How Can I Maximize My Estate?

We spend a lifetime building our wealth and making sacrifices to set ourselves up for the retirement we envision. Once in retirement however, our focus is shifted to preserving the capital that we worked so tirelessly to accumulate. Having an estate plan is an essential step to ensuring that your wealth is not only preserved but disbursed according to your wishes. Combining this with the right structure of the assets and having a tax plan, is the key to making sure the assets we currently own are passed on to our heirs in the most tax efficient way possible. Nobody likes to talk about their death, and who wants to pay more tax than they have to?  With the right plan, you can minimize the taxes your estate might pay at death and ensure a smoother transition of your assets to your loved ones. We all want nothing but the best for our family and we want to able to leave a legacy of significance behind. This article will give you eight strategies that you can you can potentially utilize to minimize the tax bill of your estate.

Transferring wealth within the family is a big decision and at the time of distribution, transferring the wealth can become a lengthy process for the person you chose to be your executor. There are so many different factors to consider, and when we add more to the mix there are multiple parties that get involved all wanting a little piece of whatever is left over. When you are planning on leaving assets to your loved ones, you need to consider: how each asset will be taxed upon death; how to go about structuring your will to make sure your wishes are carried out accordingly; and the possibility of gifting some of those assets while you are still alive. Choosing the right executor and making sure that they are aware of the responsibilities, as well as, what they are potentially liable for, is essential to not only prepare that person but also to ensure the process is as smooth as possible. Having a family meeting to discuss your wishes with all parties involved is a great venue to figure out how everyone feels about your wishes. This meeting will also give you the opportunity to gauge the reaction from all parties involved regarding your wishes, and make sure that no one is left disappointed by not getting what they were expecting.

Leaving assets to your spouse is the easiest way to minimize your taxes upon death, by taking advantage of the tax-free roll over benefit. Any assets left to the spouse are deemed to be disposed of (sold) at the deceased’s adjusted cost base (“ACB”). This will defer taxes until the surviving spouse either sells the asset or until their death. There are times however where you may want your estate to apply the fair market value rules. In the instance where, there are unutilized capital losses on the date of death and your estate wishes to trigger some capital gains to offset the losses.  An election can be made to transfer the assets at fair market value rather than at the ACB to the surviving spouse.  If assets are transferred to your spouse at fair market value, this will become the ACB for future capital gains or loss calculations.

Gifting assets is a sure-fire way to minimize the potential tax bill on death. If there are certain assets that are really of no use to you while you are alive to fund your day-to-day living, you should consider gifting them during your life. If you have  already designated certain individuals who will be inheriting these assets upon death, then giving them away during your lifetime, if possible, is good option to consider. Understand however that giving assets away is generally considered a disposition for tax purposes and it could create a tax bill if, the fair market value at the time of gifting is greater than its ACB. The best way to decipher if this strategy will work for you is to make sure that the assets being gifted are likely to grow in value in the future; or that you will be in a lower tax bracket in the year the gift is made than the year of your death.

Choosing beneficiaries of particular assets must be done with careful consideration. If you are planning on leaving assets to persons other than your spouse, it is best to leave tax-friendly assets such as: cash; Guaranteed Interest Contracts (“GICs”) money market funds, Tax Free Savings Account (“TFSA”), or assets that have not greatly appreciated in value. For other assets that will flow through your estate, it is best to provide your executor the ability to make that decision after consulting a tax professional upon your death.

We have access to certain types of exemptions that greatly help the minimization of a tax bill on death. The first exemption that most people take advantage of is the principle residence exemption. This exemption can be used to offset the capital gains on the deemed disposition on the property you own. This can include your home, but it could also be a cottage or a second property.  Note that rental properties do not qualify for this type of exemption.

The lifetime capital gains exemption is another commonly used strategy that states you can offset $800,000 (indexed to inflation after 2014) of capital gain resulting from the deemed disposition of your shares in certain private companies in Canada or a qualifying farm or fishing property. There are tests that that apply to be able to use this claim, so I would suggest speaking to a tax professional.

At the time of death, the difference between the fair a market value of any asset and the ACB is considered capital gain, which is subject to taxation. If you can justify a higher ACB this can help minimize the estate’s tax bill. Although the purchase price is generally the starting point, there are a number of events and transactions that can alter the ACB over the years. The following are a list of things that can alter the ACB for capital assets:

1) Purchases of the same security over time at different values;

2) 1994 capital gains elections to “bump up” the cost case of certain assets; 

3) Inherited of gifted assets;

4) Reinvested distribution from mutual funds or reinvested dividends from stocks.

In the year of death, there are four tax returns that potentially need to be filed. By filing more than one tax return, it could save your estate some tax. The four (4) potential tax returns that could be filed are:

1) Final or terminal returns which is the regular return that reports regular income plus income accrued from January 1 to the date of death;

2) Return for rights or things is an optional tax return that includes some income earned and receivable at death but not yet received. Examples of this type of income include accrued vacation pay or dividends declared but not paid as of date of death;

3) Return for income from a testamentary trust is also optional and can be filed, if the deceased was the beneficiary of a testamentary trust and more then 12 months of trust income would otherwise have been reported on the deceased final tax return

4) The last optional return that can be filed is the return for sole proprietor or partner. This return reports business income of he deceased if the business has an off-calendar year end and more than 12 months worth of business income would otherwise have to be reported on the deceased’s final tax return. 

There are a few benefits to filing multiple tax returns; for instance, a claim can be made for some personal tax credits, such as: basic personal amount on each of the returns on your behalf, effectively multiplying the number of credits claimed. Additionally, by spreading your income over serval tax returns, your estate benefits from the lower graduated tax rates, more than once in the year of your death. The rules governing filing multiple tax returns are complex, so a tax professional should be consulted.

Charitable giving is a great way to not only help a great cause of your choosing but at the same time receive a tax break. If you designate a portion of your assets in your will, your estate will be able to claim a donation tax credit for the fair market value of the gift on your final tax return. If you give assets other than cash, your estate may still have to report a capital gain (or loss) resulting from the deemed disposition rules however, the donation tax credit your estate receives will offset that gain. Recently, changes have been made that now allow for the donation of marketable securities to charity with no capital gains inclusion on your tax return.

Even after implementing all the strategies listed above to minimize your estate’s tax bill, we still know that eventually the tax man will get his cut and there will be a bill to pay. Life insurance is a tool that is used by many to make sure that any and all tax liabilities plus final arrangement costs, are met and that these costs will not be incurred by their heirs.  This will maximize the estate that is inherited by your loved ones and they will not have to succumb to liquidating any of your assets just to pay the estate tax. This becomes a vital option for any individuals who have heirs that are depending upon their inheritance to assist with their day-to-day living expenses. Any funds that are paid out by life insurance bypasses both probate and estate tax and flows directly to the beneficiaries.

The estate planning process should be a pleasant, respectful process that involves: listening and understanding one’s wishes. A good financial advisor considers all aspects of a person’s desires and coordinates a team of experts such as: lawyers and accountants in addition to themselves, to ensure a smooth process for all those involved.

This article was prepared solely by Omar Baqa who is a registered representative of Manulife Securities Incorporated. The views and opinions, including recommendations, expressed in this article are those of Omar Baqa alone and not those of Manulife Securities Incorporated. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund.