With optimism in the air as we write this, when people are beginning to gather again, and lockdown restrictions are fading one day at a time, it is 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 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.
Source - Statistics Canada (https://www150.statcan.gc.ca/n1/pub/91-215-x/2012000/ct008-eng.htm)
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 is 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.
- Estate Planner - Putting together an effective team starts with finding an excellent Estate Planner. 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 estate planning that they do with their clients.
- Lawyer - As in most professions, there are specializations and law is no different. You don’t want a real estate lawyer (no disrespect!) to put together your Will. 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 onside with the rules as well as carries out your intentions.
- Accountant (That’s us!) - There are specific tax filing 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 may stop after your death.
While there are several other professionals, such as real estate and mortgage agents, counsellors, and more, whose contribution is invaluable, the key professionals above form the core team to help you achieve your estate planning goals.
Create a Will
A Will is simply a document that carries out your wishes as to how you want your estate (accumulated assets) to 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 the beneficiaries, arranging for tax filings for the deceased and the estate, making payment of debts, setting aside trust funds, and 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 e.g., 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 may be not! That is the purpose of the Will; where you decide how your estate 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 Tax/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, for e.g. 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.