Funeral service preparations, obtaining proof of death and distributing inheritances are some of the many things your loved ones have to take care of upon your death. The last thing you want them to worry about is the additional financial consequences of your death. In particular, the more value in assets you have at death, the more your heirs may stand to lose to the government as a result of the Estate Administration Tax, otherwise known as probate or death tax, for which Ontario has the highest rates in Canada.
Your estate must pay this tax in order to probate your will or estate, a process required for transferring real estate and other assets to your heirs. Death tax is based on the value of your estate with certain exceptions. Knowing these exceptions provides methods of minimizing death taxes but each method comes with its own risks, some of which are listed below. Though you may not be able to beat death, at least you can beat the taxes that go with it!
- Gifting or donation of property: If you do not own a property at death, it cannot be included in the value of your estate. Risks Include:
- Tax consequences as more specifically discussed in our previous blog article: https://grinhauslaw.ca/when-it-comes-to-real-estate-giving-a-gift-can-be-taxable/
- Family rivalry similar to the risk of putting assets in joint ownership
- Secondary Will: The death tax is paid only on the assets included in the will submitted for probate. You can therefore have a separate secondary will for assets that do not require probate. Often, this is done for shares in a privately-owned corporation, which sometimes constitute a significant part of the estate and if probated, would result in significant death tax. Risks Include:
- Careful drafting of the multiple wills is required to ensure consistency and accidental revocation of the will that needs to be probated.
- Confusion of responsibilities between executors if they are different amongst the different wills.
- The executor(s) administering the non-probated secondary will is held to a lower standard than executor(s) for the probated will, leaving more room for them to act against your wishes
- Designate Beneficiaries: You can designate a beneficiary for many of your financial products including bank accounts, RSSPs and life insurance policies. If this is done properly, these assets will bypass death taxes and could save your family thousands. Risks Include:
- Without written instructions in a will, designated beneficiaries may openly defy your wishes of how the funds are to be used and the other beneficiaries will have lost the legal protection afforded to beneficiaries of probated wills and estates
- Potential income tax consequences
- Joint Ownership: You can add your children or spouse on title to your assets such as bank accounts and real estate so that when you pass away, the asset can become theirs without requiring probate. Risks Include:
- If adding an owner on title to real estate is done improperly, it could result in a significant death tax being imposed on one of the most significant estate assets.
- Transfer of real estate also comes with other real estate considerations including potential loss of first time homebuyer benefits, mortgages, capital gains, land transfer tax and Planning Act These considerations could affect the ability of your loved ones of being able to maintain and sell the real estate in the future.
- Family rivalry may arise from certain family members learning that they were not added on title while others were.
- Move the property into trusts: If property is held in trust, it will be distributed pursuant to the terms of the trust and therefore will not require probate. Risks Include: Each type of trust has specific tax treatment rules. Not knowing these rules could result in the amount of non-death tax you incur prior to death outweighing your potential savings in death tax.
It is important to receive professional legal and accounting advice before deciding how to structure your estate. Contact the legal professionals at Grinhaus Law Firm today to learn more about how you can both arrange ownership of your assets in the most tax-efficient manner while minimizing the risk that your loved ones will fight over your estate instead of supporting each other during their time of loss.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.