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CFP Canada Exam Study 2024 Needs Updating > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

POA

A Proxy Directive is?

A

Appointment of a substitute decision-maker for personal and healthcare decisions

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2
Q

POA

An Instructive Directive does what?

A

Provides instructions to the attorney related to both personal care and healthcare decisions

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3
Q

List 3 ways to distribute an estate as a form of planned giving

A
  1. Assigning ownership of insurance contracts
  2. Making charitable gifts through a will
  3. Make gifts prior to death by setting up an inter vivos trust

Insurance

Will

Trust

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4
Q

Husband Dies

Shares go to wife

Old ACB or New One?

A

Old ACB

Rollover

The delayed gift has no bearing on it and can sell long after the death

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5
Q

Death occurs

How do I get my RRSP to my 6 yr old and what are the conditions?

A

Term Annuity

Max Term

18 - age of child 6yrs = 12 yrs

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6
Q

Rollover of an RRSP to a term annuity for a child

When must payments begin and who’s MTR?

A

Within one year from the date of purchase,

payments must begin at

beneficiary’s MTR

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7
Q

What kind of trust should you have in order to leave assets to someone incompetent

A

Create a testamentary trust with the beneficiary as an income beneficiary.

Could give discretionary powers to the trustee

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8
Q

If you have a testamentary trust set up for your incompetent beneficiary and they die…what should you have done to account for this in the trust

A

You should have named a capital beneficiary as someone other than the income beneficiary

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9
Q

What is a good way for same-sex couples to leave a gift that will be private?

A

Some use life insurance as it is private and cannot be contested by the will which becomes a public document when it is probated.

No contested wills

Private

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10
Q

What are the primary duties of a trustee?

A

Prudence

Not profit

Not delegate

Treat Beneficiaries with Equity

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11
Q

In family law

What is included as net Family property?

A

Retirement Savings

Gains on business assets

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12
Q

If an Employer gives the deceased employee’s wife a bonus for her husbands service what is that called and how is it taxed?

A

It is a DEATH BENEFIT if it is up to $10,000

It is received TAX FREE

…it is NOT a retiring allowance and rolled into RRSP

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13
Q

What kind of trust would you create if you wanted to leave a donation but wanted to use the income of the asset during your lifetime?

A

Charitable Remainder Trust

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14
Q

In the event that someone becomes mentally infirm or incapable and there is no direction who takes over?

A

The provincial authority would take over.

Wills and Executors have nothing to do with it.

An appointed attorney in an enduring/continuing POA would be necessary to take control of the Grantor’s affairs.

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15
Q

What happens to RRSPs at death

A

If not passed to a surviving spouse or dependent children then they are declared on the final income tax return.

They are declared as the deceased’s income.

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16
Q

When is the YE of an inter vivos trust and how long after should the taxes be paid?

A

DEC 31

Taxes paid within 90 Days of YE

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17
Q

What is the order of payment in a Bankruptcy after secured creditors are paid?

A
  1. Funeral
  2. Trustee and Legal expenses
  3. superintendents levy
  4. $2000 in salaries or wages due to employees
  5. Family support pmts.
  6. municipal taxes
  7. rent due
  8. unsecured creditors
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18
Q

A Trust files a T3 return. What is the income threshold that will trigger the need to file a tax return?

A
  1. $500 or more of income
  2. Trust pays more than $100 to a single beneficiary
  3. maintenance of a property used by a beneficiary
  4. trust disposes of capital property
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19
Q

If you want to continue to control should you transfer your property to a trust while you are alive

A

No, you cease to have control the trustee has control

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20
Q

If you have a large estate should you consider an inter vivos trust?

A

It can be more expensive than probate if held in trust for a long time,

There would need to be a planning reason that exceeds just the probate reason

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21
Q

Is a property that is in an inter vivos trust included in your estate when you die.

A

No

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22
Q

What could you claim as an exemption on the sale of shares of a SBC?

A

Up to $892,218

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23
Q

What is Loco Parentis?

A

When someone takes on the responsibilities of a parent.

They don’t have to live with the child but perform duties or behave like a parent or refer to the child as their own.

This can be a boyfriend, or even grandparents

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24
Q

How old to purchase a LIF? and rules around the timing of withdrawals?

A

You cannot purchase a LIF until you are at least the early retirement age specified in the pension legislation governing the pension plan the funds came from.

You can begin receiving LIF payments when you reach the early retirement date or normal retirement date specified in the pension plan legislation. You must begin to receive payments in the year after you turn 71.

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25
Q

If you are a couple who should you base the min age of the LIF on, and how are they taxed?

A

You cannot use your spouse’s age to calculate the minimum withdrawal amount.

LIF payments are considered income and must be declared on your income tax, and are fully taxable at your marginal tax rate.

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26
Q

When you start a LIF whose consent do you need and why?

A

If you have a spouse, you must obtain their consent before the LIF can be set up because LIF withdrawals could impact a future death benefit payment.

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27
Q

What type of investments can you use for a LIF?

A

LIF investments follow the same rules as other registered products, and only certain types of investments are qualifying investments.

You must adhere to the minimum and maximum withdrawal requirements.

If your LIF is governed by Newfoundland and Labrador pension legislation, you must convert the LIF to a life annuity by the end of the year your turn 80.

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28
Q

Are you required to convert a LIF to annuity and by what age?

A

If your LIF is federally regulated or regulated by the province of Quebec, Alberta, New Brunswick, Manitoba, Nova Scotia or British Columbia, you are not required to purchase an annuity at age 80.

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29
Q

How are LIFs taxed at death? How is a Federal LIF different?

A
  • Upon your death, the balance of your LIF is paid to your spouse or, if they renounce it or in their absence, to your heirs.
  • If it is paid to your spouse, in the case of LIF under Quebec or Ontario jurisdiction, they can transfer it to their own RRSP or RRIF tax-free.
  • in the case of a federal LIF, the funds paid to the spouse remain locked and must be transferred to a locked-in RRSP or LIF in the name of the spouse.
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30
Q

How is the LIF Maximum determined?

A

There is an annual maximum withdrawal amount per year. The maximum LIF withdrawal is based on three factors: the market value of the LIF at January 1, the owner’s age and a federally determined rate known as the Canadian Socio-Economic Information Management (CANSIM) rate. The CANSIM rate changes every year.

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31
Q

Advantages of a LIF?

A

The funds in a LIF are creditor-protected. The full balance of the LIF cannot be seized to pay debts owing. However, the minimum withdrawal amount can be seized once the funds leave the LIF.

Account-holders can choose their own investments, as long as the LIF minimum continues to be available.

You can delay beginning to collect income until the year after you turn 71. That gives you more time for your investment returns to compound in a tax-sheltered environment.

You may be able to unlock some or all your LIF funds if:

You are facing a shortened life expectancy due to a terminal illness

You become a non-resident of Canada

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32
Q

What happens to a New LIF when you die?

A

This money may be paid out as an unlocked lump sum after your death, or may be transferred to your spouse’s own RRSP or RRIF, where it is permitted by the federal Income Tax Act.

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33
Q

What is the purpose of a LIRA?

A
  • The locked-in retirement account is designed expressly to hold pension funds for either a former plan member, a former spouse or common-law partner, or a surviving spouse or partner.
  • In general, you may not transfer a LIRA from the province in which it was registered.
  • Death benefits are not locked-in and can be paid out as cash, or the balance may be transferred to another of the owner’s retirement funds.
  • Once you reach normal retirement age, a LIRA can be transferred to a LIF.
34
Q

What happens to a LIRA when you die?

A
  • prior to reaching retirement age, the balance in your account would be transferred to your spouse or common-law partner.
  • If you and your spouse or partner were living separately because of a breakdown in your relationship prior to your death, then that spouse or partner would not be eligible to receive the death benefit.
  • No spouse or common-law partner, the balance goes to either a designated beneficiary or, if there is no beneficiary, then to your estate.1
35
Q

What is LPP?

A

Listed personal property is a type of personal-useproperty. The principal difference between listed personal property (LPP) and other personal use properties is that LPP usually increases in value over time.

LPP includes all or any part of any interest in or any right to the following properties:

  • prints, etchings, drawings, paintings, sculptures, or other similar works of art
  • jewellery
  • rare folios, rare manuscripts, or rare books
  • stamps
  • coins
36
Q

How is it different from other personal use property (PUP)?

A

The principal difference between listed personal property (LPP) and other personal use properties is that LPP usually increases in value over time.

37
Q

Name 5 types of LPP

A

LPP includes all or any part of any interest in or any right to the following properties:

  • prints, etchings, drawings, paintings, sculptures, or other similar works of art
  • jewellery
  • rare folios, rare manuscripts, or rare books
  • stamps
  • coins
38
Q

How is PUP defined?

A
  • PUP of a taxpayer is broadly defined to include property owned by the taxpayer and used primarily for the personal use and enjoyment of one or more of:
    • the taxpayer
    • a person related to the taxpayer
    • where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary
  • Also includes debts receivable from the sale of PUP and options to acquire property that would be PUP
39
Q

How is a PUP taxed?

A
  • $1000 rule: ACB or POD have to be greater than $1000 to be taxed otherwise exempt
  • example buy $400 sell $1400…$1400-$1000=$400 (bring the ACB up to $`1000)
  • tax owing is 400x50% x MTR = $200 x MTR =?
  • Example 2: ACB 500 POD 700…1000-1000=nil (Bring both to $1000)
  • Capital Losses on PUP always NIL
40
Q

How is a LPP taxed?

A
  • The exception to the rule prohibiting capital losses on PUP
  • Capital losses on LPP are not deemed nil
  • Can only be utilized against capital gains on LPP
  • In computing income, include taxpayer’s taxable net gain from dispositions of LPP
  • Taxable net gain from LPP = gains for the year from LPP less losses for the year from LPP
41
Q

What is the Exemption of the rule for losses on Personal Use Property (PUP)?

A
  • LPP is the exemption as you can write off losses
  • Net Gains of LLP - Net losses for the year of LLP
  • back 3 yrs and forward 7 yrs
42
Q

What does the $1000 rule apply to?

A

PUP and LLP

43
Q

Can you write off losses for a PUP?

A
  • NO, only LPP
  • The policy is that LPP is more like an investment than other PUP, so it is appropriate to allow some recognition of losses
44
Q

How do you qualify for CPP death benefit other than being deceased?

A

To qualify for the death benefit, the deceased must have made contributions to the Canada Pension Plan (CPP) for at least:

  • one-third of the calendar years in their contributory period for the base CPP, but no less than 3 calendar years, or 10 calendar years
45
Q

How would you calculate the estate value that goes through the Will?

what 5 categories can you list and how are they taxed to comprise the total value of the estate?

A
  • Anything not joint is included
  • Registered plans are fully taxable at MTR
  • Non-Reg plans are taxed at the MTR x 50% for CG
  • Any insurance proceeds left to the estate is full value
  • Personal bank accounts in the deceased’s name only

Take the total value after-tax and this is what is reported as the Total Estate

46
Q

What value do you do you use to calculate the Total Estate Admin Tax?

A

FMV of all assets that flow through the estate…NOT AFTER TAX

47
Q

When calculating Estate Admin Tax and given

$5 for every $1000

and

$15 for every $1000 thereafter

What is the percentage used in the calc for both?

A

5/1000 = 0.005 x 100 = 0.5%

15/1000 x 100 = 1.5%

48
Q

If you had 4 children and one died and your Will stated the assets would be split per capita net of estate fees how does this play out?

A
  1. First take the After-tax assets and subtract the estate fees
  2. Then divide the after-tax assets by 3 NOT 4.
  3. Add any life insurance proceeds if any to named individuals after the fact to arrive at what a beneficiary may receive
49
Q

Per Capita, define?

A

Refers to an equal amount per head, for all who inherit.

If you die you and your descendants are not included.

50
Q

Per Stirpes, define?

A
  • follows 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 recently deceased.
  • This does not include anything for the wife
  • Example 4 kids, 1 deceased.
  • Split 4 ways….1 share going to the grandchild
  • add life insurance proceeds accordingly after this to arrive at the full benefit for each
51
Q

If you have PRPP benefits how are they taxed and received by the surviving spouse?

A

Options are to:

  1. All property held in the PRPP is deemed disposition at the time of death at FMV. The FMV less any amounts paid to a qualifying survivor is included in the deceased member’s income on the final income tax and benefit return. If named as a beneficiary or elected by the executor for a rollover then…
  2. The spouse can take a Lump-Sum payment
  3. Or they can transfer funds directly, on a tax-deferred basis, into another investment plan such as PRPP, RRSP, SPP, RIF, RPP.
52
Q

What is the most tax-efficient way to take the PRPP if you are the spouse of the deceased?

A
  • Take over the administration of the fund keeping it intact and transferring it into another registered plan of your own, preferably aN RRSP (not locked in)
  • continue to grow on a tax-deferred basis.
  • Withdraw funds as needed. Take later when in a lower MTR
  • DO NOT RECEIVE THE FUNDS AS THEY ARE TAXED AT THE MTR OF THE DECEASED WITH COULD BE THE HIGHEST MTR, IMMEDIATELY PRIOR TO DEATH.
53
Q

Conventional Wills
Name 6 clauses?

A
  1. Name and Personal details
  2. The statement revokes all other wills.
  3. Statement naming your Executor.
  4. List your property and who will receive it.
  5. Residue Clause
  6. Date and sign the Will, and have it witnessed.
54
Q

Conventional Wills
Name and describe 6 clauses?

A
  1. Name and Personal details
    Will follow a basic structure. Naming the person who is creating the Will. The person making the will is called the testator/testatrix. Your name in the Will may include your name at birth, married names, and nicknames. Many wills may state your occupation.
  2. The statement revokes all other wills.
    This statement is revoking all other will and states this is the most current will.
  3. Statement naming your Executor.
    This is the name of the personal representative. Anyone of sound mind over the age of 18. Here you give them certain powers to carry out tasks in your place. You also name beneficiaries.
  4. List your property and who will receive it.
    Now the main part of the will. Naming everyone who will receive your property. You may also name a second person for each gift in your Will. The second person is called the alternate beneficiary. They receive the gift if the main beneficiary dies before you.
  5. Residue Clause
    A statement near the end of the Will. Names a person or organization as the beneficiary of anything not listed in your Will or leftover after all debts have been paid and all other gifts distributed.
  6. Date and sign the Will, and have it witnessed.
    The Will should be dated and signed at the bottom. If typed then two witnesses sign at the bottom and initial each page of the Will. They also need to sign a sworn statement called an ‘affidavit’, that confirms that you signed the Will in front of them. If you handwrite the entire will then no witnesses are needed.
55
Q

What makes a will invalid?

A
  • Creating a Holographic Will. A holographic will is a handwritten will without any witnesses. …
  • Not Having the Proper Witnesses. …
  • Not Destroying Previous Wills. …
  • Insufficient Testamentary Capacity. …
  • Not Following Your State’s Will Provisions. …
  • Fraud or Undue Influence.
56
Q

What makes a will void?

A
  • Tearing, burning, shredding or otherwise destroying a will makes it null and void.
  • The testator should destroy all physical copies of the will as well to prevent a duplicate from being presented to the probate court after his death.
57
Q

What does marriage do to an existing Will?

A
  • When you marry, any existing Will is automatically revoked.
  • In the situation of this, the rule of law takes charge in deciding how your assets are divided, until the parties involved in the marriage contract renew their Wills to effect their new status.
58
Q

What 3 special clauses can you provide your executor/ estate trustee in the will?

A
  1. Discretionary Encroachment: This clause allows the executor to use discretion with respect to using assets left for a minor beneficiary before they reach the age of majority.
  2. Investment Discretion Clause: This gives the executor the ability to make the investment decisions of the estate. If the clause was not provided, the executor would be limited to making very conservative investments only.
  3. Tax -election Clause: this clause enable the executor to make tax-related decisions that will benefit the testator or the estate if there are any elections that would be advantageous.
59
Q

If transferring a nonreg portfolio to a testamentary spousal trust, are you transferring at ACB or FMV?

A
  • ACB unless elected by the executor…i.e. spousal rollover
  • The tax-election clause in a Will will allow the Executor to decide what value the assets will transfer to the trust at.
  • The Income Tax act allows the executor to make the election for property subject to a spousal rollover, which enables him to trigger a deemed disposition by transfer of assets to the trust at the FMV rather than the ACB
60
Q

How are debts applied when calculating probate?

A
  • Once the assets are listed and the estate value is known a list of all creditors and amounts owning are also listed.
  • After CRA is paid taxes then creditors are paid
  • Then finally beneficiaries.
  • Mortgages on real property or secured debts are applied toward reducing the value of the estate. Other debts however are not considered.
  • Personal loan debt will be ignored for the sake of calculating the estate value on which he will be subject to probate.
61
Q

Who will pay the probate on the assets that will go into the trust, where there is an income beneficiary and a capital beneficiary?

A
  • The testamentary trust can only be set up after death via instructions from the Will.
  • Thus the assets will be part of the estate and thus subject to probate.
62
Q

What value of Assets is probate based on?

A
  • FMV
  • FMV of condo less mortgage
  • Cash nonjoint accounts FMV
  • no personal loans
  • Non-Reg destined for a spousal trust FMV

Example of breakdown

.5% x 50000 = 250

1.5% x (424,000 - 50,000) = 5,610

5610 + 250 = 5860

Alex will be subject to $5860 in probate fees.

63
Q

Who pays the probate fees and to what party are they paid?

A
  • The probate fees (estate taxes) are paid from estate funds before any proceeds are distributed.
  • This is arranged by the Estate Trustee or executor.
  • The probate fees are paid to the provincial or territorial government.
64
Q

What is a Handwritten Will called

A

Hologrphic Will

65
Q

What 5 clauses must a Holographic Will (Ontario) contain to be valid?

A
  1. Identify the Testator and his current address
  2. Revoke all former Wills and codicils (even though a will may have been prepared between two marriages and would be void by the second marriage.
  3. Appoint and Executor/Executrix
  4. Instruct the Executor, Executrix to pay all debts, funeral, and other expenses.
  5. Identify the beneficiary (beneficiaries) and what assets they are to receive.
  6. Not a clause…but sign it…and make sure its ALL handwritten.
66
Q

What are some housekeeping items you could help perform for your client to ensure that the assets pass to the surviving spouse with the least amount of tax and the max amount of rollover?

A
  • Reregister the House to Joint Tenants with right of survivorship rather than tenants in common
  • Term life Policy …change the beneficiary to Robert 100% Primary Beneficiary with the Children set up as contingent beneficiaries 50%/50%
  • TFSA…could name Robert the successor Holder or beneficiary
  • RRSP…name Robert the beneficiary (no contingent available), and ensure the beneficiary remains the same upon transfer to RRIF at the end of the following year.
  • Non Reg portfolio….hold these in seg funds and name a beneficiary.
67
Q

What is the formula for the Principal Residence Exemption?

A

We can apply the principal residence exemption for 1 year on two properties for an additional reduction in the CG.

PRE = (CG) x (1+ #yrs as principal residence)

(# yrs owned)

68
Q
A
  • Cottage -If designated as the primary residence since cg per year of the ownership is higher than that of the house. Designate 19 years of ownership (1 less than owned). We use 19 because 19+1 = 20 , so there would be 100% exemption (20/20). So the answer is NIL!
    TRICK TO SAVE MONEY
  • RRSP is fully taxable at death as income
  • TFSA - The FMV at the time of death is not taxable, however, any growth post-mortem will be taxed in the hands of the beneficiary so the answer is NIL!
  • Non-Reg Stock Portfolio -taxed on capital gains at 50%
  • Life Insurance Policy
  • Life insurance proceeds are not taxable
  • Total is 247,500 + 250,000 + 87,500 = $585,000
69
Q

Strategies to Minimize Probate where Estate is named beneficiary?

  1. House
  2. Cottage
  3. RRSP
  4. TFSA
  5. Non-Reg Stock Portfolio
  6. Life Policy
A
  1. House: Add as Joint owner
  2. Cottage: Add as Joint owner
  3. RRSP or RRIF: Can do nothing unless a qualified beneficiary spouse or dependent child
  4. TFSA: N/A *Note: Depending on the province, could name the adult child as a beneficiary and this could bypass probate
  5. Non-Reg Stocks: Hold Jointly to bypass the estate or Change to Seg funds and name adult child as a beneficiary to bypass probate
  6. Life Policy: Name adult child as beneficiary
70
Q

Why would a lone surviving parent NOT want to have a joint account with an adult child?

Remember don’t just jump to conclusions without considering the potential risks…

A
  1. Funds are immediately available to the other person’s creditors (including an ex-spouse in a divorce).
  2. Adequate funds may not be available to other beneficiaries.
  3. Possible family disputes could occur.
71
Q

Why would a lone surviving parent want to have a joint account with an adult child?

A
  1. So the child can manage the money.
  2. To leave the remaining money to the child after the parent’s death.
  3. To avoid the probate process and probate tax on the account.
72
Q

If you want to make a gift to charity…

and you want tax credits on your Final return or the estate on death.

A
  1. A gift through the will
  2. A revocable trust

A gift through a revocable trust will provide you with income from the property and provide the charity with the capital at death. Because it is revocable there is no tax credit until death.

A gift through an irrevocable trust will give him the income now and a tax credit now…the amount of the donation will be based on the PV of the residual interest.

An assignment of life insurance policy would not provide a tax credit now because the CSV is 0

73
Q

Probate

What items should we look for to be included in the FMV of the assets for this purpose?

A
  1. Chequing accounts
  2. Money Market accounts
  3. Non-reg
  4. Company shares

Look for things that are NOT owned jointly or NOT with a named beneficiary

Anything with the Estate named as beneficiary is included in Probate.

74
Q

Taxation of assets when one spouse predeceases the other

A

if joint ownership the asset will auto roll over to the remaining spouse

if non-resident aliens and have U.S. Situs Assets…U.S. estate tax is imposed on the FMV, not just any capital gains,

The shares of U.S. companies, even if held in a Canadian brokerage account, are assets subject to U.S. estate tax

The Chalet and the art held there would be subject to U.S. estate tax on the FMV

A unified tax credit is available to non-resident aliens to offset some or all of the estate tax

75
Q

QSBC

A

maybe eligible for the LCGE 892,218 for 2021

Only half of this amount is taxable due to capital gains being taxed at 50% of regular income.

LCGD…Lifetime Capital Gains Deduction is 1/2 …so $446,109

money from both spouses who own legitimately then can claim their own amount.

76
Q

If a couple were to both die intestate what happens with minors?

A

If both were to die intestate, the province would appoint a guardian and administer the estate

77
Q

If you had a couple and one had bad health…

They wanted to switch mortgage companies.

What would you suggest regarding the switch and the mortgage insurance?

A

I would recommend they not switch institutions until their application for mortgage insurance was accepted.

Do not suggest that they can get less expensive term insurance…remember he has bad health. There may be minimal underwriting at the bank.

78
Q

If a spouse receives an employment death benefits, how much of the benefit is received tax free?

A

$10,000

According to the Income Tax Act, only the first $10000 is exempt from tax provided it is paid to a spouse.

Includes: $ to recognize the employee’s service in an office or employment.

79
Q

The current balance of the SRSP is $5576

If you contributed 4000 3 yrs ago to an SRSP and then $1000 1 yrs ago.

Now your spouse wanted to withdraw $4764…

What is she responsible for and why?

How much is attributed to you?

A

$3764

$1000 is attributed back to you

3 yr rule applies.
Withdrawl made in the current year plus two previous calendar yrs.

80
Q

If grandparents contribute to an RESP and the child does not attend school after reaching 21.

What are the options?

A

Contributions made will be returned tax-free

Accumulated income is subject to a 20% penalty

Accumulated income is subject to tax at the grandparents MTR

If grandparents are over 71 they cannot add to an RRSP…and no provision for RRIF

81
Q

In the yr of death. Which can you contribute to

Your own RRSP or a Spousal RRSP?

A

Only a Spousal…

You cannot contribute to your own after you die.

82
Q

What is the unreduced pension formula?

Find the earliest age of retirement without a reduction in pension

A

(age of joining + 90)/2

(24 +90)/2 = 57

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