Probate and Tax Planning for - PowerPoint Presentation

Slide1

Probate and Tax Planning for High Net Worth Clients

Alaina Spec

400 – 1565 Carling Avenue | Ottawa | Canada | K1Z 8R1 | T: (613)236-9442 | F: (613)236-7942 | TF: (888) 909-9442Slide2

OverviewEstate Planning - who, what, where, when, why…Strategies to minimize probate tax on death

Strategies to minimize tax liabilities on deathMost importantly, how to accomplish your goals for your

Estate planning

in an effective mannerSlide3

Who Everyone 18 and over may prepare a Will and dispose of their propertyMust be done in writingMust be witnessed by two people – certain restrictions applyMust be of sound mind, capable and not under duressSlide4

What Name executors and beneficiaries Dispose of all of your assetsAssess any liabilities including taxConsider minor beneficiariesConsider disabled beneficiaries

Deal with guardianshipTrustsThink about personal items

Consider family dynamicsSuccession planning International assets Charitable donations

Funeral wishes

Organ donation Slide5

Where Will KitsHolograph WillsAt your Lawyers Office! Slide6

When Review every 5 years or major life circumstance Before getting married – make in contemplation of marriage, otherwise revokes your

WillAfter getting separated or divorcedWhen executors or beneficiaries move jurisdictions or pass away

Don’t wait until you are too ill, incapable, or in hospital Slide7

Why So you can avoid the Succession Law Reform Act telling you what will happen with your assetsSo you can state your wishes clearlySo you can protect your loved ones So you can do some tax planningSo you can control from the grave! Slide8

When you die… what happens next? All of your assets are given into the care of your executors They must have legal authority to deal with your assets including banks accounts, real estate, corporations, life insurance, and pensions as well as liabilities like bills and taxes. They must know what to do with your assetsSlide9

Without a Will…

Where do your assets go? Slide10

… the Government doesn’t get everything! But, the SLRA

does determine what happens with your assets. The spouse of a person who dies intestate receives the first $200,000.00 of

assets from the deceased’s

Estate

The remainder

is

shared between

the spouse

and children according to a formula prescribed by

law, depending on how many children there are, and who is alive at your death

C

ommon-law

spouses have no right to

a share

of

a deceased’s

Estate under

the

SLRA,

without making a claimSlide11

If no spouse, no children… then who?SLRA says you follow down the family tree until you find someoneStart with grandchildren, and if none, then your parents, equally, or the survivor – keep in mind if they are no longer together!

If parents are gone, to your siblings, equally, and if one is gone, to their childrenIf no siblings left, to nieces and nephews If no nieces and nephews, then to your next of kin in equal degree of consanguinity (blood relation, same kinship as another) to the Estate

If no one, then the government! Slide12

With a Will – the Sky’s the LimitAssets are distributed according to the deceased’s wishes, by an individual chosen by the deceased, take the guess work out

Children may be

provided for: guardianship and trusts

Charitable donations may be made

Tax saving

(probate and income) measures may

be

implemented

One can rest comfortably knowing one hasn’t left a mess for one’s family to deal withSlide13

What is Probate? Probate is the process of going to the Superior Court of Justice in the jurisdiction in which the person lived at the time of death, and asking the Court to confirm that this is the person’s last Will, and that you, as executor can rely on it. It gives you the legal authority as executorIt also means that anyone dealing with the executor under a probated Will can rely on that authority Slide14

But it’s always thought of as just … TAX!

At the time you make the application to the Court to have the Will recognized, you pay a tax on the fair market value of the deceased’s assets, more commonly referred to as Probate Tax

It’s actually properly called the Estate Administration Tax, governed by the Act of the same nameSlide15

Estate Administration Tax (Probate)Just to clear up just how much we are actually taking about Has changed incrementally since implementation, $2.50/$1,000 before 1960, $3/$1,000 before 1966, $5/$1,000 before1992

And now (since June 1992): $5.00

per $1,000.00 or part thereof of

the first $

50,000.00 of the value of the

Estate;

and

$

15.00

per

$1,000.00 or part thereof by which the value of the

Estate

exceeds $50,000.00Slide16

‘New’ Estate Administration Tax Return At the beginning of 2015, new requirement introduced that where Probate is applied for, a ‘return’ must be filed confirming the value of the assets submitted for probateHave auditors standing by to review/assessSerious penalties if not done and implications for executors personallySuggestion this will be the precursor to an increase in probate tax Slide17

Value of Estate – How to DetermineIdeally in your planning stages, you want to minimize the value of the assets that Will fall into the Estate, to minimize the amount of probate tax your client has to pay. Of course, in doing so you want to be mindful that the plan you craft still meets all of the objectives of the client We never recommend implementing any plans, just to avoid probate Slide18

What’s in, and What’s Out? There are certain exclusions from Probate to utilize in planning an Estate Inter Vivos GiftsBeneficiary designated assets Real Property in very limited circumstances

Jointly held assets Assets forming part of an Inter Vivos trustCorporate Assets in limited circumstancesAll should be used/reviewed carefully!!! Slide19

The Simplest Way To Avoid Probate… Just Give It ALL Away

While you are Still Alive!Fantastic Idea Mom and Dad!!! Slide20

Absolute Gifts – What’s in it for you? If you give everything away, there Will be no probate tax! So, a benefit for your Estate, but not you personally. But the beneficiaries will be happy! You will see the beneficiaries of your gifts enjoy the gifts during your life time.

You can clearly benefit the people you wish, and there can be no mistaking your intentions, so long as you are capable! Slide21

Absolute Gifts: 99 Problems...Typically there will be tax payable on transfer of asset, depending on typeLoss

of control over property, you can’t take it back when you want to or feel like it, or when the beneficiary wants to blow it all on a Porsche.

Property exposed to claims by the recipient’s creditors or

spouse if you gave it all to someone else to defeat creditors

May

hurt the gift giver’s ability to

provide

for

him/herself, you don’t know when you are going to die, so how do you know how much money you need to live until then Slide22

Continued… Whatever assets you do have left may be subject to Probate anyways There may be deemed distributions, capital gains, taxable events, income attribution anyways, meaning your beneficiaries get the asset, and you get stuck with the bill! You may change your mind, but you can’t reallyThe beneficiary you gave it to might die, or marry someone you don’t like, leaving your gift to them.And on, and on, and on….Slide23

When Absolute Gifts Make Sense in the Context of Estate and Probate PlanningWhen you have sentimental items that you want to see someone enjoyWhen you want to help someone out with a specific cost that is important to you, buying a house, a wedding, school, travel, a PorscheWhen you truly have more than you will ever need, and have a reasonable understanding of what that means When you make that choice fully aware of impacts Slide24

I know, I’ll just put my ___’s name on it.

More and more we see families change title to real property or bank accounts to joint tenancy to ‘avoid’ probate.

But, if you look carefully at what “Joint Tenancy with Right of Survivorship” means, it means:

Assets pass

directly

to the other joint owner(s) at the time of

deathSlide25

So what does that mean? It DOES NOT mean, the joint owner will secretly keep it when the other dies, and then give it to the Estate when no one is looking. It means that the asset actually has to PASS to the joint owner and become their property, and that was the intention of the joint owner.It will NOT form part of the Estate The asset will not be used to satisfy liabilities of the deceased, nor will they be distributed to beneficiaries Slide26

Joint Ownership – Benefits Avoid probateSimple

and inexpensiveImmediate access to assets

after death for remaining owner

Can do with some assets, including financial instruments, and real estateSlide27

Joint Ownership – Drawbacks Tax payable on transfer, particularly if other than to spouseLegal fees can be payable, or administrative work involvedLoss of control of property

Property exposed to claims by the recipient’s creditors or spouseTransfer may be frustrated, fraudulent, matrimonial Testamentary wishes may be frustrated

if no clear understandingRisk of Elder Abuse, POAs.Slide28

When is Joint Ownership Right For You? Matrimonial Situations Where the true intention is for the asset to be left to that joint owner Where there is a trust declaration in place declaring the intentions of the person what is to happen to the asset upon death, confirming joint owner is true joint ownershipSlide29

Designate, designate, designate… beneficiaries on everything! If designated beneficiary, asset will move directly to the beneficiary who has been designated, without probate

Can be done on life insurance policies, RRSP, RRIF, TFSA, pensions, or other “plan” benefitsBeneficiaries can be designated (and revoked unless irrevocable)By

Will;

OR

By instrument

If no beneficiary is assigned, the assets will form part of the deceased’s

Estate,

meaning subject to probate.Slide30

Designated Beneficiaries – Benefits No probate Clear intentions

Money usually flows quicker, not tied up waiting for probate Slide31

Drawbacks of Designated Beneficiaries Money moves to designated beneficiary, but Estate does not get benefit of money, and will likely be left with the tax burden, not always the same beneficiariesBe mindful when a particular asset is left for intended purpose that it gets where it needs to go Be mindful of designating informal Trustees for minor intended beneficiaries – one of the most common issues we see Slide32

Corporation? No problem! Create two Wills in

an Estate plan. There should be a probatable Will and a non-probatable Will. Non-probatable

Will not be subject to EAT or probate.

Assets in personal Will must

go through

probate, assets in non probatable will, do not. Examples of what assets to put in non-probatable

Wills

: shares

of a privately held

company, personal possessions, artwork, real

e

state

not required to go through probate.

Granovsky Estate v Ontario

confirms that probate tax is payable only on the value of assets in the will submitted for probate

Must ensure that one

Will

doesn’t revoke the other Slide33

When a Second Will is Right for You?If the corporation has sufficient assets, retained earnings or value, or privacy of corporation is importantIf you have a lot of expensive jewelry, cars or paintingsIf you have owned your real estate for a long time, with no ‘dealings’Wills need to be carefully drafted to be effective and recognizedSuggestions have been made that this may be the next Estate

planning technique to go with no grandfathering Slide34

Trusts – What are They?

Trust – a legal relationship whereby one or more persons (“Trustees”)

hold legal ownership and control of property for one or more other persons (“Beneficiaries”).

Set up by “settlor

”

Types

Inter

Vivos

TestamentarySlide35

Trusts: Tax ConsiderationsDeemed to be an individual for tax purposes

Pays tax on all income earned at the top federal and provincial rate – starting in 2016 for both Inter

Vivos

and

Testamentary Trust

If certain conditions are met, trust income may be taxed in the hands of the beneficiaries

21 year rule to be mindful ofSlide36

Why and when you would use a Trust Probate PlanningPrivacy and confidentialityCreditor protectionBlended FamiliesDisabled Beneficiaries Capital Gains Exemption

Minor ChildrenSpendthrift Beneficiaries Protect Elderly IndividualsDesignate Capable Trustees

Tax PlanningProvide for loved ones in a careful way Slide37

Additional advantages of Inter Vivos trustsSettlor can see the trust in operation and make adjustments, so long as trust permits and legislation allows Passes burden of investment

management to TrusteeCan be used to avoid administration of an Estate in different placesDeath does not disrupt trust administrationLess vulnerable to attack on the grounds of lack of capacity than testamentary trustSlide38

Disadvantages of Trusts Tax payable on transferHigh tax rateLoss of control of assets

Choosing capable trusteesInitial and ongoing costs associated with set up and administration21

year deemed disposition ruleSlide39

Common Inter Vivos TrustsSpousal, Joint Partner, and Common Law Partner trusts Alter ego trusts

Deemed disposition rules do not apply, assets are received on a roll-over basis allowing for the realization of capital gains to be deferred Trusts must be created, and then assets actually moved into the trust, to be managed by the trustee(s)Slide40

Some Specifics: Spousal and Common-law Partner TrustsSpousal Trust: the settlor’s spouse must be entitled to receive all

of the income and capital of the trust which arises before the spouse’s death

. Joint Spousal or Partner Trust: Settlor must be 65, must be for the benefit of the spouse and or partners to receive all income and capital of the trust before the death of the last spouse or partner

No

other person may receive or otherwise obtain the use of the income or capital of the

trust

until death.Slide41

Alter Ego TrustsThe settlor must be be at least 65 years of

ageThe settlor must be entitled to all the income and capital from the trust

arising prior to the settlor’s death

No other person may receive or otherwise obtain the use of the income or capital of the trust.Slide42

Testamentary Trusts – Changes!New tax legislation has eliminated advantageous tax treatment as of January 2016Many changes to how Testamentary Trusts will work, but will largely be treated like

Inter Vivos

Trusts

There are still many continuing benefits of using testamentary trusts in

Estate

planning, but must be weighed against just simply the tax planningSlide43

When is a Trust right for you? Analysis must be done with your professional advisory team to determine if it is right for youConsider all of the costs, benefits, taxes, and added administration before making a choice Consider whether it meets your goals Consider whether it is right for your intended beneficiaries, although it is ultimately your choice! Slide44

Estate FreezesEstate Freeze - a technique used to freeze the value of someone’s business interest, pass the future growth in that business to someone else, and yet still control the

businessAllows a person to lock in

capital gains

Corporations

, partnerships, family trusts can be used as a vehicle to effect an

Estate Freeze

Particularly effective for multi-generational businessesSlide45

Graduated Rate Estate (GRE) – New! A GRE is an Estate

Conditions

for an Estate to

be a GRE

no more than 36 months have passed since death

Estate

is a testamentary trust

Estate

designates itself as the GRE in its first tax return

deceased’s SIN provided in

Estate tax

return

no other

Estate is

designated as the GRE of the deceased

N

o

grandfathering of existing trusts or

EstatesSlide46

GRE ContinuedWhy GRE status is important:graduated tax rates on income earned and retained in the

Estate no tax instalment obligations

off calendar year end permitted

access to new flexible donation credit rules

nil

capital gains inclusion for donation of shares on death

availability

of 164(6) and 112(3.2) loss

carry back ruleSlide47

GRE Continued Important to make sure that where possible you take advantage of this designation and that there is language in the Will to provide for it. Once assets transferred from the Estate to a testamentary trust, favourable tax benefits cease Different rules apply in terms of year ends that may be more favourable Slide48

Questions? Slide49

Thank you! Alaina SpecLow Murchison Radnoff LLP 1565 Carling Avenue, Suite 400Ottawa, Ontario, K1Z 8R1

aspec@lmrlawyers.com 613.696.1312