Estate Planning

Question 1

What are considered ‘Family assets” for division of matrimonial property?

Answer 1

• Life insurance held separately would most likely be excluded
• shares in business typically excluded unless it can be shown that the Ex contributed to the growth
• investment accounts yes

Family assets to divide:
The family’s residences (house, cottage, vacation home abroad, travel trailer, etc.)
The furniture and items inside these residences
The family’s vehicles
Retirement savings (employer plans, government pensions, RRSPs, LIRAs, RRIFs)
Joint debts used to acquire, maintain or preserve assets included in the family patrimony
Be aware that the assets, like a residence, must be valued and exchanged at fair market value.

Assets that are not considered part of the family patrimony do not need to be divided up. Here are a few examples:

Income properties
Businesses (unless one partner helped grow)
Bank accounts, shares, bonds
Jewellery and other personal belongings
Money and goods inherited or received as gifts

Question 2

What factors are considered with Spousal Support?

Answer 2

• length of union
  -if there are children and if there are any prior arrangements made
• roles spouses played in union
• age of each spouse
  -each financial sitch

Question 3

How are Spousal Support payments taxed?

Answer 3

• usually paid monthly and taxed in recipients hands and is deductible for the payer

-if paid in lump sum it is neither deductible nor taxable

Question 4

How is Child Support determined?

Answer 4

Child Support Guidelines and usually based on gross income

Question 5

How is Child Support taxed?

Answer 5

Parent who receives is not taxed and parent who pays does not get a tax deduction

Question 6

What three parties is a legal Alter Ego Trust between?

Answer 6

1. The Settlor: person who sets up trust, makes decision on items inside trust
2. The Trustee: appointed by Settlor and manages the trust instructions
3. The Beneficiary: who the trust benefits

• When you set up a trust the assets are no longer personally held by you
• no real tax benefits nowadays
  -often referred to as a Will substitute

ALTER EGO TRUSTS ARE FOR THE LIVING

Question 7

What are 4 benefits of Alter Ego Trusts?

Answer 7

-Probate not required
-Privacy maintained
-Bene’s receive inheritance with less delay
- Reduced professional fees

Question 8

Alter Ego Trusts tax treatments?

Answer 8

Rollover treatment with no deemed disposition (unlike regular trusts)
21 year rule does not apply - only taxed at death of settlor! When the death of the settlor happens the assets are deemed disposition and taxed at highest marginal tax rate.

Question 9

What are cons of Alter Ego Trusts?

Answer 9

-tax returns need to be filed annually
- income in the trust will be taxed at highest marginal rate

Question 10

What is a spousal Testamentary trust?

Answer 10

• It is an income splitting strategy
• a way to defer capital gains tax consequences at death for surviving spouse
  -a useful strategy for a second marriage scenario
• component for estate planning

Question 11

What is a Henson’s Trust?

Answer 11

• for a disabled person
• it protects assets (typically inheritance) for a disabled person
• trustee has “absolute discretion”
• ## may provide tax relief with lower MTR

Question 12

What are advantages of a Henson Trust?

Answer 12

• can really improve quality of life for disabled person
  -ensures person is taken care of financially
  -eliminates probate fees
  -can have overall savings from tax benefits

Question 13

What are disadvantages of a Henson Trust?

Answer 13

• finding a trustee can be difficult
  -regulations can change
  -poorly constructed trusts can disqualify disabled person for other things

Question 14

At death, if someone has two properties what is a strategy the executor can employ?

Answer 14

Determine if the cottage or original house have a bigger deemed disposition on them. If the cottage has a larger disposition then the executor can elect to have it be the PR and get the PR exemption. So now the cottage would have no tax liability and the “oG house” would instead….

So, say the house is worth $800,000 with an ACB of $250,000:

Exempt Gain = (yrs designated as PR + 1) X capital gain / years owned

Question 15

How are these assets taxed at death?

Answer 15

• Insurance : not taxable at death
  -RRSPs : fully taxable at death unless spousal rollover
• Non -reg accounts: 50% of gain is taxable at death

Question 16

Advantages and Disadvantages of Transferring Property to Joint Tenancy

Answer 16

Advantages:
- ELIMINATES PROBATE Property will not go through Estate at one parties death (avoiding probate) and not on his list of assets at death
- With joint assets property transfers automatically to surviving partners at death with no delays or disruptions that can happen in a will
- If the property is income generating, the owners can split the investment income and if the joint owners are NOT spouse there is no income attribution

Disadvantages:
-You lose full control of the asset
- If any owner is married and there is a marriage breakdown those assets are at risk
- Creditor risk if client has bad financials or other business affairs putting them at risk

Question 17

Advantages and Disadvantages of Transferring Property (assets) to a Trust

Answer 17

Advantages:
- Settlor (gifter) remains in control of the assets
-Privacy related to the asset, it does not go through a Will and it also will not have Probate

Disadvantages:
- Trusts are expensive - set up fees and annual reporting
- You will need to pay the full capital gains tax on property when you transfer the asset into a trust TODAY
- Trusts are subject to a 21- year rule, aka a Deemed Disposition every 21 years, client could be young and causing themselves more tax consequences

Inter-vivos trusts or a Family Trust is an option to consider in Estate planning. It allows settlor control over the assets during his lifetime but has significant set up costs and tax implications today and in their 21 year rules.

Question 18

Advantages and Disadvantages of including a clause in your Will to Set up a Trust

Answer 18

Advantages:
-Owner remains control of the asset while alive
-Owner maintains flexibility to change their mind
-Capital gains taxes will be deferred until he dies, taxes will be less of a concern for owner
-Possible graduated rate estate trust taxation benefits (2016 this took effect)

Disadvantages:
- You will have to pay probate at death as the asset will go through the Estate first
-If heirs are young, Trusts have a 21 year rule
- The trust owns the assets over people
- Trusts have costs to set up and maintain that might outweigh benefits

Typically the most effective way to deal with the transfer of assets is to set up a trust via the will. This allows existing owner to remain in control and obtain income from the asset. At the death the assets transfer to the beneficiary via a trust. Probate applies to the asset.

Question 19

How do you calculate Estate Tax?

Answer 19

REMINDER - first $50,000 excluded!!

Take all the assets required to go through probate - basically anything having “estate” as bene or NO bene listed…

Add up all those assets, say the total is $821,200, you need to round to the nearest 100th!!! So that means you would round this up to: $822,000

MINUS the allowance (say $50K):
$822,000 - 50,000 = $772,000

Now apply the tax of 1.4%:
= 772,000 x 0.014
= X

Beneficiaries receive value remaining after taxes and probate split amongst their shares.

Question 20

What does Per Stripes mean in an Estate?

Answer 20

It means children of a dead beneficiary receive the inheritance rather than the division going from say 4 siblings to 3 siblings. Instead the Estate remains as 4 equals and goes to that persons children.

Question 21

Don’t forget about….

Answer 21

CPP survivor benefits!

Question 22

What are some common Will clauses?

Answer 22

1. Revokes all prior Wills
2. Signed by two witnesses and drawn up by a notary or lawyer
3. All personal details
4. Names an executor
5. Lists assets and beneficiaries

Question 23

If assets transfer to a trust at death they will be…

Answer 23

taxed and probated

Question 24

In divorce settlements how does getting a life insurance policy on the other play out?

Answer 24

Some divorces arrangements are structured so supporting spouse maintains life insurance on his life with wife or children as irrevocable bene’s - there is no legal obligation to do so but it might be negotiated.

Question 25

CPP survivor benefits are for..?

Answer 25

Surviving spouses only, not in divorces settlements

Question 26

Probate happens when?

Answer 26

An asset has to go through the Estate to be distributed… this includes anything with “estate” listed as beneficiary or NOTHING as beneficiary. Including life insurance policies if listed as Estate bene

Assets are probated at full market value in death

Question 27

If a house is NOT Principal residence are there any strategies that won’t trigger a tax consequence to lower taxes or probate?

Answer 27

No

If the house or cottage is NOT PR then registering another joint owner or gifting it to someone will result in a deemed disposition today at FMV

Transfer to an Inter-vivos Trust avoids probate but will still be taxed as a deemed disposition

Question 28

If a house is PR can you gift it and make joint tenants without triggering any tax consequences?

Answer 28

Yes, houses under the PRE exemption are not probated or taxed in these situations

• you could make joint
• you can gift it
• you can sell to someone and take back a promissory note (costly and complicated)

Question 29

Does making a Non-Registered account joint trigger capital gains taxes?

Answer 29

YES, it avoids probate but triggers CG

Question 30

Life insurance

Answer 30

given tax free and avoids probate with a beneficiary named other than estate

Question 31

People often want to reduce probate by?

Answer 31

Registering assets as Joint Tenancy with Right of Survivorship

however unless with a spouse this generates an immediate tax liability… Say dad is making joint with two daughters than 2/3 of the capital gain is due immediately

Question 32

If an asset goes into a trust (TODAY) what happens?

Answer 32

There is a full tax liability due but owner remains control of the asset if they are the settlor of the trust!

The asset will avoid probate and not be listed as their assets at death, smooth transfer to next generation of beneficiaries

Trusts are expensive with annual costs and filing requirements, the tax liability is due at asset transfer into a trust, and trusts are subject to 21 year rules

Question 33

What happens if an asset goes into a trust clause in your will?

Answer 33

It’s an effective way to deal with the transfer of an asset as it allows existing owner to maintain control and obtain income from the asset and at the death the asset transfers to the bene’s via a trust

PROS:
- maintain ownership and income
- flexibility to change your mind as you only have to redo your will
- capital gains taxes are deferred so taxes are less of a concern for owner

CONS
- asset goes through probate at owners death
- Shared ownership among benes (personality differences etc)
- 21 year rule for trusts
- Trust owns asset
- Cost to set up and maintain