August 1, 2008, 6:45 am

Basics of Estate Planning Part 4

by: The Financial Blogger    Category: Financial Planning
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My old man uses to say that there are two things that are 100% certain in life: Death and Taxes. The funny part is that once you are dead, the very first thing you do is to pay taxes on your assets! So the combination is good for your whole life! Taxes your estate will have to cover are a little bit different than the taxes you pay while you are alive. This is why it is very important to make sure you have enough liquid assets to pay them off!

If you don’t, the estate will have to sell a property or other assets in a hurry to make sure they pay your very first heir; the government!

AS I mentioned in my previous post on estate planning, you are deemed to have sold all your assets at market value at the time of your death. Therefore, it will trigger important capital gains on your non-registered investments and properties (except your main residence).

In Canada, the first thing to look after is who will receive your RRSP. You are able to roll them over your spouse without any taxes. However, if you leave them to your children, your estate will have to pay taxes as if you have withdrawn the whole amount during the same year (hello high marginal tax rate!). If you have minor or handicap children, you still have the possibility to create an annuity and pay less taxes (it will be taxable in your children’s hand according to their marginal tax rate and the amount received every year).

Pension plan are transferable to your spouse but taxable in the hand of your other heirs (i.e. children). They will be deemed to receive the full amount in cash and therefore will have to pay taxes on this extra income.

In regards, to properties, your principal residence is free of taxes. However, if you have a secondary residence or rental properties, this might create a great capital gain. You might want to plan permanent life insurance to cover this “potential debt”. This is a good example where a universal life could be included in your estate plan (Hope you are reading this V 😉 ). Depending on provinces and who inherit the properties, the heir (if it’s your spouse) might be able to acquire the property without paying taxes but he/she will be deemed to have it at your adjusted based cost. This will report taxes to be paid on the property but will still have to be paid someday!

Non registered funds will go through the same process, triggering capital gains everywhere. So when you are getting older, it may be a good idea to sell a few investments every year in order to trigger the capital gain at a lower marginal tax rate. Depending of your assets and your investment strategy, this could result into a good strategy (you definitely need to see a financial planner and revise your global situation before doing so).

A tax expert will be required to analyze your situation if you have several items mentioned above. If it’s the case, you probably have a financial planner that would be able to help you out with your estate planning or will find the tax expert for you.

Other links:

Basics of Estate Planning Part 1

Basics of Estate Planning Part 2

Basics of Estate Planning Part 3

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Another good read. For hear in the states, there are ways of reducing ones net worth that even survive ones death.

Setting up Trusts or a family corporation (FLP or S Corp are good) can help shield it. A Family Trust that owns all the properties is also another good idea.

Even though a permanent life insurance could be used here, there are other, and in my opinion better, alternatives.

by: The Financial Blogger | August 1st, 2008 (8:59 pm)


However, when you setup the trust, the individual will be deemed to have sold the rental property at the fair market value. Therefore, he has to pay taxes while he is living. If you can’t escape from Lady Death, you surely can’t escape Mr. Taxes either 😉

The other thing with trust, is that you have to keep in mind that it is deemed to have disposed of their assets every 21 years as well in order to make sure that our dear Gov gets its part of the cake 😉

Never said it was full proof or a perfect solution. 😉

On the other hand, if the trust purchased the home to begin with, instead of transferring, the individual never would have disposed of the house at fair market value since they didn’t own it to begin with.

[…] four posts on estate planning, we are getting deeper in the financial aspects of your death. Do you leave people behind that are […]