to be recipient of the proceeds for their own use or whether the proceeds are to be held in trust for the deceased’s estate. Again, work with an estate lawyer on this.
These are just a few suggestions to ensure that you are well planned for your future. Bottom line: tax planning is complicated and can be overwhelming. In order to ensure that your estate is well protected and well advised, ensure that you are working with professionals who are dedicated and well versed in tax planning.