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. 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 18, 2021

Considerations in selecting an executor and accepting the executor appointment!

Last week, Rob Carrick the personal finance columnist for The Globe and Mail, in his Carrick on Money Newsletter (the newsletter is generally only available to Globe subscribers) asked David Edey a Certified Executor Advisor questions on his experience as an executor. These experiences and frustrations are detailed in Mr. Edey's book Executor Help: How to Settle an Estate Pick an Executor and Avoid Family Fights.

The book summary states “The grief, frustration, and stress of that experience were life-altering for David. He was determined to write this book in order to help others successfully navigate the difficult tasks of estate planning and executorship—so that their families could stay together”. 

I have not yet read the book, but as an accountant on numerous estates and a multi-time executor, I understand what drove David to author the book. Rob’s discussion of the topic in his newsletter provided me the impetus to offer a few comments of my own on the topic. So today, I discuss some considerations in selecting an executor and some of the less pleasant tasks that may be part and parcel of being appointed an executor.

Who Makes a Good Executor?


I have noted in blog posts over the years that a potential executor should have the following characteristics:

(1) Financial acumen and investing experience
(2) Be detailed oriented
(3) Handle stress well
(4) Be able to deal with people, including those acting irrationally (inheriting money does funny things to people)
(5) Be results driven

I have been involved with a couple of executors who did not have the above characteristics, especially the financial acumen and ability to handle stress. Those estates went off the rails and took years to settle. So carefully consider the above characteristics in selecting an executor.

Should you name your children as executors?

This is the $64,000 question. Assuming there are no “black sheep” in the family and all the siblings get along, you would think naming all your children would be a good idea. Sometimes the answer is yes, as they can share the burdensome and time-consuming duties as co-executors and utilize their individual strengths. Other times, being named co-executors can adversely affect your children’s relationship as the stress of settling the estate and distributing money creates discontent amongst the children.

So, should you select only one or two children who meet the above characteristics? Again, the answer can sometimes be yes, where the other children trust they are competent and even-handed. On other occasions, children may feel resentment that the parent did not name them as an executor and their siblings are favoured or given preferential treatment by their parents.

You may be saying to yourself, Mark has not answered whether I should name my children as executors, he has just given me a maybe yes and maybe no answer. But that is the reality. You need to look at your children with a cold realistic view and not your rose-colored glasses to decide if they have one of more of the characteristics to be an executor. You also need to speak to them and ask them if they feel they can work together (see discussion below). If you are not satisfied on all accounts, you may want to consider a professional corporate executor so that your children will only have to deal with an independent third party.

Do you think the executor would like to know they are being named?


Many years ago, I wrote a blog post titled "Speak to your Executor – Surprise only works for Birthday Parties, not death". You would be shocked at how many people are named an executor without prior notice. You always want to inform your executor they are being named and confirm they are comfortable with being named an executor. The last thing you want is to die and have your executor renounce their executorship. As noted above, where you have more than one executor, you want to ensure they are willing to work together, whether they are your children, friends, professional advisors, or any combination of the above.

Does an executor have to do all the work?

A well-run estate utilizes accountants for tax preparation and estate planning advice and a lawyer for estate and legal advice. You may also have to hire a specialist to prepare the passing of accounts (a summary for the court of the estate). While these costs can add up, the expression penny wise pound foolish has applied to many executors. The accountants and lawyers can also act as buffers for the family, as they act as independent advisors and can deflect some of the pressure put on the executor(s) by the beneficiaries. I have heard many an executor say, "it was the accountant's/lawyer's suggestion".

There is typically a significant amount of mundane work in settling an estate. Writing and dealing with financial institutions, games of hide and seek to find assets etc. An executor may consider asking for the assistance of their family members who are not executors to help with some of these administrative tasks; assuming they are willing and the other family members are fine with their assistance.

Sadly, I must inform you, even where you delegate and use professionals, you are likely in for a very time consuming task as an executor.

I want my Money!

In my experience, an executor will be asked to distribute money sooner than later by one or more of the beneficiaries. This is one of the most stressful aspects of being an executor, since in many cases you are unsure of what will be left of the estate following the sale of the estate's assets and the income taxes on the estate. 

It is important you do not make an interim or final distribution (see this blog post on obtaining a clearance certificate) of money until you consult with your accountants and lawyers. The last thing you ever want to have to do, is go back to the beneficiaries and tell them they were overpaid, and they must return money. This is very messy, and you could end up having personal liability for the estate. So always ensure you review any distributions with your professionals before distributing any money or assets to the beneficiaries.

An executor’s job is arduous, time consuming (it can take years to settle some estates), stressful and a messy estate can fracture family relationships. You therefore need to consider the selection of your executor(s) very carefully (especially when you will involve your children), ensure you advise them and confirm that they are willing to accept the appointment. If you are asked to become an executor, consider carefully whether you wish to accept the appointment; you may also want to consider buying David's book.

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.

Monday, October 4, 2021

The Implications of Receiving an Inheritance

There is a large wealth transfer occurring in Canada, with estimates as high as $750 billion dollars.

While I have written on issues and concepts related to inheritances (with a bit of a caustic tone, based on my actual experiences), I have written very little on receiving an inheritance. Thus, today, I will discuss the income tax implications of receiving an inheritance and some of the issues to consider upon receiving an inheritance.

If you are interested, the posts I referenced in the prior paragraph are:"Is it Morbid or Realistic to Plan for an Inheritance?", and “Taking it to the Grave or Leaving it all to your Kids?” and “Inheriting Money – Are you a Loving Child, a Waiter or a Hoverer”.

The Income Tax Implications of Receiving an Inheritance


In Canada, there are generally no direct income tax consequences to receiving an inheritance. I say generally because there are a couple very rare circumstances where you could pay tax. The first is where you are the beneficiary of a deceased’s RRSP/RRIF and the estate does not have enough money to pay the estate taxes. Surprisingly to most people, the CRA has the right to go after the beneficiary of a RRSP as the CRA considers the beneficiary jointly liable with the estate. The second rare situation is where a will makes a beneficiary liable for taxes arising on the transfer of assets from the deceased. However, both these exceptions are highly unusual and in almost all situations, there are no taxes due upon the receipt of an inheritance.

So, to be clear. If your inheritance is in cash, you receive those funds tax-free. If your inheritance is a capital property of some kind such as stocks or real estate, you again receive the capital property tax free.

However, in the case of capital property, you generally inherit the cost base of the property to the deceased, which is typically equal to the deemed proceeds of disposition for the deceased. Usually, this amount is the fair market value ("FMV") of the property right before the person's death.

So for example, if your mother passes away as the last surviving spouse (it is likely when your father passed away he left his estate to your mother – which is typically a tax-free spousal transfer at his passing) and she owned 100 shares of Bell Canada that originally cost $25 a share, but were worth $65 a share at her passing; her estate would file a final (terminal) income tax return reporting a deemed capital gain of $4,000 (FMV at death of $6,500-$2,500 original cost). This deemed capital gain is known as a deemed disposition on death and occurs despite the fact the Bell Canada shares were not sold, because your mother was the last surviving spouse. Your mother’s deemed disposition FMV of $6,500 becomes your new cost base of the inherited shares. So, if you sell the Bell Canada shares in the future, the gain would be equal to your sales proceeds less $6,500.

If you wish to learn more about how your estate is taxed on death if you are the last surviving spouse, see this blog post I wrote a few years ago, The Two Certainties in Life: Death and Taxes - Impact on Your Personal Income Tax Return

Dealing With an Inheritance


Receiving a large inheritance can be overwhelming, especially if you are not financially sophisticated. I wrote a detailed blog on this topic in 2011 if you wish to read it Dealing with Financial Windfalls & how to stave off the Money Leeches

However, today I will give you the Coles notes version.

Practically, it is almost impossible for a large inheritance to go unnoticed. A family member or friend will advise someone of the passing of your parent /sibling/relative etc. and somehow someway it is likely an investment person will be amongst those to find out and you will get a call. If you avoid the above, a large deposit at the bank will likely trigger someone at the bank to speak to you. It is almost unavoidable.

If you already have an investment advisor/manager you work with and trust, selecting an advisor is a non-issue. But if you have not really worked with an investment advisor/manager or their practice is built around smaller net worth clients and your inheritance is substantial, you will want to review your situation. The best advice is often to “park” the money in a GIC for a couple months until you have regained both your emotional and financial equilibrium and have had time to speak to family and friends to get a couple good referrals and absorb your new situation.

The “parking” of the inheritance would also apply to any decision to give money away (as you may receive subtle or less than subtle hints about gifting part of your inheritance to various family members) as well as holding off investing part of your inheritance.

Putting the money in a GIC or similar investment also provides you a built-in excuse to not be able to make any decisions in the near-term, since if anyone has the audacity to ask, you answer, “my money is locked in for 3 or 6 months and I cannot touch it”.

Inheritances typically come on the heels of emotional distress and in many cases, significant changes in your financial situation. The good news is that in almost all circumstances the cash or capital property inherited is tax-paid money and you have no additional tax concerns. However, the “new-found” wealth can be stressful from both an investing and gifting perspective and you need to ensure you have a clear mind before making any decisions on both fronts.

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.