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CFP Canada Oct 2022 > Estate Planning and Legal Aspects > Flashcards

Estate Planning and Legal Aspects Flashcards

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1
Q

What assets do not flow through estate or Will?

A
  1. Assets…:
    - Where there is already a named beneficiary.
    - Gifted before death.
    - Where the owners are registered as JTWRS.
    - In a living (inter vivos) trust.
    - Covered by pre-nup.
    - Business interests covered by Buy-Sell Agreement.
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2
Q

When are the filing date requirements for taxes at death?

A
  1. Death between Jan-Oct: April 30 of following year.
  2. Death between Nov-Dec: 6 months after date of death.
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3
Q

What is the 21 Year Rule for a trust?

A
  1. Every 21 years, a trust is taxed as if it had disposed of and reacquired all capital property at FMV.
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4
Q

What are 3 general taxation rules of trusts?

A
  1. When income earned in trust is distributed to beneficiaries, taxed in their hands.
  2. Income is not taxed in trust if it is distributed.
  3. Trust pay taxes at highest MTR.
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5
Q

What is a Testamentary Trust?

A
  1. A trust created as the result of the settlor dying and is established by a Will.
  2. Allows you to control the timing and distribution of assets to your beneficiaries.
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6
Q

What are 3 benefits of a Testamentary Trust?

A
  1. Protect beneficiaries with disabilities.
  2. Trust for minor children.
  3. Control over timing and distribution of assets.
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7
Q

What is an Inter Vivos Trust (Living Trust)?

A
  1. A living trust that the settlor transfers assets to during their lifetime.
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8
Q

What are 4 benefits of an Inter Vivos Trust?

A
  1. Provide income while preserving capital.
  2. Avoids probate.
  3. Transfer assets outside Will with confidentiality/discretion.
  4. Estate freezes.
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9
Q

What is an Alter Ego Trust and Joint Partner Trust?

A
  1. AET: is an Inter Vivos Trust setup by the settlor who is 65+.
  2. The settlor is also the trustee and beneficiary of the trust.
  3. JPT: same as AET, but spouse is also the beneficiary.
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10
Q
  1. What are some pros/cons of AETs and JPTs?
A
  1. Pros:
    - Avoids probate.
    - Privacy is maintained.
    - Protected from estate litigation.
  2. Cons:
    - Cost and complexity.
    - Control and flexibility.
    - Charitable donations.
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11
Q

When to use an AET or JPT?

A
  1. Lots of assets that may be subject to probate.
  2. Do not need capital during lifetime, willing to pay tax on income.
  3. Have assets in multiple jurisdictions.
  4. In a second marriage and want to provide for your spouse during their lifetime, but leave remaining assets to your kids.
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12
Q

What are the types of Power of Attorneys (POA)?

A
  1. General - allows donee to act on your behalf. Ends if you become incapacitated.
  2. Enduring/continuing - grants donee authority over financial affairs, even if you become incapacitated.
  3. Springing/contingent - event triggers POA to come into effect (e.g. incapacity, out of country on business).
  4. Personal - someone makes decisions of personal nature (e.g. donor lives, eats, etc.).
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13
Q

What is a Living Will and an Advance Health Care Directive?

A
  1. LW: Provides instructions on treatment you do/don’t want.
  2. AHCD: similar to LW, but details type of medical treatment desired.
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14
Q

What are 3 features of Living Wills/AHCD?

A
  1. Applies only during one’s lifetime.
  2. Person appointed must be at least 16.
  3. Cannot be someone who provides paid health care services.
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15
Q

How are fees calculated for probate (Ontario)?

A
  1. $0 for first 50K (as of 2020 for Ontario).
  2. 1.5% for assets above 50K
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16
Q

What are preferential and distributed shares when dealing with intestacy?

A
  1. Preferential share is $200,000 and this amount goes to the spouse.
  2. Distributed share is the amount split between spouse and surviving children after preferential share is paid out.
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17
Q

What does dying intestate mean?

A
  1. Dying without making a valid Will.
  2. Will is deemed invalid.
  3. Will doesn’t appoint an executor.
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18
Q

What is true of a Will (5 things)?

A
  1. Must be signed by you in the presence of two witnesses.
  2. When you get married, existing Will is revoked.
  3. When you get a divorce, only options of your Will referring to your partner are revoked.
  4. Should be updated every 2-3 years.
  5. A new legal Will auto cancels the previous one.
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19
Q

What is the order of distribution of the estate?

A
  1. Funeral expenses, income taxes, taxes payable, solicitor’s cost, liabilities incurred by rep, commissions/fees, payment of other debts.
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20
Q

What is Rights or Things and what does it include?

A
  1. Are amounts that would have been paid to the deceased had they not died.
  2. Can include:
    - Employment income owing.
    - OAS, EI and CPP not received yet.
    - Uncashed matured bond coupons.
    - Bond interest before death.
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21
Q

If a Will was written after a named beneficiary was designated on a life insurance policy and the beneficiaries are different, what happens?

A
  1. The beneficiary in the Will takes precedence, but beneficiary cannot be estate.
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22
Q

Why should you convert personal debt into secured/mortgage debt for your estate?

A
  1. Mortgage/secured debt reduces the gross value of your estate, thus reducing probate fees. Personal debt does not.
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23
Q

How to be utilize the Principal Residence Exemption on death?

A
  1. If you own a house and cottage, name the property with the higher capital gain as your principal residence to minimize taxes at death.
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24
Q

How can one use estate planning to manage current income taxes (4 things)?

A
  1. Make charitable donations now, rather than at death.
  2. Make contributions to spousal RRSP.
  3. Restructure investment allocations to focus on capital appreciation, rather than current income.
  4. Implement an estate freeze.
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25
Q

What is an Informal Trust?

A
  1. Investment account set up to transfer money to minor beneficiary.
  2. Interest and dividend income taxed in contributor’s hands.
  3. Capital gains taxed in beneficiary’s hands.
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26
Q

What is a Henson Trust?

A
  1. Used for a person with a disability.
  2. Trustee has absolute discretion in how to use the trust assets to aid beneficiary.
  3. Beneficiary has no vested interest in trust, cannot claim or demand payments.
  4. Doesn’t impact government programs.
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27
Q

When does it make sense to use a Henson Trust?

A
  1. Disabled person has significant assets that wouldn’t qualify them for government programs.
  2. Value of inheritance far exceeds what they’d receive from government benefits.
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28
Q

What is an estate freeze?

A
  1. Limits the shareholder’s tax liability for potential asset growth.
  2. Freezes the value of their specified growth assets, so that future growth occurs in hands of kids/spouse.
  3. Traditionally accomplished via holding company.
29
Q

What are the benefits of an estate freeze?

A
  1. Shareholder maintains voting control via preferred shares, kids/spouse receive common shares.
  2. Any growth in common shares belongs to kids/spouse.
30
Q

What is a Bull-Sell Agreement?

A
  1. Subset of a shareholders’ written agreement that outlines the terms of succession for the business, if a shareholder were to die.
31
Q

What are the 3 types of Buy-Sell Agreements?

A
  1. Cross purchase: shareholders are beneficiaries of insurance policy.
  2. Promissory Note Arrangement: corp. is bene and proceeds deposited into CDA. Pays surviving shareholders a capital dividend.
  3. Share Redemption Arrangement: same as PNA but proceeds are used to redeem shares of deceased.
32
Q

What is the federal and provincial government responsible for with marriages?

A
  1. Federal: responsible for marriage and divorce.
  2. Provincial: responsible for marriage ceremony.
33
Q

What is the legal definition of marriage?

A
  1. Lawful union of two persons to the exclusion of all others.
34
Q

What is the definition of common-law marriage or cohabitation?

A
  1. People who have lived together in a conjugal relationship for at least 12 months.
  2. Living together in a conjugal relationship and have a child together (can be less than 12 months).
35
Q

When is a common-law relationship deemed terminated?

A
  1. Couple has been separated for 90 days.
36
Q

How are child support payments treated (tax wise)?

A
  1. Not taxable to the recipient.
  2. Not deductible by the payor.
37
Q

How are spousal support payments treated (tax wise)?

A
  1. Taxable in the hands of the recipient.
  2. Deductible from the income of payor.
38
Q

What are the 5 prerequisites of an enforceable contract?

A
  1. Valid offer and acceptance.
  2. Legally competent parties.
  3. Consideration.
  4. Genuine intention to create legal relations.
  5. Lawful object of the contract (can’t be an illegal act).
39
Q

What are 5 ways a contract can be discharged?

A
  1. Performance.
  2. Agreement.
  3. Frustration.
  4. Operation of law.
  5. Breach of a term.
40
Q

What are the 3 remedies for breach of contract?

A
  1. Damages: place the plaintiff in the same position as if the contract had been performed.
  2. Specific performance: force contract performance on the party.
  3. Injunction: restraining a party from acting in a specific manner.
41
Q

What is the definition of agency?

A
  1. Relationship in which one party, known as agent, is authorized to bring another party for whom the agent acts (aka the principal) into contractual relations with third-parties.
42
Q

What is Apparent Authority?

A
  1. The power of an agent to act on behalf of a principal (e.g. sales people working for business owner).
  2. Up to principal to inform parties if there is a change in apparent authority.
43
Q

What is the order of preference for distribution of property in case of bankruptcy (8 total)?

A
  1. Funeral expenses, if applicable.
  2. Trustee’s and legal expenses.
  3. Superintendent’s levy.
  4. Salaries/commissions/etc. due to EEs.
  5. Municipal taxes due.
  6. Rent due.
  7. Solicitor’s costs.
  8. Different unsecured creditors.
44
Q

What are 3 pros/cons of a Sole Proprietorship?

A
  1. Pros:
    - Easy setup and low cost.
    - No annual reports/filings.
    - No corporate business taxes.
  2. Cons:
    - Owner is fully liable.
    - Difficult to raise money.
    - No legal separation between person and business.
45
Q

What are 3 pros/cons of a Partnership?

A
  1. Pros:
    - Ease of formation and dissolution.
    - Flexibility in designing managerial structure.
    - Allows people to have a percentage ownership stake.
  2. Cons:
    - Unlimited joint and several liability.
    - Even if partnership ends, liability ensues.
    - No legal separation between partnership and individuals.
46
Q

What are 3 pros/cons of setting up a Corporation?

A
  1. Pros:
    - Is a separate legal entity, thus limited liability to shareholders.
    - Has perpetual life (e.g. doesn’t end if ownership dies).
    - Easier to raise capital.
  2. Cons:
    - Costly to incorporate.
    - Loss of privacy of info.
    - Lots of admin work, annually as well.
47
Q

What is a Co-operative?

A
  1. Owned and controlled by an association of members.
  2. Individuals pool their resources and provide access to common needs.
  3. Can be for profit or not-for profit.
48
Q

What must charity resources be used for (name 3)?

A
  1. Relief of poverty.
  2. Advancement of education or religion.
  3. Purposes that benefit community (e.g. food banks, shelters).
49
Q

What are 3 basic documents for estate planning?

A
  1. Will.
  2. Enduring (or springing) POA.
  3. Personal directive (living Will or POA for health care).
50
Q

When is a Will valid until (3 scenarios)?

A
  1. New Will is created.
  2. Will is destroyed.
  3. Testator gets married.
51
Q

When is it most common to use a Spousal Trust?

A
  1. In second marriages or blended families. The settlor may have assets that are needed by the current spouse during their lifetime, but ultimately be left to the children from the previous marriage.
52
Q

What is the year-end for a Trust and by when must they file their tax returns?

A
  1. December 31 of current year.
  2. 90 days from year-end to file tax returns.
53
Q

What is a Graduated Rate Estate (GRE)?

A
  1. Allows estate to use graduated tax rates up to 3 years post death, providing tax savings and opportunity for income splitting.
54
Q

What are the 3 requirements for a Graduated Rate Estate?

A
  1. Must designate itself as GRE in first year’s tax return.
  2. Cannot designate more than one estate as GRE for the individual.
  3. Must use deceased’s SIN.
55
Q

What are 6 requirements to be considered a Qualified Disability Trust (QDT)?

A
  1. Must be a Testamentary Trust (created at death, cannot be a Living Trust).
  2. Trust must be resident of Canada.
  3. Trust must make joint election with qualifying bene to be a QDT.
  4. Qualifying bene must specifically be named as bene.
  5. Bene must qualify for DTC.
  6. There can only be one QDT per bene.
56
Q

Why might the surviving spouse elect out of a spousal rollover upon the death of their spouse (5 options)?

A
  1. Deceased spouse has unused capital losses.
  2. Capital losses in estate.
  3. Estate returns and timing (if deceased dies early in year, they’ll have low taxable income and thus lower tax bracket).
  4. HBP/LLP repayment liabilities.
  5. Deceased makes a spousal RSP contribution.
57
Q

What purpose does a domestic contract serve?

A
  1. Allow couples to set out, in advance, how the division of assets will play out (e.g. property, spousal support (NOT child support), responsibility of children, testamentary wishes, gifts/inheritances).
58
Q

What are the 2 types of domestic contracts?

A
  1. Marriage contract.
  2. Cohabitation agreement.
59
Q

How is income in an Inter-Vivos or Testamentary Trust taxed?

A
  1. Inter-Vivos: taxed at the highest MTR.
  2. Testamentary: flat-top rate taxation unless trust is GRE or QDT.
60
Q

For Inter-Vivos and Testamentary Trusts, how is the income distributed to the beneficiaries taxed to the beneficiary?

A
  1. Inter-Vivos: taxed at beneficiary’s MTR.
  2. Testamentary: taxed at beneficiary’s MTR.
61
Q

How is the income distributed to the beneficiaries taxed to a Inter-Vivos or Testamentary trust?

A
  1. Inter-Vivos: Funds distributed to beneficiaries are deductible to trust.
  2. Testamentary: Funds distributed to beneficiaries are deductible to trust.
62
Q

Do attribution rules apply to any distributed income from a Inter-Vivos or Testamentary Trust?

A
  1. Inter-Vivos: attribution rules apply when trust is revocable or when a gift made to the trust and income from it is allocated to a spouse or minor child.
  2. Testamentary: attribution rules do not apply.
63
Q

What are 3 government benefits available to the surviving spouse upon the death of their spouse?

A
  1. CPP death benefit (max of $2,500, taxable).
  2. CPP survivor benefit.
  3. CPP child benefit (available if child is under 18 and dependent).
64
Q

What are 2 ways to protect a spouse’s inheritance from their partner?

A
  1. Keep inheritance in separate account from their jointly owned assets/property.
  2. Do not use inheritance for any jointly owned (e.g. house renos, debt).
  3. Revise their Will with clear instructions.
  4. Keep records of balances/deposits.
65
Q

What are 2 estate planning issues that business owners can potentially face?

A
  1. Business succession plan (is there a bull-sell agreement in place for smooth transition).
  2. Deemed disposition of business on death (is there life insurance proceeds available to cover tax liability).
66
Q

What can the trustee of an estate invest in?

A
  1. Provincial legislation does not allow trustee to place assets in risky investments.
  2. The allowable list of investments (legal list) consists of conservative investments (bonds, debentures, etc.).
67
Q

What can an Inter Vivos Trust be used for?

A
  1. Defer income tax on capital appreciation.
  2. Provide creditor protection.
  3. Control distribution of assets.
68
Q

What does Per Stripes mean in a Will?

A
  1. Should a beneficiary predecease the testator, the beneficiary’s share of the inheritance goes to that beneficiary’s heirs.
69
Q

What does Per Capita mean in a Will?

A
  1. Property is divided equally among surviving descendants in the same generation nearest the testator (e.g. estate is left to 4 siblings, if 1 sibling predeceases the parent, estate is divided among 3 remaining siblings and not the dead siblings heir(s)).

CFP Canada Oct 2022 (7 decks)

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