Tax Planning the Will

It is generally recognized that everyone should make a will; it is, however, not always recognized that doing so can often be the occasion for tax planning the will.

• The Importance of the Spouse as Beneficiary

To the extent that assets have appreciated in value.  There is likely capital gains that taxes have not yet been paid.  These assets should generally be left to the spouse, or a qualifying spouse trust is an example of Importance of the Spouse as Beneficiary and good tax planning in the will.  That way, the property “rolls over” to the spouse (or spouse trust) without immediate tax.  Otherwise, the assets will usually be treated as if they had been liquidated at current market values.

• The Principal Residence Exemption

Consideration should be given to leaving a residence to a beneficiary who will be eligible to claim the principal residence exemption another good example of tax planning the will. Married couples and common-law partners, together with unmarried children under the age of 18, are generally entitled to only one principal residence exemption among them. However, the principal residence exemption might be maximized, for example, by leaving the residence to an adult child who does not already have a principal residence.

• Life Insurance

Upon the disposition of a life insurance policy, the excess of the cash surrender value over the adjusted cost base will be treated as income in the hands of the owner of the policy. However, in the case of death, the proceeds of a life insurance policy payable on the death of the insured will not produce taxable income to either the deceased or a beneficiary is an example of tax planning the will. The designation of a life insurance beneficiary may be made in the will or in a document outside the will.  Even where the designation is made in the will, it can be drafted such that the proceeds will not form part of the estate.  This means savings on probate tax and protection from creditors of the estate.

• Low-Tax Bracket Family Members

Consideration should be given to leaving income-earning assets to beneficiaries who are in low tax brackets, such as grandchildren, a low-income child (or his or her spouse) good tax planning the will. This is because income from bequests to high-income individuals will, of course, be added to their other taxable income, thus resulting in a significant tax exposure.

• Testamentary Trusts

A testamentary trust is a trust that is settled by an individual as a result of their death. Effective January 1, 2016, “testamentary trusts”, which hitherto benefited from several tax preferences (including graduated rates and off-calendar year ends), ceased having access to such benefits, unless such trusts are “graduated rate estates”, which are limited to a lifespan of 36 months from the date of death. Another qualification of a graduated rate estate is that there may only one per deceased.

• RRSPs and RRIFs

Immediately before death, the annuitant of an RRSP is deemed to have received as income a sum equal to the fair market value of all of the property of the RRSP. The general rule is that all of this income is taxed as a benefit in the terminal tax return of the deceased (RRIFs are accorded a similar treatment). The first major exception to the general rule is where the annuitant designates his or her spouse as the beneficiary of the RRSP example of good tax planning the will .

• Shares and Partnership Interests

If shares of a corporation, or an interest in a partnership, whose value has appreciated, are held, and these assets are to be left to someone other than a spouse, it should be remembered that, in many cases, it will be advisable to undertake some rather complex tax manoeuvres within the first year of the estate; otherwise, there could be “double tax” exposure when the underlying corporation/ partnership assets are sold off.

• Donations

Effective January 1, 2016, greater flexibility is available in using the donation tax credit related to donations made by will and gifts by direct designation. The rules allow a donation to be allocated between the deceased and his or her estate where the donation is made by a graduated rate estate (or a former graduated rate estate within 60 months after death). In such case, the deceased may use the donation credit in the year of death or in the immediately preceding year. Alternatively, the estate may use the donation in the year of the donation, carry it back to any of its prior taxation years, or carry it forward for up to five years.

• Spouse and Common-Law Partner Trusts

A spouse trust can be an effective succession and estate planning vehicle. It combines the tax-deferral advantages of leaving assets to a spouse, with the ability to protect family interests. Where a successful business is involved, it is more usual to use a spouse trust rather than leaving the shares and other assets outright to the surviving spouse, in order to preclude the possibility of the surviving spouse changing the terms of his or her will (e.g., in the event of a remarriage). In addition, the appointment of suitable trustees may protect against mismanagement of the business or distributions which could jeopardize financially the viability of the ongoing business. Specifically, this could provide protection from the surviving spouse exercising retraction rights attaching to freeze shares (e.g., where an elderly surviving spouse has remarried and is under the influence of a spendthrift spouse).

• Rights or Things

Where at the time of death, a person has “rights or things” which, if they had been realized or disposed of during the taxpayer’s lifetime, would have been included in computing income, the value of such rights or
things must be included in the final return of the deceased. Although the phrase “rights or things” is ambiguous, examples may include work-in-progress of a sole-practice professional, dividends that have been declared but not paid, unused vacation leave credits, unmatured bond bonus coupons, and so on.

• Probate Fees

Although it is not a tax in the traditional sense, many professionals refer to probate fees as a tax. There are various methods of planning to lower probate fees, but they can bring their own challenges and potential pitfalls. Common strategies include: holding assets jointly, transferring assets during one’s lifetime, multiple wills, and designating beneficiaries. However, it is important that a person’s estate plans come first, and probate planning comes second, because these probate planning strategies can potentially upset a person’s bequests.

 

It is generally recognized that everyone should make a will, however, not always recognized that doing so can often be the occasion for tax planning.  If you would like to discuss tax planning a will in more detail contact us or call us at 514-954-9031 to book an appointment to discuss tax planning