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 BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 19, 2020

Probate fees: These two ways to avoid it also bring pitfalls

Finances are the last item on people’s minds when a loved one dies. Between grieving for the loss of a family member and caring for other members of the family, people worry more about feelings than finances.

Eventually family finances do kick in, primarily in the form of the deceased’s wishes for their assets. Taxes play a large role in the estate, but less known are the probate fees assessed by the courts as part of the estate probate.

This week Jeffrey Smith explains what probate fees are and why two strategies to avoid them are more complicated than they first appear. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.

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By Jeffrey Smith

Probate fees are the estate administration fee charged by the courts to administer probate—which is the process to confirm that the will of the deceased is valid. If a will isn’t validated by the courts, third-party interests on assets such as banks or land titles will not transfer ownership to the estate. Any assets that transfer through the will to the deceased’s estate will be probated. If the will is not probated, there will be little success with transferring assets of the deceased to the beneficiaries of the estate, such as bank accounts, real estate, and investments.

Each province assesses its own probate rates. When looking at provinces where probate is more expensive, B.C., Ontario and Nova Scotia have rates ranging from 1.4% to 1.65% on estate assets exceeding a minimum - $50,000 in B.C. and Ontario, and $100,000 in Nova Scotia.

Let’s look at B.C. as an example. Someone with an estate worth $2 million would be subject to probate totaling $27,450: no fee for the first $25,000, then $150 for the next $25,000, followed by $1400 per additional $100,000.

As probate fees are significant, people try to plan appropriately to reduce it where possible. They or their estate may be subject to significant taxes on their death, before paying probate fees. However, some of these strategies create additional challenges.

Let’s examine a couple of the strategies used to avoid probate fees and the pitfalls that sometimes arise as a result. As you learn about these strategies, consider whether the benefits outweigh the costs for your estate.

Making a child joint owner of your home

People often wonder whether they should add their child to the title of their home. The thought is to allow the home to pass directly to the child, and not form part of the estate for probate. With properties in Canada having potentially very significant value, it becomes an appealing option to save on probate. However, there are potential disadvantages of making your child a joint owner of your home:

  • May allow your child to borrow against or use the equity in the home as collateral for a loan without your consent
  • Opens the value of the home to creditors of your children
  • May form part of family property for division if your child goes through a separation
  • Could potentially lose principal residence exemption on the portion of your home if your child owns a home themselves. This would create a future taxable event for your child, or even a loss of the exemption for the parents if the child wants to claim another home as a principal residence.

A possible alternative to transferring part of your home to a child is to place your home in a trust. This is complicated and should be discussed with your tax and legal advisors, but where structured correctly, the trust ownership may avoid probate on the home entirely. Alter ego and joint partner trusts will typically work to prevent probate fees and allow for the principal residence exemption. Again, this is complex and should be reviewed with your professionals in light of your provincial rules as it may not work in each province. 

Naming direct beneficiaries of your RRSPs or RRIFs

By naming direct beneficiaries of your registered accounts, you allow the value to bypass your will and avoid probate.

While naming a direct beneficiary avoids probate fees, the estate is still subject to tax (unless you have named your spouse as the beneficiary of your RRSP/RRIF, in which case, the transfer should be tax-free). The full value of your RRSP or RRIF at the time of death is taxable on the deceased’s terminal return. For example, if the RRIF had $500,000 of value and assuming that it is taxed at BC’s highest rate of 53.50%, there would be $267,500 of personal taxes due on the terminal return.

This presents two challenges. For one, if the estate had no other liquid investments or cash and taxes are payable, the executor of the will may struggle to come up with the cash. The beneficiaries of the RRSP or RRIF have the cash and the estate owes the tax owing on the RRSP or RRIF ($267,500 using the above example). If the beneficiaries do not want to fund the tax liability related to the RRSP or RRIF, it becomes an estate issue - i.e., the estate has the $267,500 tax obligation and the beneficiaries get the RRSP or RRIF value tax-free, an unfair result.  

Bloggers Note: There was a recent case in Ontario where the judge found a beneficiary son was not the RRIFs ultimate beneficiary (as there was not sufficient evidence to prove the father’s intention) and the court held the son was holding the RRIF in trust for the deceased’s estate. Legal advice should be sought regarding how this decision applies.

Secondly, if dealing with a large estate and testamentary trust planning is being used, any funds that flow outside of the estate, in this case the RRSP or RRIF account, would not be included in the testamentary trust. This could reduce the overall benefits of will planning that was previously completed.

When looking at implementing a probate savings strategy, it is important to discuss your goals, family situation, tax planning and net worth details with your financial advisor and tax and legal professionals. In doing so, you can weigh the benefits and costs for each specific asset type and make proper decisions in your estate planning, so that your probate planning decisions are not made in isolation. 

Jeffrey Smith, CPA, CA, CFP, CLU - is a Manager in BDO's Wealth Advisory Services practice. He can be reached at 250-763-6700 or by email at jrsmith@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, October 5, 2020

Gifting and Leaving Money to Your Grandchild (Part 2)

My previous blog post discussed the concept of  deemed dispositions when making gifts to grandchildren while alive and upon death. It also covered the issues of income attribution and ensuring family law is considered when making or providing for gifts. 

Today, I discuss gifting by grandparents using a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP). I also briefly discuss estate planning considerations for grandparents.

RESPs


RESPs are great vehicles to save for a grandchild’s education. A grandparent can contribute under their own plan for a grandchild, but it is very important for the grandparent to ensure they are not duplicating contributions made by the child’s parents.

If both a grandparent and parent have plans for a child, they must coordinate their contributions on a yearly basis. If the grandparent intends to make the annual contribution, the child's parents may not even want to bother opening a RESP for that child. Alternatively, the grandparent can just gift the yearly contribution to the parent, who then puts the money into the RESP they have set up for the child.

RESPs upon the death of a grandparent


If a grandparent (subscriber) dies, things can get very complex and deserve their own blog post.

However, here are two key things to consider in your estate planning:
  1. Ensuring you have a successor subscriber so the plan can continue, or the RESP may become part of your estate.
  2. A clause in your will setting out your intentions for the RESP, including whether you wish to have your estate continue making the RESP contributions.
Takeaway #1 – If you set up a RESP for your grandchild, ensure their parents don’t already have a plan. If they do have a RESP, communicate each year with them. Ensure your estate planning considers the RESP.

TFSAs


TFSAs are a great tax-free option to help your grandchildren (who are 18 or over) save for education, a house, a car, vacation or even retirement (if they can look that far ahead). 

Care should be taken to ensure you do not over-contribute to the TFSA, as penalties will apply.

TFSAs are far simpler than RESPs when giving money to a grandchild. The TFSA is set up in your grandchild’s name, so you don’t have the estate concerns you have as an RESP subscriber; however, you should not make direct contributions (you should gift the money to your grandchild to contribute), and you have no control over the TFSA and what your grandchild does with the money in their TFSA. If they wanted to, they could cash in the TFSA and travel the world - and you would have no say.

A grandparent does not require a clause in their will to deal with the TFSA. A grandparent could have a clause in their will to have their estate continue making yearly gifts equal to the TFSA contribution limit.

Takeaway #2 – Gifts to fund a TFSA for a child 18 and over are tax efficient and a great way to assist them in funding their education, home purchase or retirement savings. Just be aware, they can decide to use the money for a fancy sports car or vacation and you have no say in the matter.

RRSPs


For grandparents making gifts to grandchildren, an RRSP is like a TFSA in that it is set up in the grandchild’s name, the grandparent has no control over the RRSP. A gift for a RRSP should be on the understanding the grandchild will not touch the money until their retirement. But a grandparent has no way to enforce this.

RRSPs can be set up at any age, as long as the child has earned income and a social insurance number. Practically, there is limited tax savings value in an RRSP when a child has minimal taxable income (although there is a tax-deferred component and it can assist in teaching a grandchild about saving for retirement). A TFSA is often the better choice if you plan to gift $6,000 a year or less to your grandchild.

If you intend to gift more than $6,000 (assuming the first $6,000 goes to a TFSA), an RRSP contribution can be made equal to your grandchild’s RRSP contribution limit. It often makes sense for the grandchild to not claim an RRSP deduction until their income is higher and carry forward the contribution until they can obtain a larger tax refund. In any case, the RRSP money grows tax-free.

The grandparent and child need to ensure they do not exceed the child’s RRSP contribution limit, or penalties may apply.

Grandparent gifting to RRSP: Example


An example may help clarify the above.

Say a child works part-time, is over 18 (so has no attribution concerns) and makes $15,000 to $20,000 a year. The child’s RRSP contribution room is 18% of their annual income, so let’s say $3,000 a year for simplicity's sake (they may also have contribution room from prior years). The grandparent gives the grandchild $3,000 a year for five years to contribute to their RRSP while the child is in university. There would likely be little to no tax refund if the RRSP contribution is claimed each year while the grandchild is in school, due to tuition credits. 

But if the grandchild works full-time in the year after graduation and makes, say, $60,000, they could claim the RRSP carryforward deduction in Year 6 and obtain a refund – likely somewhere in the $4,000 to $5,000 range, while getting the tax-free growth on their RRSP assets from Day 1.

Takeaway #3 – Gifting money for a grandchild’s RRSP will typically be your last option (likely better to gift to RESP or TFSA).

Your will

A will is best discussed with an estate specialist. I will just provide a few considerations:
  1. If you are leaving money to your grandchildren in your will, ensure you consider additional grandchildren that could be born after you draft your will or even after you pass away.
  2. Is the bequest going to be outright or in trust? You may wish an outright gift for smaller bequests and if the grandchildren are older. If the grandchildren are younger or the bequest is large, a trust (a formal properly executed trust) will likely provide greater protection from the whims of an immature child.
  3. Most legal writers suggest grandparents consider their own children’s financial circumstances, as you do not want to skip a generation from your children to your grandchildren when your own children may need the money and unintentionally create resentment with their own children.
  4. At what age do you want your grandchildren to have access to the inheritance?
Takeaway #4 – There are multiple trips and traps in leaving bequests to your grandchildren. It is imperative you have an experienced estate lawyer draft your will if you are leaving substantial assets to your grandchildren.

I am finally done, and now I’ll catch my breath. Somehow one brief blog turned into two parts and almost 2,000 words. But long-time readers will not be surprised, I have never been one to buy into the conventional wisdom of keeping everything short because people have short attention spans. Anyways, stepping off my soapbox, grandparents: please consider the various issues I have discussed when considering gifts and bequests to your grandchildren.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.