My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 22, 2018

Should You Simplify Your Investment Holdings for Estate Purposes as You Age?

Clients often ask me if they should sell stocks, real estate etc. for tax purposes. I typically answer back, “your decision should be an investment decision, do not let the tax tail wag the dog". However, where the question is framed as “Mark, I am starting to get my estate in order and I think it is too complex, should I sell certain assets to reduce the complexity?", my answer is often couched with “it depends”.

Before I delve into this issue, let us first take a step back. This question/issue arises in two ways:

1. The client consciously decides they need to make their estate more manageable for their spouse and/or children. The reasoning behind this decision is often they had to deal with a messy estate left by their parents, sibling or friend. In other cases, they just know their family is not as sophisticated as they are, and they want simplicity.

2. During an estate or financial planning discussion I ask my client if they were hit by a car leaving the meeting (I am very popular among my clients for this line of questioning 😊) would their family know what assets they own and where there are? Or, I just point out a complexity that makes the client step-back and consider whether they need to simplify things for their estate.

Whether it is the client or a question I asked that brings forth this issue is irrelevant. The key take-away is that when you are undertaking estate planning, simplification of your estate should be considered when practical.

Simplification of an estate at its finest is when you clean up complexity with no foregone investment opportunity cost or tax cost. Unfortunately, simplification for many people often comes with at least some investment and/or tax cost and thus, may not be practical where the tax and/or investment cost is higher than the person is willing to absorb.

No Cost Simplification


The following are examples where you can simplify your estate for your family at no cost:

1. You have four investment brokers handling your affairs. To simplify your estate, you consolidate to one or two.

2. If you have multiple corporations, you may be able to amalgamate, dissolve or consolidate without any tax consequences.

3. You open a joint account with a child (your trust implicitly) with enough money to cover a few months expenses and your funeral expenses if you died.

Simplification With an Investment or Tax Cost


In contrast to the above, there are many examples of where a decision to simply will result in a tax cost or possibly foregoing an excellent investment opportunity. For example:

1. Let’s say you were born in a foreign country and have kept investments or business structures in place back home. However, your children do not speak your mother tongue or understand the business culture and customs of that country. I have seen clients liquidate those investments to simplify their estate for their spouses/children’s benefits and bring the money back to Canada.

2. Some people have shareholdings, partnerships or joint ventures with friends or business associates. In the case of say a partnership, both parties often have no desire to keep the partnership going if one partner were to die and the other’s children step in. Thus, as they age they either sell the business or real estate earlier than they envisioned, or when a property is sold, instead of re-investing together, they go their separate ways.

3. I have also seen situations where a parent has a holding company and to avoid the estate complications of the deemed disposition of that property and the other post-mortem tax issues, they distribute the cash or assets as a taxable dividend to themselves, such that the corporation has no assets left. The parent has thus pre-paid tax, possibly years earlier than required (the tax would typically not be due until the latest death of the deceased or their spouse, if they left the holding company shares to their spouse).

Having it Both Ways


Some clients try and kill two birds with one stone. They keep their structures in place, but purchase insurance to cover any estate liability so that the family is not scrambling to sell assets to satisfy the CRA and the family keeps the more complex structure. The only real advantage here is that the simplification of the estate becomes less time sensitive, but the complexity remains.

Simplification is Not Required


In some families, the spouse and/or children are sophisticated business people and can seamlessly step into the parent’s shoes. This allows the parent to keep a complex structure in place but does not guarantee the estate will not initially be messy for estate and/or tax purposes.

Others have teams of advisors whom they expect to step in and guide the surviving spouse and/or children, so the estate complications are greatly reduced.

It Depends


So, I come full circle back to my answer in the first paragraph. Does simplification of an estate make sense? My answer is still “it depends”. Where there is no cost to simplifying, there is no question simplification should be undertaken. Where there is a tax cost or estate complexity cost, it depends on various factors; from the complexity of your estate, to the potential returns that would be forgone by simplifying, to the tax liability that will be incurred, to the sophistication of your spouse and/or children.

The only definitive advice I can provide is: always consider how complex your estate is, and consider whether you can simplify it for your family.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

2 comments:

  1. your comment about adding a child to a property is interesting. I want to do this, not for tax prevention BUT to protect my parents should someone try and trick them and sign over their new condo they are buying. Any suggestions on how to do this without me being on title and essentially giving up 50% of the capital gains for primary residence savings that they would lose.

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    1. Hi Kelly,

      You would need to speak to your real estate lawyer in conjunction with your accountant, this is a complex issue. See my blog on "sometimes you need to shake your head" from a couple weeks ago, it touches on the issue of legal and beneficial ownership. But to re-iterate, you would need to go through the facts with your lawyer and accountant to ensure any actions contemplated work legally and for tax and probate purposes, I cannot provide an answer.

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