Some people choose to avoid thinking about what will happen after they pass away. The result of that choice, as we've discussed before, can cause headaches and heartaches for our loved ones. We've also discussed how important the executor is in the estate, as well as how much work is required to settle an estate.

 

Before we get into too much detail, let's make some assumptions.

1) You're in good financial shape and have some investments in a few different accounts (RRSP, TFSA, non-registered), you own a good portion (or all of) your house, and you have something else of value (insurance, rental property, cottage, small business, or an amazing stamp collection). 

2) Most importantly you love the people who will inherit everything - and want to make it a little easier for them to inherit everything.

3) You are Canadian. Everything you own is in Canada. And your heirs are Canadian. Foreign citizenship and foreign assets can complicate things but we will evaluate this from a purely Canadian perspective for now.

 

How can we move things to our heirs as painlessly as possible and minimizing as much tax as possible?

 

The simplest planning approach (also the least tax efficient) is to sell everything in the estate, pay taxes, and then divide up the rest as you would like. For some clients this is the cleanest solution and the added taxation is worth the added simplicity. This triggers probate on everything, limits tax planning opportunities, and also can be very challenging if the assets are hard to sell, like a piece of real estate, or something that your heirs might like continued access to, like the family cottage. 

 

The more tax (and time) efficient approach does require some planning but can reduce probate, reduce income taxes, and will help speed up how quickly funds move to your heirs. Here are five strategies to consider:

 

1) Designate beneficiaries on your registered accounts and insurance policies - these designations bypass the will so probate does not need to be paid on these amounts. Keep in mind that taxes do need to be paid on tax-deferred accounts like an RRSP or RRIF.

2) Non-registered Accounts - consider donating positions with large capital gains. Donating positions with large capital gains in your lifetime is the most efficient way to make a charitable donation as you avoid probate, eliminate taxes on the capital gains, and receiving a charitable tax credit for the entire donation amount. You can do this during your lifetime, or direct it to be done in your estate.

3) Use insurance to cover costs. This strategy can be used for transitioning a business, rental property, or vacation property. On these transfers there could be substantial taxes owing that could require the sale of the asset if funds aren't immediately available. Using insurance to cover that extra costs helps ensure that these assets can stay within the family. 

4) Establish a trust. There are specific ways that trusts can be useful to better transfer funds to heirs and dependents, though the federal government has tightened up rules in recent years to minimize their use for purely financial reasons. If you have funds or property that you want to be used in very specific ways (ie giving multiple heirs rights to a property, or giving usage rights to the surviving partner for their lifetime after which the property transfers to a different heir), trusts can be very useful to achieve those goals. You absolutely should connect with a lawyer who specializes in these trusts, as well as your financial advisor.

5) Gifting in your lifetime. This is a strategy that we suggest very regularly to our clients who know that they have enough assets and income for their lifetime. Gifting during your lifetime means that you get to see the impact that your gifts have on heirs or charitable organizations. Whether that's helping with the purchase of a house, supporting a grandchild's education, or supporting a charity that you love. It also bypasses probate and if done regularly can act as a tax optimization strategy over time. You do want to be absolutely sure that the gift will not reduce your ability to support yourself, so planning is key.

 

If you haven't considered any of these, or know that you want to discuss taking action on some of these estate planning strategies - please give us a call.

 

Peter Galbraith - Investment Advisor, CFP

613-531-2922

peter.galbraith@cibc.com