Golden Girl Finance
 
Christine Van Cauwenberghe
Posts (14)
 
 

Ask the Expert

Q&A: How to minimize taxes and probate fees when transferring investments to beneficiaries?

July 25th, 2013 by
 

Q:  I have a non-registered investment account and I would like to know the best way to transfer it to my beneficiaries.  How can I minimize income taxes and probate fees?  Is joint ownership a good option?

Asked by D.S.

 

Generally speaking, I advise clients not to give up control of their assets any sooner than they have to. Although minimizing taxes and fees is important, don’t let that be the driving force in your estate plan. I generally don’t recommend adding a joint owner during your lifetime (other than a spouse), because that could then expose the account to the creditors of the new joint owner, which could include a child’s ex-spouse. When a person adds an adult child to an investment account for no consideration (meaning that they didn’t pay for their interest), the courts currently presume that the account still belongs 100% to the parent and the child isn’t a true joint owner.But that is a presumption only and the presumption has been rebutted in many cases, forcing the parent to share the account or property when that wasn’t their intent. 

One of the other potential problems is a possible inequitable distribution of your estate. For example, if you add your 3 children as joint owners and one of them predeceases you, will their children receive the deceased child’s share? These are just some of the questions that can arise – my advice is to keep control of your assets and have them distributed equitably in a properly executed will. Although adding a joint owner might help you save probate fees, the probate fees across Canada are quite low (the highest fees are around 1.5%). 

The other issue is the payment of income taxes, which is quite separate and apart from the payment of probate fees. Although you can potentially save probate fees by adding a joint owner to an account (which, as mentioned above, is often not recommended), the same doesn’t hold true for income taxes. In the case of non-registered investments, income taxes are calculated by subtracting the adjusted cost base from the fair market value of the investment at the time of transfer. So if your investments are worth $200,000 when you die (or transfer them) and you paid $50,000 for them, the capital gain would be $150,000. The taxable portion of that is 50%, or $75,000, multiplied by your marginal tax rate. Although you can “rollover” your investments to a surviving spouse or common-law partner, the same cannot be said when transferring the assets to the next generation, and there is generally no way to avoid this. You might be able to minimize the tax by transferring the asset now vs. later (assuming the gain will only grow over time, which isn’t always the case), but again, why would you give away your assets before you need to? In some cases, even adding a joint owner could trigger part of the capital gain when you indicate that you want the child to become a true joint owner (for example, where you want to make an immediate gift of part of the account to your child and you sign documentation to that effect).  In that case, if the unrealized taxable capital gain is $75,000, and you add 2 children on as joint owners, it is possible that you could trigger 2/3rds of the capital gain at that time (assuming there was 1 original owner, and there are now 3). If you sign a document indicating that you aren’t making your children true joint owners of the account, that may avoid having the capital gain triggered at the time they are added as joint owners, but all that means is that 100% of the gain will be triggered at the time of your death (again, assuming you don’t leave it to a spouse or common-law partner). 

If you are concerned about the tax bite that the taxes on the capital gain may take out of your estate, then buying additional insurance is usually the most tax-effective strategy, since insurance proceeds are paid out tax-free at the time of death. Having a well-drafted will is also highly recommended.

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Q&A: Tax implications for children inheriting a home

December 29th, 2012 by
 

Q: What are the tax implications for my 3 children inheriting my home on my death? What is the best way to handle the inheritance issue?

Asked by Anonymous

 

Except in rare cases, it is not the beneficiaries of an estate who are responsible for paying taxes owing as a result of someone’s death; it is the deceased (or their estate) who will be liable.  So, upon your death, the executor would sell all of your assets (except certain special items that your children want to receive in kind), pay any taxes owing, and then divide the remainder according to the will. 

In the case of a principal residence, there generally are no income taxes owing because of the principal residence exemption (unless you also own a cottage and you are using the exemption for your cottage).  Assuming you own the home in your name alone, the house would be subject to probate fees (which are generally quite small) and then there would be transaction costs for selling the home. 

As for how you should leave the proceeds to your children, you should speak to your lawyer about the benefits of leaving it to them in trust.  Depending upon their age and how much will be in each trust, it may be worthwhile to put the money in trust either to control how it is used (which may be an issue if they are very young) or to help them income-split for tax purposes (if they are older and in a high income tax bracket). 

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Q&A: Whether to name a child as your beneficiary

November 19th, 2012 by
 

I am a single mother of a 10-year old daughter. I want to leave her everything. Do I name her as the beneficiary or contingent, and who for the trustee, if so?

Asked by Anonymous, Newcastle, ON

 

Because your daughter is a minor, it is probably best if you do not name her as the direct beneficiary of any of your assets. You should direct all of your assets to go through your estate, and then ensure you have a properly drafted will that creates a trust for your daughter. You can then appoint a family member or trusted friend to act as the trustee of the trust, and provide that the assets are to be distributed in a more structured manner (e.g. you could provide that she would receive the annual income at age 18, some of the capital at age 25, 30, etc.)

If you designate her as the direct beneficiary, then the Public Trustee will take over the management of the funds and pay it out to her in one lump sum when she reaches the age of majority, which is generally not recommended (and even if you were able to name a trustee under the plan, they would still be required to pay out the funds when your child becomes an adult). Although designating your estate as the beneficiary of your assets may result in the payment of some probate fees, those fees are generally quite small (1.5% in Ontario) and not worth worrying about; it is usually a much bigger problem if a child receives a large lump sum before they are mature enough to properly manage it.

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Q&A: Getting advice after a spouse passes away

November 7th, 2012 by
 

With the sudden passing of my common-law husband, I find myself having to make choices about his pension benefits (paid out now or a certain amount every month) and I’m not sure what to do? I need some advice on investing and income tax.

Asked by Anonymous, Thunder Bay, ON

 

My condolences on the loss of your husband. There are a lot of issues that can arise upon the death of a spouse; dealing with pensions, insurance payouts, filing tax returns, etc.

It is usually too overwhelming to go it alone. I recommend that you meet with a financial planner, preferably someone who has their Certified Financial Planner designation, so that they can help you wade through these waters. You may also need to confer with a tax accountant at some point, and potentially an estates lawyer to either help you administer your husband's estate and/or to help you revise your own estate plan, but going to a financial planner is probably where you should start.

The proper professional help and guidance is needed to help you navigate the financial issues, including the payout of the pension benefits.

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Q&A: Splitting pension after a divorced spouse passes away

November 5th, 2012 by
 

I have been divorced for approx 20 years; my ex-husband just passed away. His entire pension has gone to his girlfriend. Am I not entitled to a portion based on the number of years we were married?

Asked by Anonymous, Vancouver, BC

 

Generally speaking, the survivor benefit of a pension plan is paid to the person who was the pensioner’s spouse at the date of retirement (the definition of “spouse” varying between the provinces, but generally including common-law partners who have lived with the pensioner for 2-3 years).

If your ex-husband had not yet retired, then the rules regarding pre-retirement death benefits would generally result in it being payable to the spouse as of the date of death. However, the pension itself should have been split at the time you divorced. You should have either received an entitlement to part of the pension at that point, or received more of other types of assets to compensate you if your ex-husband chose to keep all of his pension.

If you were supposed to have received part of the pension and never did, that could be because the pension administrator was never informed that the pension had been split. You should review the terms of your divorce agreement and consult with a family lawyer if you believe that you were supposed to have received payments that you never did in fact receive.