Common Estate and Tax Planning Issues

Over the years, I have reviewed many individuals’ financial affairs. Most people have their affairs somewhat in order, but there are typically still some issues to be considered or holes to be filled. Today, I list some of the most common issues and gaps.

Estate Issues

The most common estate planning issues I have observed relate to wills, powers of attorney, estate documentation and insurance. I discuss these below.

 

Wills

Wills always seem to have multiple issues and errors of omission when I review them. These five are the most common:

1. No Secondary Will – Depending upon your province of residence, a secondary will can be used to reduce the probate taxes due upon your death. This would most typically apply to shares you own in private companies and other personal items. It is my understanding that Ontario and British Columbia are the two main provinces where secondary wills are used, so check-in with your advisor if you live in a province other than Ontario or B.C.

2. Old or Dead Executors - As many people do not update their wills on a regular basis, I have often found their executors have passed away or they are very old (if your children are not your executors). You may want to review your executor selection and ensure you have at least one “youngish” executor.

3. All the Children are Executors – Keeping with the executor theme, many people have all their children as executors. I suggest that if you can finesse this with your children, in some cases it is better to only have one or two of your financial savvy children as executors, to avoid the estate being bogged down. This is not always practical given family dynamics, but is more efficient and can often reduce sibling friction.

4. Individual Bequests are Missing – Estate lawyer Charles Ticker notes in his book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight that one of the biggest issues children have post-mortem, is where a parent had promised a child a certain personal item, be it jewelry, art, purse etc. and it is not reflected in the will. Parents, make your will consistent with your promises.

5. Blended Family Issues – Blended family issues can be so complicated, there is sometimes “paralysis by analysis” and they are just ignored. In this blog post I wrote in June 2020, I note that estate planning is complicated enough in a first marriage; second or third marriages multiply the risks and complexity. You may want to read the wills and estate planning sections of this blog post on blended families.

Powers Of Attorney

The two most common issues I come across with Powers of Attorney "(POA) are:

1. They are often not done!

2. The personal healthcare POA is out of date and does not reflect the significant health care issues that should be considered from extraordinary health measures to mental capacity (see this blog post) to assisted death.

Estate not Documented

I have seen many estates with no documentation in respect to the assets that constitute the estate and where the assets are located. I wrote about this a couple weeks ago, so I will not re-iterate. Here is the link to the blog post.

Insurance

Most people dislike paying insurance. However, parents often have family legacy assets they wish to keep in the family such as cottages, rental properties, family businesses etc. I have seen several instances where these legacy assets must be sold by the estate or to keep these assets in the family, excess taxes are paid as a work around solution. Often, life insurance, typically permanent insurance, such as Universal or Whole life would have made financial and tax sense and emotional sense (where the parent wanted a legacy asset to remain in the family).

I discuss many other uses of insurance for estate planning purposes in this blog post including the most popular, being life insurance to cover an estate tax liability on death.

Income Tax Issues

Capital Dividend Account

The capital dividend account (“CDA”) is a cumulative tax account that tracks certain amounts (most commonly the non-taxable portion of capital gains) that are not taxable to a Canadian Private Corporation and may be distributed tax-free to the company’s shareholders. See this detailed blog post I wrote on the subject.

Over the years, I have often seen this account not tracked or overlooked. A brief discussion of your corporation’s CDA balance should be part of your annual discussion with your accountant to ensure that you are not leaving any tax-free money on the table.

Charitable Donation Tax Efficiency

I have written several times (the last time being this blog) that many people do not maximize the tax benefits of their donations. If you plan to make a charitable donation and you own marketable securities with unrealized capital gains, it is far more tax-efficient to donate the securities in lieu of cash. This is because the capital gain on the security is not subject to tax when donated. For example, if you own shares of Bell Canada with a cost of $1,000 and a fair market value of $5,000, you would have to pay capital gains tax on the $4,000 capital gain when sold. However, if you donate the shares, the capital gain is deemed to be nil and you still get the donation tax credit.

Where you have a corporation and own marketable securities, it is even more tax-efficient to make a corporate donation, as the capital gain is eliminated and the capital gain gets added to the CDA account discussed above.

Unfunded TFSA

I find it very surprising how many people still have unfunded or partially funded Tax-Free Savings Accounts (“TFSAs”). These accounts allow you to grow your money tax-free and provide substantial flexibility in using and replenishing the account.

In the early days of TFSAs, the contribution limits were not large and people did not want the hassle of opening the account. However, as of Jan 1, 2022, the contribution limit for a TFSA is now $81,500. So, if you have not contributed, get going. If you have contributed haphazardly, check your balance with the CRA and get caught-up.

Capital Loss Utilization

I often see people pay tax on capital gains that is unnecessary, as they could have sold securities that had unrealized losses to reduce the gain and the related tax.

As 2022 has been a tough year in the markets, you may want to undertake some tax-loss selling before the end of the year. I will have my annual tax-loss selling blog in a couple weeks which is very detailed to assist in your tax-loss selling planning.

Estate Freeze

As per my blog Estate Freeze -A Tax Solution for the Succession of a Small Business undertaking an estate freeze in the right circumstances is often a great way to defer a families tax liability to the next generation. However, not everyone agrees as per this blog Are Estate Freezes the Wrong Solution for Family Business Succession?

I am a proponent of using an estate freeze where it fits a families needs. Over the last two years I have seen three estates that caused tax havoc for families that could easily have been minimized with an estate freeze several years ago.

Hopefully you and your advisors have already considered most of the issues discussed above. If not, you may wish to “clean-up” any holes in your planning and ensure the efficiency of your estate and tax planning.

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.

My latest podcast interview – The Rational Reminder Podcast

I was recently interviewed by Ben Felix and Cameron Passmore, portfolio managers at PWL Capital, for their Rational Reminder Podcast. I thank Ben and Cameron for the interview. It was fun and they had some great questions.

Here’s a link to the podcast.

On the podcast we discuss a bunch of really interesting topics. Here are some highlights:

• Why it is important to ensure that both spouses are relatively financially literate
• When it makes sense to hire a corporate executor
• Why you should involve your adult children in financial conversations
• Why you may want to consolidate your investment holdings
• How to deal with potential uneven distribution in an estate
• Why success is not always linked to money
• How I define my own personal success

The last question, about my own personal success, was a surprising question from Ben and Cameron. I was expecting to only discuss and provide advice on getting your financial affairs in order, not my personal successes. Afterwards, I thought about that question and my answers and was a bit surprised where I went with my answers, especially my comment on jealousy. I became so introspective on that answer that during the holiday break I wrote a blog post on that topic and will publish it in a couple months.

Anyways, I think this podcast is worth a listen and you may also want to check out some of the other interesting podcasts Ben and Cameron have made.

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.

The “Hole” in Whole Life Insurance

One issue that confounds most accountants and their clients alike is life insurance. The products can be complex and you are always concerned whether you are being sold something you don't need or something more than you need.

Today and next week, I have guest posts by Doug Leyland and Jordan Matters two Chartered Professional Accountants who deal full-time in insurance solutions for Leyland Insurance Solutions Inc. I am hoping you find their posts help demystify term life insurance and permanent insurance (whole life and universal life insurance) for you, or at least clarify what you should be looking for in an "investment" insurance policy for you personally or your corporation. I thank Doug and Jordan for their efforts.

Please keep in mind that these two posts are Doug and Jordan's beliefs and there are insurance advisors and accountants who may not necessarily agree with their opinions.

The “Hole” in Whole Life Insurance

By Doug Leyland and Jordan Matters

What is your opinion on life insurance? Chances are it is good, bad, or ugly with no middle ground. Is this opinion based on personal experience or what you have heard from friends and colleagues? There is a vast array of life insurance strategies and products available and this can make the landscape appear to be somewhat complex. Some people base their opinions on a limited understanding of the various applications and benefits that life insurance can offer, especially for business owners. The goal of this post is to provide insight on this and simplify things for you.

The need for insurance and the related tax-free proceeds a policy can provide arises from the undesirable economic consequences of either a premature death or an estate liquidity need (i.e. your estate needs to sell real estate in a down market to raise funds to pay income tax for the estate of the deceased person).

Typically, a term insurance policy is used to cover a premature death, while an estate need is most often satisfied by permanent insurance, either Participating Whole Life ("Par") or Universal Life ("UL"). All types of life insurance are simply a promise to pay by a third party in the event of death.

In the next couple paragraphs we will provide some background on these various insurance options.

Term Life Insurance

Term coverage represents insurance in its most traditional and simple form – transferring risks that are too high for you to accept to an insurance company in exchange for a fee.

If the insured does not die during the term, there is no residual benefit other than the ability to convert the contract to either Par or UL without a medical or to renew the term coverage at contractually specified amounts. In many cases, these polices are left to lapse and are not renewed in any form.

Let us ask you this simple question. What might the financial implications be if you were to die prematurely?

This question leads to a needs analysis that considers the following important issues:

• How do you replace the decline in a business’ value (Goodwill or Key Person insurance)?
• How do you ensure there are funds available to buy out the shares of a deceased business partner?
• Do you wish to have insurance to pay off a mortgage or other debts?
• Do you wish to ensure there is funding for your children/grandchildren education?
• Do you want to replace your lost income and provide spousal support, if applicable, to avoid having your spouse needing to find employment?

If your objectives are listed above, a term life insurance policy is likely the most appropriate for you.

Permanent Life Insurance

There are significant differences between Par and UL contracts. Understanding the differences is essential because they will have a profound impact on the premiums required to fund the contracts and the likelihood that your estate financial objectives will be achieved. The key take away here is to understand which party to an insurance contract assumes the investment risk of turning premium dollars into a paid promise.

With a Par policy, the risk is shared by the policy owner and insurance company (this represents the “hole” in whole life). With certain forms of UL, the risk falls entirely to the insurance company (i.e. minimum funded Level Cost of Insurance (COI) and Limited Pay UL contracts).

Where the goal is to fund an estimated estate liquidity need, in our opinion, this risk should be third partied entirely via a minimum funded UL contract.

Once again, please consider the following question. What are the liquidity implications for my estate or spouses estate, when I, and/or my spouse, die near life expectancy?

This question about your liquidity requirements causes you to consider some of the common estate needs detailed below:

1. How do I fund capital gains taxes?
2. How do I ensure Estate Equalization (For example, when some heirs are in the business while others are not)?
3. How can I use insurance to assist with my succession planning (Transfer assets to the next generation tax free)?

Other economically beneficial strategies using permanent life insurance include:

1. Life Insurance as an Investment – Estate Anchor & Maximization
2. Charitable Giving
3. Retirement Income

Now that we have explored some of  the various needs for insurance, next week in Part 2 we will discuss some of the appropriate strategies.

Doug Leyland CPA, CA, MBA & Jordan Matters CPA, CA work together at Leyland Insurance Solutions Inc. in Burlington, Ontario. They assist their clients with insurance based tax and estate planning strategies. If you would like to get in touch with Doug or Jordan, their emails are dleyland@leylandinsurance.com and jmatters@leylandinsurance.com or you can call them at 905-331-2885.

The above blog post is for general information purposes only and does not constitute legal, insurance or estate planning or other professional advice of any kind. Readers are advised to seek specific legal, insurance or estate planning advice regarding any specific issues.

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.

How Not to Plan Your Estate!

Over the years, I have been involved with or been asked to assist with some "messed up" estates.  I often ponder how anyone who loved their spouse and/or children could ever leave their estate in such disarray?

So what is a "messed up" estate? Typically it involves:

• an outdated will
• transfers of family property in contradiction of the terms of the deceased's will
• terrible recording keeping
• investments in the wrong name
• missing tax information
• family members or second spouses, either threatening litigation or already having commenced such

Since so many people seem to ignore estate planning advice, I thought I would take a different tact and write an article on How Not to Plan Your Estate. My hope being, that if you read about the financial and emotional stress you can place upon your loved ones, you may take action.

I wrote this article during the Christmas holidays. I then asked Roma Luciw, The Globe and Mail's personal finance web editor, if she had any interest in this topic. She did and on January 15th, the article was published in The Globe and Mail business section under my byline.

If you did not read The Globe and Mail on Friday, here is the link to the article (The Globe changes the title for the online version if you were wondering). Thank you Roma for your editorial assistance and help in getting the article published in the paper.

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.

Getting Your Financial Affairs in Order

I was recently interviewed about my book Let's Get Blunt About Your Financial Affairs, by Promod Sharma, a Toronto based actuary, for his Tea at Taxevity series. The interview ended up being as much about my opinions on the importance of getting your financial affairs in order as about the specifics of my book. If I do say so myself, I think the interview is interesting and informative (especially considering you have an accountant being interviewed by an actuary; who would have imagined :).

I thought today, instead of writing, I would link to this interview, so you can actually hear my views on the topic. By the way, and you can believe it or not, that empty space from the bottom of my forehead to the top of my head once was full of flowing locks - big sigh.

Enough about being “follicly-challenged". Here is the interview, I hope that it spurs you to take action and you get your financial affairs in order.

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.

Recent Changes in Legislation Make Reviewing Your Will A Must

Tax changes that will become effective January 1, 2016, may have a harsh and surprising effect on your will and estate planning. To explain these new changes, I have a guest poster, Howard Kazdan, a tax expert with BDO Canada LLP.

Below, Howard highlights some of the more significant changes in the legislation.

Recent Changes in Legislation Make Reviewing Your Will A Must

By Howard Kazdan

 

The interaction of life’s two certainties – death and taxes – is about to get more complicated effective January 1, 2016, due to legislative changes to the taxation of trusts and estates that have been enacted. You may wish to review your will after considering the information discussed in today's post.

Change in tax rates for estates and testamentary trusts, except for Graduated Rate Estates ("GRE")

 

Currently, estates and testamentary trusts (i.e. trusts that are created by will upon death) are subject to tax at graduated tax rates. Under these old rules, you could set-up multiple trusts (generally for each child to control their inheritances) to be taxed at the lower graduated income tax rates.

Effective January 1, 2016 only a GRE will be eligible for graduated tax rates. The lower tax rates may only be available during the first thirty-six months of the estate if that period is required to settle the estate. All of the income in other estates and testamentary trusts will be taxed at the highest personal tax rate. Under the new rules, if you had set-up say 3 separate trusts for each of your children, all of them will be subject to the highest tax rate, as they will not be considered GRE’s (however, there may be non-tax reason for still creating multiple trusts, such as to protect against spendthrift children, protect assets for family law purposes and asset protection).

The administration of these new rules may also become challenging where you have multiple wills (some provinces allow for two wills, one for personal assets and one for assets that are not required to be probated) and have different executors, since all of the wills may make up one estate. If one component of the estate no longer qualifies as a GRE, the entire estate may no longer qualify, and therefore all income will be taxed at the highest marginal tax rate.

Finally, the availability of tax elections for income to be taxed in a trust at graduated rates, even if such income was paid or payable to a beneficiary will now be extremely limited.

To qualify as a GRE certain conditions must be met, which include: 

 

• The estate must arise as a consequence of death

• The determination time is within the first thirty-six months of the estate

• The executor must designate the estate as a GRE

• No other estate can be designated as a GRE

Other benefits that will only be available to a GRE also include:

• ability to maintain an off-calendar year end

• ability to avoid capital gains on taxation of donated securities

• no requirement to make tax installments

• ability to carry losses back to terminal return

• more flexibility for claiming tax credits in respect of donations made by will/bequests

Due to the significant benefits of qualifying as a GRE, it will be necessary to plan accordingly.

Change in taxation of Life Interest Trusts

 

These trusts are often used to provide an income stream to a surviving spouse during their lifetime with the residual assets being distributed to other beneficiaries after that individual dies.

For example, spousal trusts are common in a blended family where husband and wife were previously married and each has children from a previous marriage. The husband may have established a spousal trust in his will whereby his wife was to receive income during her lifetime, but his children from previous marriage will receive the capital of the trust after she dies, and her children from a previous marriage are the beneficiaries of her estate after she dies.

Currently, when the wife dies, there will be a deemed disposition of the assets of the trust at fair market value and any income arising from the deemed disposition will be taxed in the trust.

The new rules will shift the reporting of income arising in the final year before death of the wife, including income on the deemed disposition of the assets, to her final income tax return. Since the beneficiaries of her estate and the spousal trust are different, this will lead to inequitable results (estate beneficiaries will owe tax, but the trust beneficiaries will own the assets). If the Canada Revenue Agency is unable to collect this tax from the estate, then it will have the ability to demand payment of the tax from the trust beneficiaries.

Planning for Disabled Persons

 

The new rules provide for a Qualified Disability Trust (“QDT”) which can be established for a beneficiary that qualifies for the disability tax credit. A QDT will allow for the taxation of income at marginal tax rates during that beneficiary’s lifetime, provided all of the required conditions are met.

As the conditions are very complicated and potentially require elections, it is imperative to review any wills that have provisions for a disabled person in context of the new rules with your lawyer and accountant.

Charitable Bequests On Death

Currently, on death, donations in the will are included in the final tax return of the individual or in the prior year, not in the estate return. Under the new rules, the donation will be deemed to be made from the estate which may result in additional flexibility in claiming the donation tax credit if the estate qualifies as a GRE.

The new rules are very complex and it would be prudent for your accountant and/or lawyer to review your will and any current estates, testamentary trusts or other life interest trusts that you may be connected with as a trustee, executor or beneficiary because planning strategies previously anticipated may no longer be effective. Where it is possible to amend such documents, it may be advisable to do so. Where it is no longer possible to amend such documents then additional planning may be required to determine next steps.

Here is a link to an excellent BDO tax memo which you may also wish to read if you want more detail.

Howard Kazdan is a Senior Tax Manager with BDO Canada LLP. He can be reached at 905-946-5459 or by email at hkazdan@bdo.ca

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.

New Will Provisions for the 21st Century – Reproductive Assets

In my wildest dreams, I would never have imagined ten years ago I would be posting a blog on how you address reproductive assets in your will. Yet today, I have a guest post by Katy Basi on this topic. This is Katy’s third post in this series on New Will Provisions for the 21st Century.

Her first post in the series dealt with how you handle RESPs in your will and her second post discussed will provisions related to Digital Assets.

I thank Katy for this very informative and enlightening series. I have received excellent feedback on all of Katy’s posts.

Does your Will address your Reproductive Assets?

By Katy Basi

“My what?” you may ask. Do you have sperm/ova/embryos in a clinic somewhere? Have you banked cord blood for your child? (Okay, cord blood isn’t really a “reproductive asset” but I’m throwing it in as a two for one promotion). If so, what are your intentions with respect to these “assets” in the event of your death, and does your will tell your executor what these intentions are? If reproductive technologies were involved in creating your children or grandchildren, does your will adequately define “child” and “issue”?

Medical technology is able to leap tall buildings in a single bound these days, and estates law is hard pressed to keep up. For example, the drafting of most wills implicitly assumes that your ability to have children dies when you do, but medical reality tells a different story. If your DNA is banked in any form, your ability to reproduce may long outlive you, potentially creating “after-born children”. (In one of the few instances of the Canadian legal system addressing these issues, your written consent is required in certain cases for the use of your reproductive assets (see the Assisted Human Reproduction Act)). 

You may be able to have your estates lawyer deal with the possibility of after-born children in drafting your will, or you may have no reproductive assets banked and therefore not be very worried about this issue. If you fall in the latter camp, consider whether part or all of your estate may be inherited by your grandchildren. For example, if your son Clark predeceases you having his own children, should a grandchild conceived by your daughter-in-law after your death, using Clark’s banked sperm, be included or excluded from your estate?

Regardless of the after-born children consideration, what should happen to any sperm/ova/embryos banked in a clinic upon the death of the donor? The contract signed with the clinic in question may provide an answer, e.g. the donor may have given the clinic permission to donate or destruct these materials upon his or her death. Otherwise, does the residuary beneficiary inherit these materials? Is an embryo even capable of being inherited, i.e. is it property? Ideally these issues should be dealt with before the death of the donor, while his or her intentions can still be ascertained.

Clearly we are just starting to address this somewhat murky area of estates law. In my practice, reproductive assets currently come into play in three additional areas:

1) Parents have banked cord blood for their child. I often include a provision in the parents’ wills (i) directing the trustee of their child’s trust to continue paying storage fees for the cord blood until the child reaches a certain age, and (ii) instructing the trustee to transfer ownership of the cord blood to the child once he or she attains that age. We do not yet know the limitations of cord blood, and it may end up being the most valuable asset in your estate if a member of your family has certain medical issues (yes, potentially more powerful than a locomotive….)

2) A couple with fertility issues has found a surrogate or gestational carrier. There is usually a surrogacy contract in this scenario, and the contract often requires the couple to have properly executed wills providing for the child that may result from the surrogacy. This requirement can lead to last minute, faster than a speeding bullet wills, which may not be as carefully drafted as they need to be under these circumstances (see #3 below). Expert advice is strongly recommended!

3) A client has a child (or is planning to) where the child is not biologically related to the client, and the child has not yet been adopted by the client. Careful drafting of the client’s will is required to ensure that the child will inherit regardless of the status of any planned adoption. Often a will refers to “my child” generically, without naming the child, either because the child is not yet born, or the client intends to have additional children and does not want to revise his/her will immediately upon the birth of the next child. If not specifically defined in the will, “my child” refers to a person’s child by blood or adoption. If a client has not yet adopted a child, and is not related by blood to the child (e.g. a donor was used), a broader definition of “child” needs to be included in the client’s will. Conversely, if a client has donated reproductive material (e.g. sperm or eggs), his or her will should be carefully drafted to exclude any children related to the client only by virtue of this donation. (While other provinces have legislation clarifying that sperm and egg donors are not parents, Ontario currently does not.)

Clients who have been involved with reproductive technologies have often been through significant stress and, in some cases, heartbreak. Reproductive technologies are incredibly costly, so credit cards are maxed out and wills and estate planning are very low down the priority list. Once the time comes to address your estate plan, alert your lawyer to these issues if they pertain to you – protect that child you worked so hard for!

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

When Spouses Don’t Leave All Their Assets to Each Other - The Income Tax Implications - Part 2

On Monday, I addressed deemed dispositions, automatic spousal rollovers and the reasons behind spouses deciding not to have mirror wills. Today, I look at the income tax liability and liquidation issues that arise when spouses do not leave all their assets to each other.

Tax Liability

The debts of an estate are paid from the residue the estate. This can be problematic where the intention is to leave a certain amount of money to a spouse and the rest to say the children of a first marriage. For example, an RRSP will transfer to your surviving spouse tax free, but the assets left to the estate for the benefit of the children will be subject to tax and the children will only get the net proceeds. This result is often not the intention of a parent who ignores the tax aspect of their legacy.

Often wills leave specific assets to certain beneficiaries and the residual of the estate to others. For example, if a son is the beneficiary of a specific asset, let's use a cottage, the son gets the cottage and the estate has the tax liability for the deemed disposition of the cottage. Again, that is not the intention of the deceased who assumes his son will be responsible for the tax liability on the cottage.

Lynne Butler of the blog Estate Law Canada says “It's possible to draft a will to state that the person receiving an asset should also pay the tax bill associated with the asset, but almost nobody ever does that. I think more people would do that if they were only aware that it was possible.”

In order to ensure you don’t “stick” your estate with a large tax liability, you may wish to consider Lynne’s advice when drafting any will, but especially where spouses have different wishes.

Liquid vs Illiquid Assets

As discussed on Monday, the deemed disposition rule can result in the estate being left with a large income tax liability; the ability to pay that liability is a function of the liquidity of the remaining assets. Where spouses have different wishes on death, your estate planning needs to consider if you are leaving the estate and/or your spouse with enough liquid assets to pay the deemed income tax liability.

For example, say Sue and her spouse Edward have equal ownership in a rental property. But Sue wants to leave her estate to her children from her first marriage while Edward wants to do likewise to his children from his first marriage. If Sue were to pass away first, there would be a deemed disposition of her 50% ownership in the rental property. Because much of Sue’s wealth is tied up in the rental property, it may be problematic for the estate to pay the income tax liability on her deemed disposition without liquidating the real estate to pay the income tax liability and Edward may not be amenable to doing such.

In situations such as these, where spouses have different wishes, they need to consider ways their estate can pay their final tax liability without a forced liquidation of assets. One possible solution is the use of insurance. Many people purchase insurance to cover their anticipated income tax liability on their death. Another alternative where there are significant liquid assets is to ensure the estate always maintains enough cash to cover any potential income tax liability on death.

Plan

Where spouses have different wishes upon death, the income tax consequences can get ugly. While in good health, spouses either independently or jointly, need to review these consequences with their accountant(s) or lawyer(s) to ensure they have considered the possible consequences and have a plan.

Next week, I will continue with this somewhat morbid theme and post a two-part guest blog by Katy Basi on "qualifying spousal trusts". Katy will discuss how they work and why you would consider using them. Katy is back by popular demand after guest posting on New Will Provisions for the 21st Century in respect of RESPs and Digital Assets.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

When Spouses Don’t Leave All Their Assets to Each Other - The Income Tax Implications

You must admit, nobody has as many uplifting titles for their blog posts as I do. I have previously had such cheery titles as “Stress Testing Your Death” and “Is it Morbid to Plan for an Inheritance”. So today, in keeping with my "Morbid Mark" theme, I will discuss the tax implications that can occur when one spouse passes away, and does not will all of their assets to their surviving spouse.

Deemed Disposition Upon Death

Upon death, you are deemed to have disposed of your capital and non-depreciable property (typically your principal residence is tax-free) for proceeds equal to the fair market value (“FMV”) of the assets immediately before death. If the FMV of any property is greater than the original cost of that property, your executor must report a capital gain on your income tax return for the year of death (known as a terminal return).

For example, if John passed away on September 1, 2013 and he owned shares of Bell Canada worth $40 on September 1st, that he had purchased for $28 several years ago, his estate must report a deemed capital gain of $12 per share on his terminal return. The same would hold true for a rental property, which may also have additional potential issues, such as the recapture of capital cost allowance (depreciation).

Automatic Spousal Rollover

There is an exception to the deemed disposition rule, where the property passes to the deceased spouse, common-law partner or a "qualifying spousal trust". In this situation, the transfer takes place at the adjusted cost base (ACB) of the property, not the FMV of the property and the deemed capital gain is deferred until the spouse or common-law partner dies; or the property is disposed of by the spouse or common-law partner. So if John was married to Mary and left everything to her in his will, the Bell Canada shares would transfer to Mary tax-free at a cost base of $28.

In the good old days of Ozzie and Harriet, the automatic provision was fairly standard. People stayed married and both spouses would usually have mirror wills, leaving all or most of their property to each other.

Today, with the high rate of divorce, second families and spouses who have independent thoughts, it is not that unusual for spouses to have different wills or wills in which they only leave some assets to their current spouse.

Where spouses have different wishes in their wills and don’t leave all their property to their surviving spouse, the deemed disposition rules noted above come into effect. The resultant income tax liability can in some cases be large and where assets are not liquid, the payment of those taxes can sometimes be problematic.

Why Would Spouses Have Different Wishes

There are a myriad of reasons why spouses may not have mirror wills or leave all their assets to each other. Here are some common reasons:

1. Second families- A testator may structure their will to only leave a certain amount to the surviving spouse, or to a spousal trust for their surviving spouse so they can leave other property and monies directly to their children from the first marriage; this triggers the deemed disposition rules on the property left to their children.

2. Black Sheep Children -One spouse may have an issue with one of their children and be concerned their surviving spouse will turn around and leave money to the black sheep child when they pass away.

3. DINKS – The “double income no kids” cohort often have other family members they wish to benefit from their estate, such as parents, siblings, nieces and nephews. They are confident that their surviving spouse has enough assets of their own and will not need a large inheritance in order to have a prosperous retirement. According to estates lawyer Katy Basi “The wills that we draft for childless testators are often long and sometimes quite complicated. The tax implications of the estate plan need to be carefully considered.”

4. Charitable Wishes – Spouses often have different charitable views. One spouse may want to leave a significant portion of their wealth to charity while the other does not. In this case, the concern is not an income tax issue, as the donation(s) eliminate most of the tax liability, but the issue becomes a question of whether assets must be liquidated to enable the executor to make the donations in the will.

As I have been told my blog posts are too long, I will stop here today. On Wednesday, I will discuss the income tax implications, liquidity concerns and planning issues when spouses don't leave all their assets to each other.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

How much Control do I have from the Grave?

Last week I wrote a blog post on the virtues of spending some of your kid's inheritance on a family vacation while you are alive. That post reflected my personal philosophy that a parent(s) who is/are fairly certain that they will have more cash than they will require for retirement, should consider partial gifts to their children or grandchildren while alive. My rationale is simple: why not receive directly or vicariously, while alive, the pleasure and joy from those gifts, rather than giving from your grave.

  

However, I understand that viewpoint is not held by all, and that some people only wish to distribute their wealth after they die. In addition, there are some people who not only wish to wait until they die to distribute their wealth, but wish to continue to control their wealth after their death.

For a discussion on whether it is actually possible to control your wealth from the grave; today I have a guest blog post by Albert Luk, a lawyer, who is an estate and wills specialist.

How Much Control do I Have From the Grave?

If nothing else, Charles Millar had a good sense of humor. The lawyer turned entrepreneur stipulated in his will that on the ten year anniversary of his death a portion of his estate was to be given: “to the mother who has since my death given birth in Toronto to the greatest number of children…” Given Millar was a wealthy man in life, and his estate well managed in death, the baby bonus was worth approximately $750,000: a small fortune to the depression era mothers hoping to win the prize. The ensuing local baby boom would be known as The Great Stork Derby.

Charles Millar’s estate represents one end of the will planning spectrum. A testator (the legal term for the will-maker) rather whimsically plays one final practical joke on the world. On the other end of the spectrum, testators attempt to control the lives of their beneficiaries from their graves, sometimes with the best of intentions but sometimes for more sinister purposes. It is not unusual for a frustrated father-in-law to write: “To my son, I give the sum of $50,000.00 if he divorces his wife” in a will.

To testators, the question often becomes, “How much control can I assert from the grave?” To beneficiaries, the question is often asked, “Do I really have to conform to those conditions in the will?”

The answer, as usual, is that it depends. Conceptually, it is possible to give a gift with conditions. The analysis is often whether the conditions themselves survive scrutiny or how long of a reach one truly has from the grave.

A general and non-exhaustive review of the Canadian law provides the following information:

• The more uncertain the condition of the gift, the more likely the condition will fail. An Albertan case found the condition that a home be gifted as long as the beneficiary lived in it and kept it in “good condition” was too uncertain. Specifically, who defines what “good condition” means? Martha Stewart or Frank the Tank? As the condition was too ambiguous, the condition failed and the home was gifted without conditions.
• A restraint on alienation (a legal term for restricting the sale of land) is not a valid condition. A mother once attempted to divide a plot of land equally to her sons on the condition one son sell his half at a specified time and specified price. As this condition restricted the ability of either son to sell, the condition failed. The exception to this rule is that property can be left to a beneficiary only for the duration of their life.

• Conditions contrary to public policy will be struck down. Violations of public policy would include conditions which, if carried out, would be considered to be in violation of the Charter of Rights and Freedoms or require the beneficiary to commit a hate crime or engage in criminal behaviour. For example, “I give to my son the sum of $50,000 only if he renounces his homosexual lifestyle,” or, “I give my daughter the sum of $100,000 if she burns down John Smith’s farmhouse,” would be conditions struck down as being contrary to public policy (not to mention the ethics behind such conditions).

• Conditions promoting marital or family breakdowns will also be struck down. Conditions which grant a beneficiary a sum of money conditional upon leaving or divorcing his spouse or requiring a child to live with one parent have been struck down as being contrary to public policy. However, conditions prohibiting a widow or widower from marrying again or prohibiting a marriage not in accordance with religious rules, tantamount to forcing someone to convert, are valid. It is not as clear whether partial restraints on marriage are valid conditions or not. Confused? These types of restrictions are confusing and qualified advice should be sought before contemplating any such condition.

• Conditions of residence should be reviewed carefully. “I give my son $75,000.00 to return home to Mother Russia” may or may not be upheld. Often these conditions are void for being too uncertain. However, if drafted carefully, they may hold up to scrutiny.

In summary, one’s reach from the grave can be quite long if the will is properly crafted. Courts have held in the past conditions which are positive (“I give my daughter $10,000 if she graduates high school and $25,000 if she earns a university degree”) are generally enforceable. Conditions which are progressively more restrictive are correspondingly more difficult to enforce if not struck down altogether. If struck down, the gift is usually granted without some or all of the conditions.

The key is that anyone looking to impose positive or negative conditions in their will, or any beneficiary subject to conditions, should seek qualified legal advice to determine their rights.

As for The Great Stork Derby, Millar’s estate survived challenges to the clause, withstanding even Supreme Court of Canada scrutiny. He was, after all, a lawyer. Four women each won $125,000 (over $1.5 million today) having nine (!) children in the ten year period. Two women—each having had ten children, but several out of wedlock (remember, this was the 1930’s)—sued the estate and settled for $12,500 each.

Albert Luk is a lawyer at Devry Smith Frank LLP, a Toronto based law firm who act as trusted advisors and advocates for corporations, individuals and small businesses. His particular expertise is in advising owner-managers on their business affairs and planning their wills and estates. Albert can be reached directly at albert.luk@devrylaw.ca.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

Having the "Talk" about your Will

In my blog post on Monday “Is it morbid to plan for an Inheritance,” I referenced a recent survey undertaken by the Investors Group that stated that 53% of Canadians are expecting an inheritance, with over 57% of those, expecting an inheritance greater than $100,000.

In the press release announcing the survey results there was a paragraph on “Having the talk” which discussed the lack of communication between parents and children in respect of inheritance issues and, more specifically, wills. As I noted on Monday, my most read blog post by far is now One Big Happy Family until we discuss the Will which discusses this exact topic.

In that blog post, I suggest that where a family discussion can be held without creating World War 3, the benefits of such a discussion include allowing parents to (a) explain possible perceived inequities in the will, (b) determine the wants and needs of the beneficiaries, (c) help in determining an executor, and finally (d) allow for full disclosure.

Admittedly, the one aspect lacking in my blog post was actual data in relation to what extent Canadians actually discuss their wills with their children. The Investors Group filled that void in their press release stating “the poll reveals that many families are not taking the time to discuss or deal with inheritance issues. Four-in-ten Canadians whose parents have a will (39 per cent) say they have not discussed the terms of the will with their parents while sixty-one per cent of Canadians with deceased parents who had a will, admit they never had the talk.”

While the Investors Group press release focuses on the fact most families do not have the "talk', a glass half-full view reflects that a significant number of families actually do discuss this sensitive issue. In the Investors Group press release Christine Van Cauwenberghe, Director, Tax and Estate Planning at Investors Group says "When it comes to wills in Canada, there's not enough action and certainly not enough talk," Christine goes on to say that "Broaching the sensitive topics of wills and estate details with loved ones can be daunting but having "the talk" early on can provide security for planning and make the process easier when the time comes."

Finally, in the press release, the Investors Group states “Interestingly, those who have discussed will and estate details with family members indicate it was not a difficult conversation. Three-in-ten (31 per cent) said the discussion was very easy while only three per cent said they found it very difficult.”

That the survey reflected many families are able to have this conversation without issue is heartening. However, I would speculate that these families are most likely families without a black-sheep child and their distributions are probably somewhat equal and not contentious.

Nevertheless, it is nice to have some statistics that reflect that some parents are having this difficult discussion, which allows for estate planning certainty and minimizes the issues for the executor(s) in administering the parent(s) estate.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Why Survey: Are your Employees not your best source of Client Information?

Wow, what a stunning revelation. According to a recent survey by RBC Wealth Management, the top three concerns of high net worth clients are the transfer of wealth at death, minimization of taxes and financial needs during retirement. Who would have guessed such? How shocking! Could/should RBC's wealth management advisors not have conveyed this message to the wealth management department in the first place?

RBC completed 2,500 surveys during sessions with their high net worth clients and, according to Howard Kabot, vice-president, Financial Planning, RBC Wealth Management Services, they found that their clients “are very concerned about estate planning. What happens to their wealth during retirement and after they are gone are their main priorities… Clients tell us that they want to make sure their families are appropriately taken care of and that their financial plan is as efficient, effective and prudent as possible."

If I was RBC, I would be concerned that my high net worth clients are going to ask themselves the question, "why did I have to tell RBC this, should RBC not already have been aware of my concerns via my advisor?". I have written about most if not all these “estate planning concerns” in my blog during the last year because I know that they cause apprehension to my high net worth clients. I didn’t conduct sessions and surveys, I just listened to my clients concerns during meetings and lunches etc.

This survey reminds me of a variation of this theme. Years ago a friend of mine worked at a company that in its infinite wisdom decided to engage an efficiency consultant. She told me she could tell her employer everything they needed to know about how her company could become more efficient for the cost of a free lunch. The company paid the consultant hundreds of thousands of dollars for advice that was discarded a year later when the organization became dysfunctional. Why companies do not first access the opinions of their human internal resources (employees) in these type situations is somewhat mystifying.

Obviously, I am just picking on RBC to make a point; this could be a survey by CIBC, BMO or Scotia or any other large company. In addition, before you marketing types attack me, I know this survey was probably partly undertaken by RBC to learn about their clients and partly to be released as a study. But why do companies spend money on endless surveys and consultants when their employees should have most if not all the answers?

One would think that RBC should have been able to determine its clients’ top concerns through a session with its own wealth advisors. These findings could then be confirmed with 50 or so clients to make sure the advisors are in sync with their high net worth clients.

My firm is by no means the most progressive in the world, but we constantly request feedback and suggestions from our staff on internal and client matters. We even have outside consultants solicit opinions from our staff in confidence so they won’t withhold their true feelings out of fear of recrimination.

In my opinion, most of these surveys are a waste of time and money and the resources would be better spent talking to your staff on the ground. Assuming your employees are on the ball, you will get most of the information you need from your staff and their interpretations and understandings can be confirmed by a limited survey of your clients. More importantly, if your clients’ opinions do not agree with what your employees expected, you will have identified a huge expectation or communication gap which adds further value to the whole exercise and then you can commission a full fledged survey.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The Top Five Areas of Estate Litigation

I have written several blogs on wills, estates and executors; some from a tax planning perspective and others  from a purely philosophical or observational perspective. I find this topic area fascinating. Thus, I am pleased today to have a guest blog by Charles Ticker, a lawyer who specializes in estates. Charles will discuss the ugly underbelly of estates, the litigation that can arise.

The Top Five Areas of Estate Litigation

The writer Ambrose Bierce once quipped: “Death is not the end, there remains the litigation over the estate”. As a lawyer who deals with estate disputes, I can certainly confirm Bierce’s observation. Today I will discuss the top five areas where litigation tends to occur.

Challenging the Will

Wills can be challenged if the testator ( person who made the will) lacked the requisite capacity. The legal test for capacity to make a will was set out in the 1870 English case of Banks v Goodfellow :

It is essential to the exercise of such a power that a testator shall understand the nature of the act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties — that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not been made.

Anytime an elderly person changes his or her will in a significant fashion or decides to leave a child out of the will, the likelihood of a will challenge greatly increases. To defend the will against any possible claim, it is well worth spending the money to obtain the written opinion of a capacity assessor prior to the making of the will as to whether the individual had capacity. As well, it is helpful if the will is prepared by a lawyer as opposed to a self –help will kit. Medical records and lawyer’s records can be reviewed and may shed some light on the testator’s mental condition.

Another ground for challenging the will is undue influence. If Mom was coerced by daughter Sally to cut brother Bob out of the will, then the will may be set aside. However, it is difficult to prove undue influence.

Family Law Act Applications

In Ontario, if a married spouse dies without making adequate provision for his or her spouse, the surviving spouse can within 6 months of the date of death make an election either to take the gifts under the will or apply to the Court for an equalization payment similar to a divorce situation. Sometimes the surviving married spouse needs more time to make a decision whether or not to seek an equalization payment because the spouse does not have sufficient information or documentation concerning the deceased’s assets. In those situations, the surviving spouse can apply to the Court for an extension of time within which to file the election. Legal advice should be sought as soon as possible after the spouse’s death.

Dependant’s Support Relief Applications

In Ontario and most jurisdictions, there is an expectation that the deceased make adequate provision for the support of dependants. The definition of dependant varies from jurisdiction to jurisdiction, but in Ontario dependants can include minor and adult children , grandchildren, parents, siblings, married spouses, common law spouses and same sex partners. The dependant in Ontario needs to prove not only financial need but also that the deceased was under a legal obligation to pay support or was paying support just prior to the time of death. Once gain, there are time limits within which to launch a claim ( six months from the grant of letters probate of the will or of letters of administration) and legal advice should be sought as soon as possible. The Court, if it considers proper, may allow a claim that is filed later if there are still assets in the estate that have not been distributed.

Claims based on constructive trust and unjust enrichment

If a person has contributed money or labour or has provided value to the deceased which benefited the deceased and contributed to the acquisition, maintenance or improvement of an asset, a claim based on the doctrine of constructive trust can be brought against the estate. The Court may award the claimant an interest in the asset if there is a connection between the asset and the contribution made or may make a monetary award of compensation. Constructive trust cases are not easy to prove. There is often no real agreement that the claimant will receive compensation. Therefore, the claimant must show that the deceased received a benefit and was unjustly enriched at the expense or detriment of the claimant and that there was no legal reason for the benefit and related deprivation, that is the person contributing the money or services was not making the contribution as a gift or did not receive some other benefit from the deceased. Constructive trust claims are often seen in the context of a common law spousal relationships because at present in Ontario common law spouses do not have the same property rights on death as do married spouses.

Claims against executors

Executors have a difficult job. They are trustees and fiduciaries owing the highest duty of care to the beneficiaries. They are responsible to manage the estate in accordance with the provisions of the will and keep detailed records. If trusts are involved, they must prudently invest the estate. Executors can be called upon to account for their actions and in particular any compensation they propose to take. Even if the will allows the executors to pre-take compensation they will still be required to account to the beneficiaries. If the beneficiaries do not approve of the accounting, the executor must have his accounts passed by the Court. Sometimes, the Court will remove an executor if the Court is satisfied that the executor is not carrying out his duties competently or honestly. Executors also face potential personal liability from creditors of the estate if the executor distributes the estate and neglects to pay the deceased’s creditors. To avoid this problem, executors should advertise for creditors.

Charles Ticker, is an estates lawyer based in Toronto, Canada who focuses on estate litigation and mediation of estate disputes. More information about him can be found at http://www.tickerlaw.com/. The information in this blog is not intended to be legal advice. Readers should consult their own lawyer, attorney or other professional for advice.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.