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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about death and taxes with Wilmot George, managing director of tax and estate planning with Canada Life. We talked about underappreciated tax traps, the use of estate trusts, and we started by asking why tax considerations are a key part of estate planning.

Wilmot George (WG): Advisors would know that income tax is a reality at death, and depending on province, estate administration or probate fees might also add to estate costs. Quite often, Canadians are subject to lower tax brackets and lower tax rates during their lifetimes, only to become subject to taxation at top rates for the year of death, due to the deemed sale or withdraw of assets just prior to death. This can lead to taxation as high as 55%. Assets flowing through the estate at death might also result in probate fees of up to 1.7% of the value of the estate. Estate planning can reduce these costs, perhaps through triggering additional taxable income at lower tax rates in the years prior to death or using named beneficiary designations on planned contracts to bypass the estate for probate purposes. Planning in advance allows time to consider and implement appropriate strategies to reduce taxes and other fees of death, thereby maximizing assets for beneficiaries.

Underappreciated tax traps

WG: Two often overlooked tax traps or blind spots include: one, the taxation of RRSPs and RIFs, where named beneficiaries and estate beneficiaries are different; and, two, missing an opportunity to tax income in the hands of the deceased, as opposed to a spousal rollover in all cases. In the absence of a spousal rollover, RRSPs and RIFs are deemed withdrawn at death with taxes payable by the deceased’s estate. This is the case even if the plan contract has a named beneficiary, such as an adult child or grandchild. Now, where the estate beneficiary is different from the named beneficiary on the RRSP or RIF contract, taxes payable by the estate for the RRSP or RIF can frustrate estate beneficiaries when the RRSP or RIF is paid to named beneficiaries free of withholding taxes. Understanding the taxation of RRSPs and RIFs at death can go a long way in avoiding potential conflicts through appropriate planning. Also with RRSPs and RIFs at death, spousal rollovers, while common, might not always be the best option for families from a tax perspective. Where an individual dies earlier in the year, he or she might not have accumulated significant income for the year of death, allowing for taxation of additional income at lower tax brackets and rates if a spousal rollover is not requested. Financial advisors can work with executor clients, their tax advisors and financial institutions to flush out and determine where spousal rollovers may and may not make sense.

Jointly held property

WG: Another potential trap or blind spot for Canadians is the use of jointly held status or jointly held property. We often see jointly held status between spouses and common law partners, and that can work well. But quite often, parents might want to add adult children to properties by way of joint ownership for the purpose of avoiding probate. We need to understand that there are risks associated with jointly held property with adult children. Who’s going to have signing authority? Do the children have creditors? Are the children in unstable relationships? And what happens at the time of death if you have multiple children, but only one child is listed as a joint owner on that account? It can create conflict at the time of death. We need to understand the potential risks as well as the potential benefits, to determine whether or not it makes sense to engage that situation.

The use of estate trusts

WG: In brief, trusts are typically used when asset protection or control is required. Trusts can be effective in managing assets for beneficiaries who might not be able to manage assets themselves or have creditor concerns. Think about the scenario where assets are left to minor or spendthrift children or grandchildren, or perhaps where a parent or grandparent wishes to provide assets for a child who’s living with a disability that compromises their ability to manage money. As opposed to gifting lump sum amounts directly, a trust can be established where a separate trustee can manage the gift for the benefit of the beneficiary. Payouts from the trust would be defined by the trust settler with detailed instructions or discretionary authority granted to the trustee.

And finally, why estate planning is so important?

WG: Simply put, peace of mind. Whether it is advice related to tax minimization and death, the benefits of probate planning, or tips on avoiding family conflict after death, the estate planning conversation is one that potentially impacts all Canadians. Intestacy can lead to unintended consequences, can lead to unintended distributions, and we can avoid these challenges by the financial advisor having a good conversation with their clients about estate planning and the many tools and resources available to them to ensure that objectives are met.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Wilmot George of Canada Life. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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