Estate Planning Flashcards
1
Q
When is a general power of attorney effective?
A
Immediately, once it is signed and witnessed.
2
Q
When does a general power of attorney terminate?
A
When grantor dies, attorney dies or grantor becomes incapacitated due to mental infirmity.
3
Q
What is the difference between a general power of attorney and a continuing power of attorney when it relates to mental infirmity?
A
A general power of attorney ends when the grantor becomes incapacitated due to mental infirmity.
A continuing or enduring power of attorney continues and is used as a legal means to provide an individual with the authority to act on behalf of the grantor in the event the grantor becomes incapacitated due to illness, injury or senility.
4
Q
What are the two types of enduring (continuing) power of attorney?
A
- General power of attorney that incorporates the continuing or enduring clause
- An enduring power of attorney that becomes effective when triggered by a specific event such as mental incapacity of the grantor (aka a springing power of attorney or a contingent power of attorney).
5
Q
What is a general power of attorney?
A
It provides an attorney with the power to make decisions or commitments that an individual can make on his or her own with the exception of making a will or a power of attorney
6
Q
What is a limited power of attorney?
A
A power of attorney where the grantor authorizes the attorney to make decisions and commitments on the grantor’s behalf for a specific or defined task
7
Q
Does a continuing or enduring power of attorney provide the authority to deal with an individual’s estate?
A
No, the attorney’s authority is limited to the period while the grantor is alive and the document remains valid.
8
Q
What is a power of attorney for personal care?
A
A legal document through which the grantor appoints an attorney to make binding decisions regarding the grantor’s medical or personal care during the grantor’s lifetime but only when the grantor is unable to do so because he or she incapacitated due to illness, injury or senility.
9
Q
Does a power of attorney for personal care provide the attorney with any powers or authority relative to the grantor’s property?
A
No. It’s only for decisions regarding health and personal care.
10
Q
What are the types of wills?
A
- English form will
- Notarial will
- International will
- Holograph will
11
Q
What is an English Form Will?
A
A will that requires the signature of 2 witnesses.
Must be a written document (typed or handwritten) signed by testator in the presence of 2 witnesses.
12
Q
What is a notarial will?
A
A will that is drawn up by a notary and incorporates the date and the place that the will was made and is read by the notary to the testator.
Commonly used in Quebec, and does not have to be probated under Quebec’s civil law.
The will doesn’t require witnesses at the time it is read by the notary to the testator but requires the testator sign in the presence of a witness. It can be a single witness.
13
Q
What is an international will?
A
A will used when a testator owns assets outside his country of residence.
14
Q
What is a holograph will?
A
A will written in the personal handwriting of the testator.
15
Q
What is a mirror will?
A
A mirror will is used to describe a situation when two wills are drafted (often for spouses) and each testator is the beneficiary of the other’s residuary estate.
16
Q
What is a joint will?
A
A joint will is will where two or more people execute one will intended to serve as the will for any or all parties. It is rarely recommended.
17
Q
What is a mutual will?
A
A mutual will is used with two spouses who execute separate but related wills. Where two documents are prepared as mutual wills, the two wills mirror each other.
Eg. John leaves his assets to Mary and Mary leaves all her assets to John. They both have mutual wills that mirror each other.
18
Q
What is the purpose of a will?
A
To give directions relating to issues such as:
- Distribution of testator’s assets
- Appointment of an executor
- Recommendation for the preferred guardian of any minor children
- Specific powers entrusted to the executor or any trustees
19
Q
Is a will made under duress a legal will?
A
No.
20
Q
What is an ademption?
A
An ademption refers to the removal of a bequest within the will because the asset is no longer in the estate at the time of testator’s death.
It is important that a testator include a statement in their will to address the possibility that the item will no longer be in the estate.
21
Q
What is an abatement?
A
An abatement is when there are not sufficient assets available to satisfy the bequest so the amount is lowered or adjusted to reflect a reduced amount.
22
Q
What is a lapse in terms of a will?
A
A lapse is when a gift cannot be made under a will because the intended beneficiary has died before the testator and there is no contingent beneficiary.
23
Q
What is the gift over provision?
A
The gift over provision is the power of the testator to name a contingent beneficiary.
24
Q
What is a residual estate or a residue?
A
A residual estate or a residue is the remainder of the estate after debts, expenses, taxes and legacy distributions
25
What is per stirpes?
Per stirpes is a system where the children of a deceased parent share in the inheritance that their parent would have received had he or she survived the deceased.
That is, e.g., the grandchildren will share the inheritance in the place of and with the children of the deceased.
26
What is per capita?
Per capita is when the descendants of the deceased share equally in the size of the share share that each inherits regardless of kinship.
27
Mary had 3 children: Bob, Carl and Don. She died leaving a net estate of $300,000 to be split between her children. But Bob predeceased Mary a few years ago, leaving his kids: Frank and Etienne.
Upon Mary’s death, her estate was distributed as follows:
$100,000 to Carl
$100,000 to Don
$50,000 to Etienne and $50,000 to Frank in Bob’s stead.
What type of designation is this: per stirpes or per capita?
Per stirpes
28
What is a Henson trust or an absolute discretionary trust?
A Henson trust is a trust that provides the trustee with the authority to use his or her discretion in the management of the trust so that the doses led person does not have absolute rights to the property.
This is used to help in cases so a disabled person does not disqualify for government benefits because of exceeding prescribed limits. It is quite common to fund the trust with life insurance, even though it can be funded with existing estate assets.
29
What are the two methods for an estate executor or administrator to bring closure to the estate?
1. Release from beneficiaries
| 2. Passing of the accounts
30
What is the common disaster clause?
The common disaster clause is the requirement that a specific beneficiary survive the testator by a period of at least 30 days in order to qualify to receive the inheritance.
It reduces the possibility of the beneficiary’s estate or beneficiaries inheriting the gift if he/she dies a few minutes, days or hours of each other. Also minimizes the likelihood of double probate that would arise in a flow through situation.
31
What is a testamentary trust?
A testamentary trust is a trust created on the day a person dies.
32
Does an executor have the power to establish a testamentary trust after the demise of a testator?
No.
A testamentary trust must be established prior to the testator’s death either in the will or by law or court order under provincial legislation.
33
What are the two categories a testamentary trust falls under?
1. Spousal trust
| 2. All other non spousal trusts
34
What is a spousal trust?
A testamentary spousal trust or common law partner trust is a trust created at the time of the testator’s death in which the surviving beneficiary spouse or partner is entitled to receive all income that may arise during his or her lifetime and is the only person who can receive or access use of any income or capital of the trust during his or her lifetime.
It allow settlor to provide needs for the spouse during spouse’s lifetime while maintaining control of the assets.
35
What is a qualified spousal trust?
A qualified spousal trust is one created by the deceased for the benefit of his or her spouse or partner such that only the spouse and partner receive income or capital of the trust before the beneficiary spouse or partner’s death.
To be qualified, the trust must be a Canadian resident, property must vest within 36 months. If it does not meet this criteria, it is a tainted spousal trust which becomes a non spousal trust.
36
What are the benefits of a qualified spousal trust?
1. It receives special tax treatment such as spousal rollovers which allow the trust to maintain control of the assets
2. It is not subject to a deemed disposition of its assets every 21 years
37
What is a non-spousal trust?
A non spousal testamentary trust is a trust that does not meet the definition of a qualified spousal trust
38
What is a testamentary trust commonly used for?
To hold assets that are to be retained and managed over an extended period of time. Eg a family cottage
39
What is consanguinity?
Consanguinity refers to a relationship connection by blood.
40
What is lineal consanguinity?
Lineal consanguinity exists between descendants where one is directly descended from another such as mother, daughter and granddaughter
41
What is a collateral consanguinity?
Collateral consanguinity is used to describe individuals who have a common ancestor but have descended from a different line. Eg brothers, sisters, nieces and nephews, there is a common ancestor but not a direct lineage
42
What is a preferential share?
A preferential share is the specific dollar amount of the net estate directed first towards the surviving spouse if the deceased dies intestate. In Ontario, the preferential share is up to $350,000.
43
What happens if the net value of the estate is below the pre-established preferential share amount?
The full amount passes to surviving spouse.
44
What happens if the net value of the estate exceeds the preferential share?
Then the surviving spouse receives the preferential share amount and then shares in the residue of the estate with the intestate’s children.
45
Is eligibility to share in the estate based on the age of the children?
No, it’s based on their relationship.
46
What is an issue?
An issue in estate planning is all lineal descendants born in and out of marriage.
47
If an intestate dies leaving a spouse and an issue and all the issue are also issue of the surviving spouse, how is the estate treated?
The entire intestate estate goes to the surviving spouse.
48
If an intestate dies leaving a spouse and an issue and the issue is not also an issue of the surviving spouse, what happens with the estate?
Then the preferential share comes into play whereby the surviving spouse will receive a preferential share of the intestate estate and also share in the residue of the estate with the children or issue if the net value of the estate exceeds the preferential share.
49
What are the two criteria upon which the distribution between the spouse and the children in a scenario where the net value exceeds the preferential share?
1. When there is a spouse and one child.
The net value of the estate is to be distributed one half to spouse and one half to child with child’s share is distributed per stirpes to his issue of predeceased.
2. When there is a spouse and more than one child.
The distribution differs by jurisdiction. But one half to one third (mostly one third) goes to the spouse and the remainder goes to the children in equal shares per stirpes.
50
If there is no preferential share in the jurisdiction, how is an intestate divided?
1. If only spouse, no issue - 100% to spouse
2. If only children, no spouse - 100% to children
3. If surviving spouse and one child - one half to spouse and half to child
4. If surviving spouse and more than one child - 1/3rd to spouse and 2/3 to children in equal shares per stirpes
51
What happens if an intestate dies and has no surviving spouse or children?
The net value of the estate passes to the intestate’s parents in equal shares, except in Quebec. If only one surviving parent, then that person gets the full value.
If no surviving parent, then the estate is distributed equally between brothers and sisters. If no surviving siblings, then nieces and nephews share equally in the estate.
52
What happens if there are no surviving spouses, children, brothers or sisters, parents, nieces of nephews to receive the value of the estate for an intestate?
Then the estate is distributed to the next of kin of equal degree of consanguinity (related by blood).
Kindred is computed upward from intestate to the nearest common ancestor and then downward to the relative.
Kindred of half blood inherit equally with those of whole blood in the same degree.
53
What is an escheat?
An escheat is the process where a person dies intestate without an heir and the estate passes to the crown.
54
What is partial intestate and how is this treated?
Partial intestate is when an individual with a valid will dies but the will does not deal with the whole estate or a segment of the will is considered invalid.
When this occurs, jurisdictions typically integrate the benefits that a spouse is eligible for under the will of the deceased and the maximum entitlement the spouse is eligible to receive is under the provincial intestacy rules.
55
Under Quebec civil law, does a notarial will have to be probated?
No, because of the significant formality associated with its creation.
56
When it comes to ownership, what assets pass through probate?
Assets owned wholly by the deceased and assets owned through tenants in common.
57
What are some probate planning techniques that achieve a greater degree of confidentiality since probate involves loss of privacy, as a deceased’s will is exposed to public view?
1. Use of an inter vivos trust so assets do not form part of the deceased’s estate
2. Use of named beneficiary designations eg think life insurance, TFSA, RRSP etc
3. Use of joint title with the right of survivorship for asset ownership
58
What are some options to reduce probate fees?
1. Relocate to another province with lower fees.
| 2. Prepare multiple wills for individuals with different properties in different jurisdictions
59
Are assets owned by joint tenancy with right of survivorship subject to probate?
No.
60
What are the implications of transferring an asset from sole ownership to joint ownership with right of survivorship for probate purposes?
1. Creates a potential income tax consequence and can trigger an immediate tax liability
2. Exposes the property to creditors and family law claims of the new joint owner
3. Could disrupt the flow of the property relative to the original intentions
4. Could trigger implications relative to provincial legislation
61
Can RRSPs be moved to joint ownership with right of survivorship?
No, because the owner and annuitant must be the same
62
What is a joint tenancy ownership?
It is when there are two or multiple owners on a property and the death of one of the joint tenants causes the deceased’s share to pass immediately upon death to the surviving tenant. It is created through an express agreement only.
The deceased’s share does not pass to the estate nor is it governed by the will so the tenant cannot sever his share through this will. Valid strategy for not passing through to probate. But it can create vulnerability eg creditor exposure, family issues etc.
Commonly used for married couples.
63
What is an inter vivos trust?
A trust that is established during the settlor’s lifetime. It can be beneficially if there is a threat of the will being challenged by an heir of non heir.
64
Name some situations in which an inter vivos trust can be used.
1. An inter vivos can be established for the benefit of a spouse, common law partner, ex-spouse or ex-common law partner
2. Can be established in advance of a parent’s death in anticipation of providing for the maintenance and financial well being of children or even elderly family members
3. Can be valuable for retaining control of business interests
4. To maintain and administer a cottage or vacation property for future generations
5. Can offer privacy and confidentiality, as it only has a reporting requirement to CRA for tax
6. Can enhance creditor protection of assets
65
What is Donatio Mortis Causa?
It is a unique form of an inter vivos transfer whereby a seriously ill person, who anticipates that their death is near, gives a gift to an individual, conditional upon their death.
66
What are the conditions of the gift for an inter vivos transferred to be considered as donatio mortis causa?
Gift must be:
1. Of personal property and not real property such as real estate
2. Made by the donor in peril of death
3. Is only complete if death should occur as a result of an impending illness
67
Does a Donatio Mortis Causa gift form part of the deceased’s estate and is it subject to probate fees?
No
68
How are inter vivos trusts taxed?
At the top marginal tax rate both federal and provincial combined.
69
For property transferred into an inter vivos trust, there is a deemed disposition of the property by the settlor of the trust at the time the property is transferred. So settlor will realize a capital gain with a tax liability. What are the exceptions to this case?
1. When property is transferred to a spousal or common law partner trust or alter ego or joint partner trust that are deemed to have occurred at the settlor’s ACB, resulting in a tax deferred transaction.
2. Property transferred from an inter-vivos trust to a beneficiary of the trust at the trust’s ACB so the asset rolls over tax free. Just defers the capital gain till beneficiary disposed of property.
70
What is the deemed disposition rule for trusts?
A trust is subject to a 21 year rule such that there is a deemed disposition of capital property every 21 years from the year it was established.
71
What are the tax implications of a revocable trust relating to income attribution?
All income and capital gains are taxed to the settlor.
There is no tax free roll out to beneficiaries other than the settlor.
72
What happens, in terms of tax purposes, if the settlor is one of the discretionary capital beneficiaries of an irrevocable trust?
The trust is viewed as a revocable trust for tax purposes.
73
What are the two types of inter vivos trusts that are eligible for special tax treatment?
1. Alter ego trust
| 2. Joint partner trust
74
What are the tax implications of transferring property to a trust?
The property is considered to be disposed at FMV which triggers any capital gain and creates a tax liability. The exception to this rule is the rollover of property to a spousal trust.
75
What is an alter ego trust?
An alter ego trust is a trust in which an individual can transfer capital property to the trust without the transfer being considered as a disposition at FMV for tax purposes.
Disposition will be deemed to take place upon the death of the transferor at the property’s FMV at the time.
76
What are the qualifications of an alter ego trust?
1. Transferor has to be at least she 65 at the time the trust is created
2. The trust must be created after 1999
3. Only the transferor is entitled to all of the trust’s income during the transferor’s lifetime
4. No other person is entitled to the capital of the trust during the transferor’s lifetime.
77
What is a joint partner trust?
A joint partner trust is is a trust established by an individual for his or her benefit and for that of his or her spouse (or common law partner) where property rolls over tax free, thereby deferring capital gains until the disposition of the asset by the trust or the death of the two spouses.
78
What are the qualifications for a joint partner trust?
1. Transferor must be age 65 or older when trust is created (spouse’s age is not taken into consideration)
2. Trust must be created after 1999
3. Only transfer and his or her spouse is entitled to all of the trust’s income (attribution rules apply to income)
4. No other person is entitled to the capital of the trust during the transferor’s or the spouse’s lifetime.
79
When is a joint partner trust useful?
When the transferor is in a second or third marriage, a joint partner trust can be useful to support current spouse but also protect the assets and have them pass to children from first marriage.
80
When an inter vivos transfer of property takes place from a taxpayer to an alter ego or joint partner trust, the rollover provision automatically applies unless the taxpayer specifically opts out of the rollover provision. What are the tax consequences of the rollover provision?
1. The transferor is deemed to have disposed the property at its adjusted cost base (ACB) or undepreciated capital cost (UCC) in case of depreciable property
2. The trust that acquires the property assumes the taxpayer’s ACB for the property
The rollover results in no capital gain or loss for transferring spouse, tax is deferred until trust disposes property. Income attribution rules will continue to apply to the property transferred through rollover.
81
What are some situations in which opting out of a rollover for transfer of property to an alter ego or joint partner trust may be more economically viable?
1. Transfer of property at FMV to eliminate continued income attribution.
2. If taxpayer has current capital loss or a capital loss carry forward, that triggering a capital gain could permit an offset
3. Taxpayer may have a capital gain exemption under which the gain can be sheltered.
82
What is a spousal or common law partner trust?
An inter vivos spousal or common law partner trust is a trust established by one spouse during his or her lifetime and where the beneficiary spouse or common law partner is entitled to receive all income that may arise during his or her lifetime and is the only person who can receive or can access use of any income or capital of the trust during his or her lifetime.
83
In addition to a taxpayer’s final return, there is an opportunity to elect to file three additional returns on behalf of the deceased. The elective returns allow for specific types of income to be reported through separate income tax returns. This can lower marginal tax rate associated with relevant income or increase access to multiple tax credits or to better use tax credits that may be otherwise lost. What are the three elective returns associated with income?
1. Rights or things
2. Proprietor or partnership business income
3. Testamentary trust
84
What is rights or things income?
It is income that is owed to the deceased but not paid at the time of his or her death and which would have been included in the income had the taxpayer not died. There is no option to split the income between the rights or things return and the final return.
Income included on rights or things return:
- Employment rights or things
- Other rights or things
85
What are the items that rights or things return cannot include?
- Income from RRSP or RRIF
- Period accumulations such as bank account interest
- Bond interest accumulated between the last payment date prior to the deceased’s death and the date of death
- Capital property and eligible capital property
86
What are some types of income that can fall within the other rights or things category?
- Uncashed matured bonds
- Bond interest payable that was earned up to a period prior to death but not yet paid or reported in a prior year
- Declared and unpaid dividends, if the ex-dividend date (or date of record if no dividend date) is prior to the date of death
- OAS benefits due and payable on a date proper to the deceased’s death
87
Can the income tax liability for items that fall within the rights or things return be transferred fully or partially to a beneficiary, who then becomes responsible for reporting the income on their tax return?
Yes.
88
What is stub period?
Stub period is the period between the end of the fiscal year of a business and the date of death of the business owner.
89
If testamentary debts are being handled through a spousal or common law partner trust, what is the extension for the due date for filing the final return?
18 months after the date of death
90
What are the qualifications for a spousal rollover for a trust?
1. Deceased and deceased’s spouse must have been Canadian residents immediately prior to death
2. The property must vest indefeasibly in the spouse or trust created for their benefit within 36 months after death
3. If a trust is involved, the trust must be a Canadian resident immediately after the time the property vests indefeasibly in the trust
91
What are the tax consequences if a spousal rollover provision applies automatically when capital property is left to surviving spouses or common law partner?
The deceased taxpayer’s capital property is deemed to have been disposed at the property’s ACB or UCC for depreciable property
The spouse who receives the property assumes the taxpayer’s adjusted ACB or UCC for the property
The deceased spouse incurs no capital gain or loss in the deemed disposition. The surviving spouse assumes the adjusted ACB and tax is deferred until the spouse disposes the property.
92
What happens if a legal representative of the deceased elects to opt out of the spousal rollover provision, what are the tax consequences?
1. The deceased is deemed to have disposed the property at the FMV so that if there is a capital gain, it may be taxed.
2. The receiving spouse is set to receive the property at an ACB equal to the FMV
93
An allowable capital loss from a disposition. Of capital properties can generally be offset against taxable capital gains.
Usually if a taxpayer has an allowable capital loss and no taxable capital gains, the allowable loss cannot be claimed against any other type of income. What is the exception in this case? When can an allowable capital loss be claimed against any other type of income?
The exception is in the year of the taxpayer’s death where a capital loss that is realized in the year of seatbelts or a capital loss that is carried forward into the year of death is deductible against any type of income realized in that year.
94
What is the criteria for the transfer of farm property from a taxpayer to his or her child at death can occur on a tax free rollover basis?
1. Property must be located in Canada and must have been used as a farm or regular and continuous basis by the transferor or spouse or partner or children immediately prior to the transfer
2. Property is transferred from taxpayer to child as a consequence of taxpayer’s death
3. Recipient child was resident in Canada immediately prior to the taxpayer’s death.
4. Property becomes indefeasibly vested in receiving child within 36 months of taxpayer’s death.
95
When spouses own property as joint tenants, what are the tax consequences?
The spousal rollover automatically applies if the qualifying criteria is met.
Or the deceased’s legal represent is it may elect out of the rollover provision and the tax consequences that apply to general joint owners apply.
96
Upon the death of an RRSP annuitant, what are the tax consequences of a deceased’s assets in an unmatured RRSP transfer to anyone other than a qualifying beneficiaries such as a spouse, common law partner or a qualified child or grandchild?
The fair market value of the plan assets immediately before death are included in the annuitant’s income for the year of death.
If there is a decrease in the value of an unmatured RRSP or RRIF between date of death and final distribution to estate or beneficiary, then the legal rep for the decreased can request the amount of the decrease to be deducted on the final return.
97
Upon the death of an RRSP annuitant, what are the tax consequences of a deceased’s assets in an unmatured RRSP transfer to a qualifying beneficiary such as a spouse, common law partner or a qualified child or grandchild?
Then there is no tax consequence to the deceased’s estate,
The tax consequence passes on to the receiving individual. The receiving individual must transfer the assets to a qualifying account eg RRSP, RRIF or annuity in the year of receipt.
Otherwise it will be included as income in the year of receipt for the beneficiary. The amount being transferred muster the definition of a refund if premiums.
98
What is a refund of premiums?
A refund of premiums is defined as any amount paid out of or under an RRSP to the spouse or common law partner or dependent child or grandchild prior to the plan’s maturity.
99
Can a deceased’s legal representative contribute to the deceased’s RRSP and to a spousal RRSP?
The representative can contribute to a spousal RRSP on behalf of the deceased but not to the deceased’s RRSP.
Contributions made to a spousal RRSP are allowed and provide the opportunity for an RRSP deduction on the final income tax return of the deceased up to the available deduction limit.
100
What is an employee death benefit?
An employee death benefit is a benefit paid as a result of death of an employee where the death benefit is a recognition of service in an office or employment.
101
What are the tax consequences when a deceased tenant’s share passes onto the other joint tenant through right of survivorship immediately upon death?
1. The deceased taxpayer is deemed to have disposed their interest in the property at the FMV immediately prior to death
2. The remaining tenant acquires the property at a cost base equal to the fair market value
102
What is the maximum cumulative exemption amount of an employee death benefit that is exempt from income tax?
$10,000
103
What are payments that qualify as an employee death benefit?
1. Payment in recognition of an employee’s service (lump sum or periodic amount)
2. Payment in recognition of service for an employee who dies prior to retirement where the amount may represent a settlement if the deceased’s accumulated sick leave credits.
104
What is a resident alien and a non resident alien?
A resident alien is a person who is normally taxed on world wide income, similar to a U.S citizen. A Canadian citizen who is a resident in the unites states either permanently or with the intention of making it permanent is a resident alien.
A non resident alien is only taxed on income from sources within the United States and on certain income connected with conduct of business in the United States. Eg canadian snow birds are non resident aliens.
105
What is a U.S situs asset?
A U.S. situs asset includes assets such as real estate or tangible property located in the U.S.
A Canadian who is not a U.S citizen and is a non resident of the U.S but owns property that is a U.S. situs asset is subject to U.S. estate tax.
106
What are examples of U.S situs assets?
Vacation home in the U.S.
Personal furnishings in the vacation home in the U.S.
Shares of a U.S corporation regardless of where it was purchased e.g. Apple stock shares purchased on a TSX.
Corporate debt obligations, bonds or promissory notes issued by U.S corporations.
Currency held in a safety deposit box within a U.S bank. - All subject to U.S. estate tax
107
What are examples that are not considered U.S. assets?
Canadian mutual funds holding U.S. investments
Funds on deposit with a U.S bank
108
What payments do not qualify as an employee death benefit?
1. Retirement compensation arrangements (RCA) payments
2. Payments out of a salary deferral program or those out of a superannuation or pension fund
3. CPP or QPP death benefit
4. Payment in respect of accumulated vacation leave or representing overtime
109
Why is a holding company a valuable place to accumulate and diversify investments?
Because when the taxpayer/shareholder dies, only shares of the holding company are dealt with in his or her will.
Assets within the a holding company continue uninterrupted, reducing the need to liquidate or transfer many different investment holdings.
110
What is an estate freeze?
An estate freeze is a planning technique that allows the owner of an opco (operating company) to freeze the growth of his or her interest in an operating company in order to avoid further capital gain on his or her shares that would be triggered at death.
111
When is an estate freeze useful?
When a shareholder has accumulated sufficient long term wealth and would like the future growth of the corporation to accumulate for the benefit of the intended heirs.
112
How can a holding company be used to effect an estate freeze?
The holding company becomes the owner of the common shares of the operating company.
The shareholder of the opco transfers his shares of the opco to the holdco and takes back fixed value of preferred shares of the holdco in exchange.
113
How much may charitable donations be claimed on income? And what is the carry forward provision?
Charitable donations may be claimed up to 75% of the taxpayer’s net income. Any amount not claimed in the taxation year may be carried forward and used in the subsequent 5 years.
In the year of death, they may be claimed up to 100%. Amounts that a deceased taxpayer cannot claim in the year of death because of net income maximum may be carried back one year and claimed as a credit up to 100% of net income.
114
What is the super credit when it comes to donations?
It is the credit for first time donors who have not claimed and been allowed a charitable donation tax credit on any year after 2007.
If eligible, they qualify for 25% on the first $1000 donated.
40% on the first $200 of donations and 54% of the amount donated in excess of $200 to a max of $1000.
It expired at the end of 2017.
115
How is the credit calculated for charitable donations?
- 15% on the first $200
- 33% on either the amount of donations above the first $200 or the amount of taxable income over $202800 in 2018 (whichever is less) - only used if someone has a taxable income that exceeds the top personal tax bracket
- 29% on total donations for the year above the first $200 which are not eligible for the 33% rate above.
116
What are the three methods for using a life insurance policy to plan a charitable gift?
1. Absolute assignment of the life insurance policy to the charity.
2. Retaining ownership but designating the beneficiary as the charity
3. Using a life insurance policy to fund a bequest made within a will
117
If a life insurance policy is transferred from a donor to a charity through an absolute assignment, who is responsible for premium payment?
The new owner which is the charity. But the donor can still be the payor, with the premium payments treated as a charitable donation for tax purposes. The donor however is not obligated to continue paying the premiums.
119
If Ben owns a life insurance policy on His spouse, Kate’s life, and the beneficiary is listed as a charity she deeply cares about, when Kate dies, are the life insurance proceeds treated as a donation?
No.
Instead Ben could name name himself as the beneficiary and is the owner of the policy on Kate’s life, and use the proceeds as a direct contribution to the charity and get a tax receipt for the donation.
120
What happens if Ben names his estate as the beneficiary of his life insurance policy on his life and makes a bequest to a charity of his choice in his will using the life insurance policy to fund the bequest?
The estate is the beneficiary of the policy so the proceeds will be paid to the estate upon Ben’s death.
The estate will use the proceeds to fund the charitable bequest and receive a donation receipt which can then be used in the year of death or carried back one year.
But this method makes the proceeds subject to probate and claims from creditors of the estate.
121
How are the donations treated if the policy is:
(a) a whole life or universal life policy with a cash surrender value?
(b) a term policy or universal life policy with no cash value?
Assume the policy is transferred through absolute ownership from donor to charity.
(a) a whole life or universal life policy with a cash value - the donation would be considered as a disposition and any income gain is taxable to the owner (the donor)
If the donor continues to pay premiums, then the premiums are treated as a donation for tax purposes.
(b) if the policy has no cash value and no dividends on deposit - then there is no tax receipt if the policy is transferred through absolute ownership to the charity. However if the donor continues paying premiums, the premiums are treated as a charitable donation.
122
With an alter ego trust, an individual can transfer capital property to the trust without it being a disposition for tax purposes. In other words, assets can be rolled over into an alter ego trust tax free, what are the tax implications when the transferor dies?
With an alter ego trust, disposition will be deemed to have taken place on the death of the transferor of the trust at the FMV at that time.
Sale of an asset by the trust is also a disposition.
