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CFP Exam Prep > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

What are the general steps in estate planning?

A
  1. Analyze assets and beneficiaries
  2. Identify your succession objectives
  3. Implementation
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2
Q

What are some estate planning strategies from an overview perspective?

A
  • The use of a Will
  • Holding property in Joint Tenancy
  • Gifting
  • The use of Corporations
  • The use of Trusts
  • Insurance Policies
  • Naming beneficiaries in your registered investments (RRSPs, RRIFs, etc)
  • Life Insurance Policies
  • Powers of Attorney
  • Non-legally binding “Living Wills”
  • Representative Agreements
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3
Q

What is the most important difference between Joint Tenancy and Tenancy in Common?

A

For Tenancy in Common, on the death of one of the co-owners, his or her interest will not pass to the surviving owner, but will pass according to the Will of the deceased.

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4
Q

What is “Planned Gifting”?

A

This is used to describe making gifts to a charity, foundation or similar organization while you are alive or by way of your Will.

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5
Q

What are the benefits of gifting before your passing?

A

Main benefit is to minimize the size of your estate. By doing so you may be able to avoid probate fees, possible future inheritance tax, executor fees, legal fees and potential creditors and ensure that more of your hard earned assets go to your beneficiaries.

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6
Q

What are testamentary and inter-vivos trusts?

A

A trust can be created while you are alive, called a “living trust” or “inter-vivos” trust, or on your death, called a “testamentary trust”.

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7
Q

What is the tax benefit with spousal testamentary trust?

A

This is used to defer income taxes on a settlor’s estate, as this trust, like the spouse, can take advantage of “spousal rollover” provisions, which allows capital gains taxes to be deferred until the surviving spouse dies or sells the assets.

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8
Q

How to determine ACB of the trust’s assets?

A

ACB of assets in a trust is equal to the FMV as of the date the asset was transferred in to the trust, NOT the FMV as of the date the asset was transferred out of the trust.

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9
Q

What is an estate freeze?

A

It is a process to freeze all or part of the value of appreciating assets at their current value, in such a way that the future growth on these particular assets accrues to the next generation of family members.

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10
Q

What are the steps involved in an estate freeze under section 85 rollover?

A

First, assets are transferred to a corporation. Under the tax rules there is no deemed disposition and therefore no capital gains realized.
Then, the corporation generally issues preferred shares equal to the value of the assets to the transferor (basically “freeze” the assets value in their hands).
Finally, common shares are then issued to the heirs of the transferor.

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11
Q

What about the second method of estate freeze under section 86, naming “Internal Freeze”?

A

This is basically a capital reorganization of an existing company. Steps are similar in a section 85, just that assets are already in the company.

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12
Q

What are the benefits of section 86 that differ it from section 85?

A
  • No need to incorporate an additional company.

- Does not require the timely filing of prescribed election forms as required by section 85.

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13
Q

What about a family trust? Can this be used with estate freeze strategy?

A

Estate freezes and “family trusts” are often used in conjunction. A family trust is a trust where a parent is usually the settlor and the trustee. The children/grandchildren are the beneficiaries. When the estate freeze is set up the family trust will end up owning the appreciating asset (usually new common shares). The parent who wishes to freeze the value of his or her shares can continue to control his or her business by being the trustee of the family trust.

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14
Q

What is a living will?

A

A “Living Will” is a written statement by you to your family, friends and Doctors about whether you wish to be kept alive by active life support measures or other health matters that you might not be mentally capacitated to decide.

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15
Q

While there is no inheritance tax in Canada, what are the 3 potential taxes upon death?

A
  1. Income tax due to the deemed disposition rules
  2. Provincial probate taxes
  3. U.S. Estate Tax on your U.S. assets
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16
Q

What does it mean by deemed disposition at death?

A

The deemed disposition rules of the Income Tax Act treat all capital property owned by the deceased as if it was sold immediately prior to death. Thus, all unrecognized capital gains and losses are triggered at that point with the net capital gain (gains less losses) included in income

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17
Q

Does the estate need to file tax?

A

Yes. One “ordinary” return would be filed for the period January 1st to the date of death, also known as the “terminal return”.
Three additional tax returns can be filed for “rights or things” (income earned but not received yet at death), “partnerships/proprietorship” (business income from end of last fiscal year to date of death), and “testamentary trusts” (income from trust from last year end to date of death).

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18
Q

What happens to the deceased’s RRSP or RRIF?

A

An RRSP or RRIF can be transferred tax free to:

1) a surviving spouse’s own plan
2) a financially dependent child or grandchild who is under age 18. This amount can then be used to purchase an annuity with a term max = 18 - child’s age
3) who is mentally or physically infirm, even if there is a surviving spouse.

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19
Q

When would Canadian be subject to US tax upon their death?

A

If the value of their worldwide estate at the time of death is above $11,700,000.

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20
Q

What would NOT be considered as a US situs assets?

A

1) Mutual funds, ETF and segregated funds from Canadian Corporations, even where the fund invests in U.S. securities.
2) Deposit within a US bank.

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21
Q

What is the advantage of having a treaty between Canada and US in regards with US estate tax?

A

The Canada-U.S. Tax Treaty provides Canadian residents three forms of relief from U.S. estate tax that can reduce their U.S. estate tax liability.

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22
Q

What are the 3 forms of relief from US estate tax for Canadian? Number 1 is?

A

Unified credit. Canadian resident estate can reduce its U.S. estate tax liability by claiming the unified tax credit equal to the greater of:
$13,000 OR
$4,625,800 x (Value of U.S. assets/Worldwide assets)

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23
Q

What are the 3 forms of relief from US estate tax for Canadian? Number 2 is?

A

Marital credit. The marital credit is equal to the lesser of the unified credit and the amount of the U.S. estate tax owing. This is available when a surviving spouse inherits U.S. property on death.

24
Q

What are the 3 forms of relief from US estate tax for Canadian? Number 3 is?

A

Foreign tax credit.

25
Q

Is tax filing required for an Canadian estate with IRS?

A

Yes, if the deceased owned US assets with FMV over US$60,000.

26
Q

What would be considered US property that a lot of time would be overlooked?

A

US securities (for example, IBM or Apple stocks) in clients’ Canadian brokerage account, which may result in a U.S. Estate Tax liability for their estate.

27
Q

What are the common US tax planning strategies?

A
  1. Use life insurance to cover the U.S. Estate Tax bill
  2. Sell your U.S. assets prior to death
  3. Consider using a Canadian holding corporation since the assets would be owned by the Canadian corporation
  4. Reduce the value of your estate below the threshold and dispose of your U.S. real estate
  5. Hold Canadian mutual funds that invest in the U.S. market
  6. Hold asset in joint ownership
28
Q

What would be the reasons for divorce?

A
  1. The couple has separated for one year and doesn’t intend to get back together
  2. One spouse was cruel to the other
  3. One spouse has committed adultery
29
Q

What happens a divorce is applied?

A

If both sides agree on everything, then it is an uncontested divorce. If there are issues that neither agrees, a contested divorce applies where court needs to step in.
Once the judgment is final, you can apply for a Certificate of Divorce.

30
Q

What is joint custody?

A

Joint custody means that both parents have custody of the children. In other words, both parents continue to share in making all the major decisions concerning the children.

31
Q

How child support impact income tax?

A

The person who receives the child support payments does not have to list them as income on his or her income tax form.
The person paying the child support cannot deduct the support payments from his or her income.

32
Q

What about property division?

A

The Divorce Act does not deal with sharing your property or debts. Each province and territory has its own law that sets out the rules for dividing the property and debts you and your spouse have.
“Property” includes such things as the matrimonial home, its contents, any other real estate, pensions from employment, Canada or Quebec Pension Plan credits, RRSPs, investments, bank accounts and cash. Debts include such things as amounts owed on your credit cards, mortgage, and any loans outstanding. Some provinces or territories also include business assets in their definition of property.

33
Q

How spousal support impact income tax?

A

Spousal support (commonly referred to as alimony) is considered fully taxable in the hands of the recipient. And it is deductible from the income of the payor.

34
Q

What is an Alter Ego Trust?

A

Alter Ego Trust is a special type of trust permitted under the Income Tax Act, under which you are the Settlor, Trustee and Beneficiary for as long as you are living. The main criteria to be able to set up an Alter Ego Trust is that you must be 65 years of age or older.
Trust Deed must state that only you are entitled to the benefit of trust assets while you are alive, you get to provide for who gets the trust assets after you pass away. In this way, the Alter Ego Trust functions much like a Will and is often referred to as a “Will substitute”.

35
Q

How is Alter Ego Trust’s income tax being treated?

A
  • It receives a rollover treatment which means that there is no deemed disposition when you transfer your property into these kinds of trusts.
    Instead, the deemed disposition is deferred until the time of your death
  • The 21-year deemed disposition rule does not apply to Alter Ego Trusts until after the date of your death.
  • Income retained in the trust is however taxed at the highest marginal tax rate.
36
Q

What are the benefits of Alter Ego Trust?

A
  • Probate is not required
  • Privacy is maintained
  • Beneficiaries can receive their inheritance with less delay
  • Professional fees are reduced
  • 21-year rule doesn’t apply, deemed disposition happens when settlor dies
37
Q

What is a Testamentary Spousal Trust?

A
  • Surviving spouse is the only one who can access income and capital of this trust. If not trust is tainted and there will be deemed disposition.
  • 21-year rule doesn’t apply, disposition happens when spouse dies.
  • Children can be set up as capital beneficiary of this trust upon spouse’s death.
38
Q

What are the benefits of Testamentary Spousal Trust?

A
  • It allows a deferral of the capital gains tax consequences upon death, and would avoid the deemed disposition rule that would apply after 21 years of the existence of a non-spousal trust.
  • Its income is taxed at graduated tax rates for the first 36 months after testator’s death.
  • Helps to provide for children from first marriage upon your death. If the assets are given to your second spouse outright, on her death the assets would form part of her estate and would likely end up in the hands of her children.
39
Q

When would be the best option to transfer RRSP/RRIF to a Testamentary Spousal Trust?

A

If surviving spouse has funds/assets* that are equal to your RRSP/RRIF value. This strategy can be done by:

  1. Under a proposed amendment to section 146(8.1) of the ITA, a beneficiary of a trust, the executor and your surviving spouse could jointly elect for an amount up to your RRSP value at date of death to be included in your spouse’s income.
  2. Your spouse can then use their own funds* to make a RRSP contribution to their own RRSP (value equal to your RRSP value) and claim an offsetting deduction.
  3. The net income from the trust is higher when the strategy is used. Surviving spouse’s asset* will grow faster under a registered plan as opposed to non-registered plan thanks to the tax-shelter ability. And your own RRSP is now taxed under the trust’s graduate tax rate.
40
Q

What is a Henson Trust?

A

A Henson trust (sometimes called an absolute discretionary trust) is a type of trust designed to benefit disabled persons. It protects the assets (typically an inheritance) of the disabled person, as well as the right to collect government benefits and entitlements. Trustee has absolute discretion for this type of trust.

41
Q

What are the differences in tax treatment between inter-vivos trust and testamentary trust?

A
  • Inter-vivos trust is taxed at highest marginal tax rate.
  • Testamentary trust is taxed at graduate tax rate for the first 36 months after testator’s death (unless it’s a qualified disability trust).
42
Q

What is a Qualified Disability Trust?

A

A QDT is a testamentary trust that jointly elects, together with one or more beneficiaries (who are qualified for disability tax credit) under the trust, in its tax return for the year to be a QDT.
A trust does not have to be a Henson trust in order to become a QDT.

43
Q

What does it mean by distributed per stirpes?

A

This means children of deceased parent (who is originally the will’s beneficiary) would receive the late parent’s share of inheritance according to the will.

44
Q

What are the clauses that a will can include in regards of executor’s responsibility?

A
  1. Discretionary encroachment: managing asset for a minor
  2. Investment election clause
  3. Tax-election clause
45
Q

What are the probate fees in Ontario?

A

$5 for every $1000 up to $50,000.

$15 for every $1000 for amount above $50,000.

46
Q

How to calculate property’s exemption upon death?

A

Exemption = [Capital Gain x (1 + years as principle residence)] / years of ownership
*Note: the “+1” only applies when there is more than 1 property

47
Q

What happens when someone is appointed as guardian for children in the deceased’s will?

A

The guardian will receive immediate temporary guardianship, and needs to apply for permanent guardianship with court.

48
Q

What are the options to elect asset value when transferring to a Hold Co for estate freeze purpose (Section 85 ITA)?

A

When transferring assets to a Hold Co for the purpose of estate freeze, the transferor can elect the asset value anywhere between ACB to FMV.
Scenario 1: Elected value = ACB —> No CG
Scenario 2: Elected value > ACB —> CG reported but this can be waived or offset if the difference is = allowable capital loss or LCGE balance

49
Q

What is a charitable/remainder trust?

A
  • Charity is named as remainderman or capital beneficiary of the trust.
  • Donor would continue being income beneficiary while alive.
  • Donor would receive a charitable tax receipt = PV of the charity’s interest in the trust upon transfer of asset by donor to trust.
50
Q

How much is CPP’s survivor benefits?

A
  • Survivor over 65: 60% of contributor’s retirement pension
  • Survivor between 45 to 65: 37.5% of contributor’s retirement pension + flat benefit
  • Survivor between 35-45: 37.5% + flat benefit - 1/120 each month survivor is under 45
  • Survivor under 35: no benefit until age 65 or becomes disabled
51
Q

When does a trustee have to file T3 for the trust?

A
  1. has paid a benefit of more than $100 to a beneficiary for the upkeep, maintenance, or taxes on a property
  2. income of more than $100 allocated to any single beneficiary
  3. the trust receive total income from all sources of more than $500
52
Q

If a company pays surviving spouse a death benefit, would it be taxable?

A

No if the amount is $10,000 or less.

53
Q

After death, can the estate make RRSP contribution for the deceased?

A

Yes but only to a spousal RRSP.

54
Q

What is a constructive trust?

A

The trust orders the person/estate who would otherwise be unjustly enriched to transfer the property to the intended party.

55
Q

What is an insurance trust?

A

The insurance trust owns your life insurance policy. The trust holds the insurance policy with you as the named insured and when you die, the insurance benefit is paid to the trust.
This helps to avoid probate fees on the insurance proceeds.

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