Cfp - Estate Planning

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Testamentary Trust

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1. A trust created through an individual's will and can be used to distribute assets and income according to the deceased person's wishes

2. Year end is no longer the date of death of the deceased taxpayer and is now December 31st

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Advantages/Disadvantages of Testamentary Trusts

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Advantages:

1. Control of property until death and after death

2. Settlor has flexibility to make changes to his will depending on relationship with beneficiaries

3. Capital gains taxes deferred until you die

4. Qualifies for GRE

5. Income splitting between trust and beneficiaries with GRE

6. No attribution of income as settlor is deceased

Disadvantages:

1. Subject to probate fees

2. Expensive to administer, 21-year deemed disposition

3. May lead to disputes with surviving beneficiaries

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Intestate

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If you die without a valid will and provincial legislation determines the distribution of your estate

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Intestate Distribution Examples

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If you pass away without a valid will, your wife is entitled to $200K (in Ontario) as a preferential share + 1/3 of the remaining estate value. The rest of your estate is divided 2/3 per stirpes among the surviving children or grandchildren

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Escheat

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The process determined by provincial legislation through which the estate passes to the Crown if a person dies intestate and without an heir

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Net Value of the Estate

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The value of the estate after payment of any charges to the estate, debts and expenses

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Will

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A legal document which expresses the deceased's wishes on how their property is distributed at death

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Probate

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A legal process following the testator's death to validate the will of a testator

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Probate Fees / Formula (in Ontario)

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1. $5 per $1000 of estate assets up to $50K

2. $15 per $1000 of estate assets over $50K

If the net value of your estate is $1M, this is the formula

PBF = $5 (50K/1000) + $15 [(1M-50K)/1000]

PBF = $14 500

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What should your will include?

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1. How assets are to be divided

2. Appointment of executor/executrix

3. Name a preferred guardian for minor children

4. Common disaster clause (for minor children)

5. Specific powers for executors or trustees

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Clauses in a will in order to be valid

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1. Revoke all previous wills

2. Appoint executor

3. Identify testator

4. Instruct executor to pay all debts, funeral and final expenses

5. Identify beneficiaries

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Special Clauses in the Will

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1. Discretionary Encroachment - Allows executor to use discretion with respect to assets left for a minor beneficiary before they turn 18

2. Investment Discretion Clause - Allows executor to make investment decisions with estate assets

3. Tax-election clause - Allows executor to make tax-related decisions that will benefit the testator or the estate

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Marriage and Wills

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1. A will created before a marriage will void the previous will

2. If the person dies after marriage without a valid will, his estate will proceed according to the rules of intestate succesion

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Per Stirpes vs. Per Capita

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1. Per stirpes is where the children of a deceased parent share the inheritance that their parents would have received had he survived the recently deceased. (surviving spouse of children are not entitled to estate assets)

2. Per capita is where the descendants of the deceased share equally in the size of the share that each inherits regardless of degree of kinship.

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Example of Per Stirpes

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John had recently passed, his estate was worth $300K. John has 3 kids--Michael, Tom and Bob. Bob has 2 kids, Brian and George. Bob also had passed away before John.

=> Michael and Tom will receive $200K and Brian and George will split $100K (Bob's share of John's estate).

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Example of Per Capita

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John had recently passed, his estate was worth $300K. John has 3 kids--Michael, Tom and Bob. Bob has 2 kids, Brian and George. Bob also had passed away before John.=> Michael, Tom, Brian and George will split evenly $300K and each will receive $75K.

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Codicil

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Single or a few items that are updated in a will

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Executor/Executrix

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A person who will be in charge of ensuring your estate is distributed according to your wishes

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Role of Executor

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1. Gathering and account assets of the estate

2. Payments of outstanding debts including income taxes triggered by death of deceased

3. Distribution of estate assets

4. Completion of personal and estate income tax returns

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Types of Wills

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1) Formal Will

2) Holograph Will

3) Notarial Will

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Formal Will

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Typed document signed by you and with at least signatures from 2 witnesses

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Holograph Will

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A handwritten document signed by you, no need for a witness

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Notarial Will

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Legal document for residents in Quebec which require only 1 witness' signature

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Joint Tenant

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1) Transferring ownership of your property/asset to a surviving individual immediately upon your death

2) Capital property is subject to capital gains at the time of death except spousal rollover cases

3) Survivor acquires the property at the deceased taxpayer's FMV, except for spousal rollover cases

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Benefits of electing joint tenants

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1. Rights of survivorship - property will pass to survivor, outside of your estate

2. Avoids probate fees and creditors claim to asset

3. Property transfers immediately upon death--saves time and avoids disputes with deceased's will

4. Can potentially pay for an immediate tax liability now instead of deferring a larger tax liability in the future

5. Can split property income with adult children

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Negatives of electing joint tenants

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1. You lose control of the property, the new joint tenant has the right to use the property however they choose

2. If the new joint tenant has a divorce, his share will be subject to divisible assets

3. Creditors can seize property of new joint tenant (i.e. if new joint tenant is sued)

4. Triggers immediate tax liability

5. Property transfers automatically to surviving joint-tenants, could not be transferor's wishes if one of the surviving joint-tenants is better at handling finances than the other

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Benefits of Named Beneficiaries

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1. Bypasses probate and reduces probate fees

2. Ensure beneficiaries receive assets according to the deceased's wishes

3. Minimizes the delay of asset transfers to beneficiaries

4. Minimizes challenges brought to the will

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In what situations would you name your estate as the beneficiary of an asset?

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If your estate requires sufficient liquidity to cover the deceased's income tax bill and debt

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Tenancy in Common

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1. Ownership of an asset by 2 or more individuals, but without the right of survivorship

2. Property will transfer to deceased's estate then to their heirs upon death

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Gifting

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A voluntary transfer of property to another without the expectation of anything in return

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Valid Gifting

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1) There must be evidence of the donor's intention to make a gift

2) There must be a physical act of some sort to give effect to the intention

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Planned Giving

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If you gift an asset to a charity or a foundation while you're alive, the organization can issue you or your estate with a receipt for a charitable tax credit

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Bequest

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Gifting an asset to a family member or individual through your will

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Estate Priority Order

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1) Funeral Expenses

2) Income Taxes

3) Taxes Payable under Provincial Estate/Probate Legislation

4) Outstanding Debts

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Trusts

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A separate entity in which a settlor decides how their assets will be distributed to their beneficiaries while having full control of their assets

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3 Certainties of a Trust

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1. Certainty of Intention - settlor must have clear intention to create trust

2. Certainty of Subject Matter - property held in trust must be clear

3. Certainty of Objects - beneficiaries must be identifiable

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Settlor

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The individual that transfers legal property to the trust

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Living Trust / Inter Vivos Trust

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1. Trusts created while you're alive

2. Year end is December 31st

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Benefits of Inter-Vivos Trusts

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1. Does not form part of estate minimizing family conflict and probate fees

2. Access to income from trust while alive

3. Privacy

4. Retain control

5. Creditor protection

6. Avoids challenges in the will

7. Income splitting with adult children?

8. Vehicle for estate freeze?

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Disadvantages of Inter-Vivos Trusts

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1. Immediate tax consequence when property/assets are transferred to the trust (except for spousal, joint and alter ego trust)

2. Expensive to administer, 21-year deemed disposition

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Inter Vivos Transfer

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1) When a taxpayer transfers property to a Inter Vivos trust, the property is transferred at the taxpayer's FMV (except for spousal rollover and QFP to a child)

2) The beneficiary's ACB/acquires the property at the taxpayer's FMV (except for spousal rollover and QFP to a child)

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Testamentary/Inter Vivos Spousal Trust

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An trust created in which the settlor wants to ensure their children inherits their estate but want their spouse also taken care of during his/her lifetime

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Features of a Spousal Trust

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1) Can be used to defer income taxes on a settlor's estate through spousal rollover provisions (i.e. Capital gains can be deferred until surviving spouse dies)

2) Transfers to a spousal trust can be done at the settlor's ACB without triggering any capital gains

3. Beginning in 2016, trust's taxation year end is on the date of spouse's death

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Advantages of Spousal Trust

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1. Retain control of assets until you die

2. Creditor protection

3. Provides income for spouse during his/her lifetime

4. Assets can be transferred to children at spouse's death

=> Good for people who want their spouse and children to benefit from assets and protection of assets if spouse were to remarry

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Alter Ego Trust

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1) An inter vivos trust where a person can transfer capital property to a trust without the transfer being considered a disposition

2) Deemed disposition will occur at the taxpayer's death, at the property's FMV at that time

3) Can be used as a replacement POA

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Alter Ego Trust Eligibility

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1) Transferor must be at least age 65 at the time of trust's creation

2) Must be created after 1999

3) Transferor and the trust must be resident of Canada

4) Only the transferor is entitled to all the trust income during the transferor's lifetime

5) No other person is entitled to the capital of the trust during the transferor's lifetime

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Advantages of Alter-Ego Trusts

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1) Management (good for people that become infirm)

2) Creditor protection

3) Can be used as a will substitute (trust document indicates who will receive property on settlor's death)

4) Avoids probate fees/reduces delays

5) Privacy

6) Replaces power of attorney

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Joint Partner Trust

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1. Same as an Alter-Ego trust but the transferor and the spouse are entitled to all the assets within the trust

2. Deemed disposition once settlor or settlor's spouse dies, whichever is later

3. Attribution rules still apply to income between spouses

4. Beginning in 2016, trust's taxation year end is on the date of "second" death

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Advantages of Joint Partner Trusts

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1. Management

2. Creditor protection

3. Will substitute

4. Avoids probate fees/delays

5. Privacy

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Discretionary Family Trust

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1) A trust that is established for beneficiaries who have a family relationship to the settlor

2) The trustee is given the authority to determine if, when and the amount the beneficiary is to receive the proceeds of the trust property

3) Trustee may also determine to distribute income to beneficiary with lowest MTR to reduce taxes payable

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Non-Discretionary Trust

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Settlor decides on how and when the assets will be distributed and used by the beneficiaries

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Informal Trust

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1. A trust that is neither Inter Vivos or Testamentary trust

2. Money is held into the trust until the beneficiary is of age to use the funds

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Revocable Trust

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1) All or part of the property in a trust may revert back to the settlor if the settlor retains the right to approve distributions

2) All income and capital gains are taxed to the settlor and tax-free rollover is denied

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Irrevocable Trust

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1) Trust property that cannot revert back to the settlor

2) All income and capital gains are taxed to the trust or the beneficiary when he/she receives the income

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Precatory Trust

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A trust in which the deceased individual relies on the moral values of the recipient to carry out his wishes

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Types of Beneficiaries in a Trust

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1) Capital Beneficiary (Remainderman) - person entitled to receive the asset

2) Income Beneficiary (Life interest) - person entitled to receive income generated by asset (even a settlor can still be an income beneficiary

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Charitable Remainder Trust

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A trust with a charity named as the capital beneficiary and the donor retains an income interest on the trust property

1. Donor can receive income from the trust but the asset will transfer to the charity upon death

2. To receive a current tax-credit, the trust must be irrevocable

3. Receipt provided is based on the present value of remainder interest of the trust and the age of donor

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Advantages and Disadvantages of Charitable Remainder Trust

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Advantages:

1. Immediate tax credit received

2. Access to income from property while alive

3. All other benefits associated with inter-vivos trusts (i.e. creditor protection, privacy, no probate fees)

Disadvantages:

1. Expensive

2. Deemed disposition when property transferred to trust

3. Charity must be irrevocable beneficiary

4. Cannot access capital

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Taxes with Trusts

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1) Testamentary trusts are no longer taxed at same marginal tax rate for personal income tax of the beneficiary. They are taxed the at the top marginal tax rate like Inter Vivos trusts

2) Inter Vivos trusts are taxed at the top marginal tax rate

3) A trust must file an income tax return within 90 days after the year end of the trust

4) Attribution rules can still apply for Inter-Vivos trusts

5) Trust income can be distributed to beneficiaries with low tax brackets to reduce taxable income

6) Trusts qualify for personal tax credits (i.e. dividend tax credit)

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Property Transfers for Testamentary Trusts

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1) Deemed disposition occurs at taxpayer's death

2) Property is transferred from the deceased taxpayer into the estate and then into the testamentary trust

3) The trust acquires the property at the deceased's FMV due to deemed-disposition rules before death except for spousal rollover cases

4) Beneficiary receives property at taxpayer's FMV

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Property Transfers with Inter Vivos Trusts

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1) Property transferred to an Inter Vivos trust, there is a deemed disposition of the asset at its FMV at the time of transfer (except spousal rollover)

2) Trust acquires the property at the FMV of time of transfer and the beneficiary's ACB of the asset is the settlor's FMV at the time of transfer of property to the trust except for spousal rollover cases

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Property Transfers from the Trust to the Beneficiary

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Beneficiary can acquire the property at the trust's ACB (the deceased's FMV) and no deemed disposition occurs until the beneficiary disposes of the property

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Trust Income Taxation

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1. Income may be taxed at either the beneficiary's MTR or the trust's MTR

2. Income taxed in trust is paid out tax-free to beneficiaries

3. Trusts are not eligible for personal tax credits but can claim dividend tax credit, foreign tax credits and donation tax credits

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21-Year Rule

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1) There is a deemed disposition of trust property and tax must be paid on accrued and unrealized capital gains every 21 years

2) Tax on accrued gain can be deferred until the beneficiary disposes of the asset

=> Deemed disposition occurs every 21 years for all trusts except spousal, alter ego and joint partner trust

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Main Benefits of Having a Trust

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1. Having control and access of the assets within a trust while you're alive and dead

2. Allows your spouse, kids and grandkids to have access to capital within a trust

3. If beneficiary has a divorce, prevents trust to become subject of divisible assets

4. If spouse gets remarried, allows wife and kids to have access to the trust and not new husband

5. No probate fees, information is kept private

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Estate Freeze

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1) The purpose is to freeze all or part of the value of appreciating assets at their current value in a way so the future growth of these assets is passed to the next generation of family members and to avoid future capital gains triggered at death

2) Future growth will not be taxed in the hands of the parent but to the next generation

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Section 85 Rollover

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1) Involves transferring assets of value to a Canadian corporation without any taxable implications and there is no deemed disposition or capital gains realized

2) Can be transferred to the corporation at the individual's FMV, ACB or elected transfer price (ETP)

3) When assets are transferred to the corporation, the corporation issues retractable/redeemable preferred shares equal to the value of the assets to the transferor

4) Common shares are then issued to the heirs of the transferor

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Section 85 Rollover and Holding Company

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1) Transferor transfers the holding company the growth shares/corporation's shares in exchange for the retractable/redeemable preferred shares

2) Preferred shares can have voting rights which allow the parent to have control of the assets

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Section 86 Reorganization

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1) Transferor exchanges common shares for newly authorized retractable/redeemable preferred shares

2) The corporation issues preferred shares to the common shareholder with a value equal to the value of the assets

3) The assets with increased value are already in the corporation

4) New common shares are issued to the next generation of family (can also use a trust)

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Advantages of Section 86 Reorganization

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1) No need to incorporate an additional company

2) Occurs automatically and does not require any forms like Section 85

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Section 85 vs Section 86

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S85:

1. Joint election required

2. Can use LCGE

3. Requires Holdco usually

4. Many properties qualify (i.e. land, portfolio)

5. More expensive, takes longer

6. Creditor protection

S86:

1. Automatic

2. Cannot use LCGE

3. internal, 2nd corporation is not required

4. Can only rollover shares

5. Cheaper and quicker

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Benefits of Holding Companies (Holdco)

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1. Creditor protection - not subject to claims of business creditors

2. Investment Opportunity - defer tax on assets left within corp

3. Differing Shareholder Compensation Needs - holdco can distribute dividends or salaries to shareholders based on their needs

4. Estate Planning - assets within holding company can continue interrupted

5. Estate Freeze

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Crystallizing LCGE for Estate Freeze

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1. If the gain < LCGE, the elected transfer price should be ACB = FMV (don't crystallize all LCGE)

2. If the gain > LCGE, the elected transfer price should be ACB = (LCGE+ACB) (crystallize all LCGE)

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Power of Attorney

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Legal document which allows another person have control over your financial or personal affairs if you become temporarily or permanently mentally or physically incapacitated

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POA for Property and Health

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1. Ordinary/Immediate - grants power while you're capable of acting for yourself and ends once you become incapacitated

2. Continuing/Enduring - grants power while you're capable of acting for yourself and even after you become incapacitated

3. Springing - grants power only when you become incapacitated

4. General/Limited - grants power for only some of your assets

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Living Will

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A written statement by you to your family, friends and doctors about whether you wish to be kept alive by active life support or want to be kept comfortable until you pass away in the event you are terminally ill

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Taxes at Death

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1) Income tax due to deemed disposition

2) Provincial probate taxes

3) US Estate Tax for your US assets

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Ordinary Return / Terminal Return

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The deceased person's tax return due for the period January 1st to date of death

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Additional Tax Returns at Death

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1) Rights or Things

2) Partnerships/Proprietorship

3) Testamentary Trusts

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Rights or Things

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Income items that are earned but not received at the date of death (i.e. dividends declared, bond coupons matured but not cashed, unpaid employment bonuses, CPP and OAS payments received after death)

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Partnerships/Proprietorship Tax Return

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Income from the business from the end of the business fiscal period to the date of death

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Testamentary Trust Tax Return

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Income from the trust from the end of the trust fiscal period to the date of death

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RRSP Rollover

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When a deceased person passes away he can elect a spousal/financially dependant child rollover to their RRSP, RRIF or annuity to defer income. If the spouse does not rollover into their RRSP and elects to receive as cash, it will be included as spouse's income in the year of receipt

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Separation Agreement

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A legal document signed by both spouses which details the agreed arrangements upon separation

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Joint Custody

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Both parents have custody of the children

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Child Support Taxes

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If the child support amounts set out in a separation agreement or court order after April 30th, 1997 do not affect income tax if

1) The person who receives the child support payments does not have to list them as income on their tax return

2) The person paying the child support cannot deduct the support payments from their income

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Alimony and Spousal Taxes

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Taxable in the hands of the recipient and deductible by the payer and included in earned income

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Principal Residence Exemption (PRE)

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1) If a taxpayer owns a home and a cottage, he can elect to use PRE on either property

2) You must have lived in the property at some point during the year

3) If you rent out a property for a significant period of time, cannot claim PRE

4) Better to use PRE on the property with the most gains

5) PRE = Capital Gain * [(1+A) - B]

A = # years designated as principal residence after 1971, while resident in Canada

B = # of full/partial years of ownership after 1971

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US Estate Tax for Non-Residents

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US estate tax for non-residents is triggered if,

1. You have $60 000 (USD) of assets (i.e. US real estate, US brokerage account, direct holdings of US securities) AND

2. $11.2M of worldwide assets

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Resident Alien

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1) An individual taxed on worldwide income like a US citizen

2) A Canadian citizen that is a resident in the US either permanently or planning to become permanent

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Non-Resident Alien

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1) An individual is taxed only on his income from sources within the US

2) A Canadian citizen who resides in the US only temporarily (i.e. a Canadian who lives in their Florida cottage during winter seasons)

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US Situs Asset

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Property owned in the US is subject to US EstateTaxes

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Capital Beneficiary/Remainderman

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A beneficiary entitled to the property after the life tenant's interest expires (i.e. children after mother has died for a spousal trust)

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Remainder Interest

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The remaining property/capital within a trust after the remainderman has died

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Why you should avoid having assets form part of your estate

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1. Probate fees

2. Deceased's will and family information is available to the public

3. Assets part of your estate can take several months to transfer to beneficiaries

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Final Return and Estate

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1. Final return includes all taxes paid at death (i.e. capital gains for non-registered portfolios)

2. Estate includes all assets subject to probate (i.e. this will include life insurance, full amount of RRSPs and properties with estate as beneficiary and after all taxes have been paid)

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Graduated Rate Estate (GRE)

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A testamentary trust with preferred taxation rates

1) Can be a GRE for up to 36 months

2) Can only have one GRE per deceased person

3) Can choose non-calendar year-end

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Qualified Disability Trust (QDT)

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1) A testamentary trust taxed at graduated rates

2) Can only have one (similar to GRE)

3) Beneficiary must be eligible to receive the DTC

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Employee Death Benefit

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The death benefit paid to an employee is in recognition of service in an office or employment

1. Only the first $10K is exempt from taxes

2. Amounts over $10K are non-exempt

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Non-Registered Funds Rollover

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1. Can rollover directly to spouse, spouse acquires at ACB

2. Non-registered funds still available to the estate as only the deceased can name spouse as beneficiary in the will

3. Only segregated non-registered funds can bypass estate and probate