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Estate and Tax Planning

Now that you are about to begin your retirement your main concern is probably that you will have enough funds to enjoy what is hopefully a lengthy retirement. However, this is also the time to take a look at your plans for handing down your assets when you pass away. The primary concern when planning your wealth transfer is your Will. If you do not have a Will in place when you die you are said to have died ‘intestate’. This will result in several problems. First, you will not have a representative and the provincial court will have to appoint one. This will take time. Second, and more importantly, any assets you owned at death will then be distributed to family members according to a provincial formula and it may result in your assets being distributed in a way that you did not intend.

Although there is no legal requirement to do so, it is a good idea to use a lawyer to draw up your Will. Your advisor can certainly provide you with some guidance as well, particularly in regard to financial assets.

When you complete a Will you will need to name an Executor (or Executrix if a woman). This is a very important decision as the Executor is responsible for distributing your assets according to your Will. Being an Executor can be very time consuming and complicated so you should ensure that the person has the ability to complete the task. Here are helpful resources that you can use when planning your estate: Will planning checklist, Executor’s Guide to Estate Settlement and personal record keeper.

Can you pass down your assets now?

You don’t have to wait until you die to pass down your assets. However, several issues may arise. First, you will lose control of those assets. Second, there can be adverse tax consequences since for tax purposes you are deemed to have sold an asset if you give it away and a taxable capital gain may result.

One method that can deal with the control issue is to establish a trust where the assets are held in the trust on behalf of the beneficiary. The Trustee (which can be you) controls the assets. Trusts are very useful and should be established with the assistance of a lawyer.

If you own your own business corporation there are special rules that allow you to effectively pass it on to your children while you are alive while maintaining control of the company and minimizing tax. However, this can be a rather complex strategy and you should only undertake this with guidance from a qualified tax professional.

Tax Issues

In retirement your tax situation is going to change. Your sources of income will be different and assuming you are older than 65, other tax factors will come into play, primarily in the form of tax credits. As a retired senior you may be eligible for the age credit, pension credit, medical expense credit, and spousal credit to name a few. Your advisor can help you structure your retirement income plan to minimize any negative impact on these benefits. When the time comes to do your tax return, ensure you are dealing with someone knowledgeable in seniors’ issues to ensure that you are taking advantage of all the tax breaks possible.

You have probably heard the old saying that the only inevitable things in life are death and taxes. This is true to a great extent and there will be tax consequences on your death that you need to be aware of and plan for.

When you die, it is assumed for tax purposes that you are immediately selling all of your assets for fair market value. This can result in a very large tax bill to your estate. However, one of the most beneficial tax tools available to individuals is the spousal rollover. If you have a spouse (which includes common-law and same-sex spouses) when you die, you or your representative can choose to ‘rollover’ your assets to your spouse. By doing this you will effectively defer any tax until your spouse dies when he/she may encounter some tax complications. You should speak to your advisor about the use of the spousal rollover.

You should also speak to your advisor about the special rules around your home and how taxes are impacted by the Principal Residence Exemption.

If you do not have a spouse and are anticipating taxes at death, a method to deal with the taxes is to take out insurance on your own life with your estate as the beneficiary. This will ensure that on death, your representative will have enough money to pay the tax bill. In the absence of the insurance proceeds, your representative may be forced to sell estate assets to pay the taxes.

A qualified insurance professional can assist you in selecting the right insurance in the correct amount.

Making charitable bequests is a generous way to help worthy causes and help your tax situation. Charitable donations result in tax credits which reduce your taxes and if you make a charitable request on death it will reduce your final amount of tax payable.

Speak to your advisor about how donations can help others and your tax situation.