Friday, January 30, 2015

Smile for the weekend: Baily Beagle "Plays Dead"

How are taxes paid between the time a person dies and the time the estate is distributed?

Have you ever wondered about the mechanics of filing tax returns for an estate? Who pays the tax on income that accrues between the date of death and the date the assets are distributed to the beneficiaries? A reader recently asked me about this, so I'm sharing his question and my response below:

"I know that income taxes must be paid on an estate to the time of a person's death, as part of the deceased income, but how are the taxes paid between the time the person dies and the estate is divided among those named in the will?"

As you know, in Canada we calculate our personal taxes on a yearly basis, with the year-end being December 31. When a person dies, his executor will file a tax return for the year of death. If a person dies on, say, February 14, the tax return is filed for the period of January 1 to February 14, a shortened tax year. The form used is a T1 return just as we all use every year, but because it's the last one for that person, it's called a terminal return.

Your question is about any taxes that are incurred after that terminal return is filed, but before the estate is paid out to the beneficiaries. Estates do have income for that period of time, and the longer the assets remain in the  name of the estate or the deceased, the more likely it is that there will be income. The income in question might be an increase in value of the asset (a capital gain), interest earned on funds, the taxable portion of proceeds of a registered asset, or other income.

The executor will file a tax return for the estate. The tax year for an estate begins the day after the death, and runs for a year. So in the example above, the estate tax year begins on February 15. The form used for an estate tax return is a T3 return. The tax is paid from funds held in the estate. If the estate isn't wound up a year after death, a new tax year begins. In complex estates, T3 returns are filed for several years in a row.

It's important to note that the tax rules for estates are complex, and no executor should be completing estate tax returns without the help of an accountant. In fact, I suggest you confirm the information I've provided here with an accountant, since I'm not one. Some estates require additional returns (such as a Rights and Things Return) to be filed as well as the T3, depending on the type of assets held by the estate. Also, an accountant will be able to advise an executor about filing deadlines, available deductions, rollovers, exemptions, and obtaining a Tax Clearance Certificate.

Sometimes, when an estate is wrapped up quickly, there is no need to file a tax return at all. This is not something an executor should assume. To avoid getting stuck with personal liability for not filing the proper returns, or filing them late, every executor should get an accountant's advice.

Something an executor might check with an accountant for any specific estate is whether or not estate income should be allocated to beneficiaries (and paid by the individual beneficiaries) rather than being paid by the estate itself. This would involve the individual beneficiaries each having to claim a portion of the estate income on their own personal returns, and paying their share of the tax. This is advantageous in some situations.

If you want to do some further reading about this, I suggest a paper that I wrote and presented a few years ago for the Legal Education Society of Alberta. The paper is called "Taxation of the Average Estate" and can be purchased as a download by clicking here. The site allows you to take a look at some sample pages before committing to it.

Thursday, January 29, 2015

Judge rejects Ontario man's 'racist will' that disinherited daughter for having 'bastard white son'

The Ontario court has made a new, interesting ruling. It concerns the will of Rector Emanuel Spence, who died in 2012. Mr. Spence had two daughters. He had an excellent relationship with his daughter, Verolin, but ended that relationship in anger and bitterness when his daughter revealed in 2002 that she was pregnant, and that the child's father was Caucasian.

Mr. Spence, who was Jamaican-born, called the child a "white bastard" and swore  he would not have a white man's child in his home. He cut Verolin out of his will and left everything to his other daughter, from whom he was more or less estranged.

After Mr. Spence's death, Verolin challenged the will on the ground that it violated public policy. The challenge was successful; the judge determined that the will was based on a racist principle and divided the estate equally between the two daughters. To read a more detailed version of this story, click here to see an article in the National Post. The full name of the case is Spence v. BMO Trust Company, 2015 ONSC 615.

All wills written in Canada are subject to legal rules that are collectively called "public policy". Though most people have never heard of these rules, and in fact are often surprised to find that they can't say whatever they want in their wills, the rules affect all of us. The public policy rules are in place to ensure that wills (or parts of them) are not valid if they are contrary to the good of the public. Wills cannot give or withhold inheritances based on concepts that are held to be contrary to Canadian values.

For example, a parent cannot give a child an inheritance on the condition that the child never marry, as it is contrary to public policy to prevent people from marrying. Another case in which the Ontario court considered public policy involved a trustee who refused to fund a beneficiary's inheritance because the beneficiary was involved with someone of a different religion (Fox v. Fox Estate, 1996 CanLII 779). In a case from British Columbia, parents wished to disinherit a child because he was homosexual (Patterson v. Lauritsen (1984 CanLII 353). In Saskatchewan, the estate of Robert McCorkell was challenged on the basis that he wanted to leave a huge sum of money to an organization that promoted hate against certain groups of people.

Another interesting aspect of the Spence case is that the will itself doesn't say anything racist. It says that Verolin was cut out of the will because of the lack of communication between Verolin and her father. All of the facts about the dispute between father and daughter - and the racist reasons for it - were provided by people other than the testator.

If you are planning to leave someone out of your will because you don't approve of their lifestyle, perhaps it would be a good idea to discuss your plans with an experienced wills and estates lawyer.

Monday, January 26, 2015

To litigate or to mediate?

It's no surprise to any of us that estates can be minefields of disputes, upsets, and resentments. The usual way of resolving an estate dispute is to take someone to court and let the judge decide who wins and who loses. But those of you who have thought that there simply must be a better way of dealing with these disagreements are right; there is an alternative. That alternative is mediation.

Mediation is not particularly familiar to most people, since most of us have never had any reason to go through it, but there are good reasons for almost everyone caught up in an estate fight to consider mediating rather than litigating. Not all issues can be resolved this way, but if the people involved really want to settle an issue without fighting, mediation may be a good solution.

Toronto lawyer Ian Hull is a leader in the area of wills and estates law. Mr. Hull has recently posted on his blog, the Toronto Estate Law Blog, discussing the benefits of using mediation to resolve estate issues. Click here to read the article. I hope that knowing a bit more about mediation will prompt at least some of you to look into using that method of dispute resolution.

Sunday, January 25, 2015

Movies about older adults active in the dying process

As regular readers of this blog know, I encourage families to talk to each other about the tough topics that are part of estate planning. This is a lot easier when there is nobody in the family in immediate danger of passing away, but unfortunately an awful lot of people don't act (or speak) until there is a pressing need.

I recently found a post by Karen D. Austin, who blogs at The Generation Above Me, that I thought really needed to be shared. Ms. Austin has made a list (with clips) of films that feature older adults who are actively involved in the dying process. I haven't seen all of these films myself, but I plan to see as many as I can. They are works of fiction, not documentaries, and to my mind that is the perfect way to illustrate the emotions, twists of fate, and attitudes that come up when someone is nearing the end of his or her life.

As Ms. Austin says, "These works might help viewers prepare for the death of a parent, a spouse or another loved one." Perhaps they would work as a springboard into a conversation you need to have with someone while you still have the chance.

To see the list, please click here. It was originally posted in 2012 but was updated in December, 2014.

If anyone has seen any of the films mentioned on the list and would like to leave a comment about it for the rest of us, please go ahead.

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