Aging population needs legal expertise

While the following article from www.lawyersweekly.ca was actually written to be read by lawyers and other professionals in the estate planning field, I believe it makes good reading for clients too. It does a great job of explaining what we as lawyers are trying to achieve with our clients, and what clients expect from us. It also talks about some of the challenges that lawyers and executors will face, particularly with respect to after-death tax issues. I hope that those of you who are doing your own estate planning and thinking about who should be your executor will read this article and understand the kind of thing that executors face.  Click here to read the article by Lionel W. Newton and Barry S. Corbin, two leaders in this field in Canada.

What do I need to know about tax on my estate?

Some of you may already know that I write a quarterly column for News & Views, the magazine published by the Alberta Retired Teachers' Association. I'm attaching a link here to the winter 2012 issue, in which my column was called "What Do I Need to Know About Tax on my Estate?". Click here and scroll down to page 12.

Beware taxes on your US estate

If you own a condo in Florida or Arizona, as so many Canadians do, you may wonder whether you'll have to pay U.S. tax on it when you pass away. The U.S. estate tax system was in a state of flux during 2012, making it very hard for professional advisors to give their clients certainty about what would happen tax-wise upon their deaths, but the tax rules have now been settled. Click here to read a column by Jamie Golumbek in the Financial Post that explains very clearly whether or not you'll have to pay tax in the U.S. if you own that vacation home when you pass away. Yes, you heard right - an article about tax that will give you a clear answer!

Who should help an executor with estate tax returns?

A reader recently sent me the following question about who should be hired to prepare tax returns for an estate. It's a great question really, since we lawyer are always saying that executors should "hire an accountant" but not everyone knows where to turn.

Here's the question:

"What type of person should I be looking for to help me prepare terminal (and other tax returns) for my father who died last year? CA vs CGA vs CMA? I'm so confused."

I posted this question to my LinkedIn group called "Canadian Will and Estate Professionals" to see what the accountants in the group (and the other estate lawyers) would say about this. The general answer seems to be that an executor should look for a CA (Chartered Accountant).

However, every person who answered the post commented that the individual accountant's experience with estates and trusts is far more important than the letters after his or her name. I would agree with that.

In larger cities, you can get in touch with large accounting firms who have accountants working exclusively in different areas of tax, such as personal income tax, corporate tax, or estates/trusts. However, not everyone has access to a firm like that. When shopping for an accountant to help you with estate returns, ask how much experience the accountant has with estates. (Note that this is a different question than "do you do estate tax returns?")

You can also ask your estate lawyer for some names, as all of us work with accountants on our files on a regular basis.

One of the people who replied to my post suggested that executors avoid tax preparers, as opposed to accountants. This of course brought a reply from a tax preparer to counter that warning. My experience using tax preparers to work on estate returns hasn't been good. One of my clients who went to a tax preparer to have the deceased's terminal return prepared was told to "go away. You can't do a tax return for a dead person".

That of course was completely wrong; you can and should do tax returns for dead persons and their estates. This is why I agree with my colleagues' advice that the individual's experience is most important. Not all tax preparers are as poorly trained as the one that my client was unfortunate enough to encounter, by any means. Make sure you're comfortable with the expertise of the person to whom you trust your estate returns.

Canada Revenue Agency - what to do when someone has died

Here is an extremely useful link for executors from Canada Revenue Agency. It's called "What to do when someone has died" and contains information about which tax returns need to be filed. It also contains information and forms for dealing with RRSPs and RRIFs of a decceased person. Personally, I would never try to handle an estate without consulting an accountant, but I like to be as informed and prepared as possible to make the most of my consultation. This page is also great for just getting that overview of what your job as executor is going to take. Click here to visit the page. I'll add it to my "interesting links" section so that executors can find the link in the future.

Donate securities to charity (and be a bit of a tax Scrooge)

You may have heard that there are tax advantages to giving to charity, particularly if you want to give shares and securities, but do you really understand how it works? Do you know whether it might work for you? I'm attaching a link to an excellent article in the Globe and Mail by Tim Cestnick that really explains it well. Click here to read it. Although the article talks about charitable giving while you're alive, the same tax principles apply to giving to charities through your will.

Passing the torch to the next generation

There's a good article in www.globeadvisor.com that talks about several issues relating to passing your estate on to your children. It covers a bit of everything, from choice of executor to life insurance, but the main topic is saving on taxes when passing on property. I wish more people would read articles like this one before going ahead with steps like putting their children's names on the cottage.  Click here to read the article.

RRSP/RRIF spousal transfers on death - not so automatic

Warning! This post talks about tax. I realize that not everyone finds tax information as interesting as I do, but it's important stuff for all of us.

I'm attaching a link to a blog post by accountant Mark Goodfield, better known as The Blunt Bean Counter. In this post he talks about the transfer of an RRSP or a RRIF from a deceased spouse to a surviving spouse. You might be surprised to find that a spouse can choose simply to take the funds outright rather than receive the funds into his or her own RRSP or RRIF. If that happens, the estate may end up paying the tax.

Click here to read the article, which is very readable and contains tons of good information.

Not knowing this simple tax rule causes problems in estates

I recently dealt with a question from a reader about paying "his portion" of the taxes on a RRIF, which he and another person are going to receive as they are the named beneficiaries of the RRIF. This is something that I hear very frequently, as it's commonly thought that a person receiving an asset must be the person who pays the tax on it. Unfortunately, this is not correct and it causes many problems and disputes in estates where executors don't seek professional guidance.

Let's say that the RRIF in question is worth $100,000, or $50,000 per beneficiary. Let's also say that the tax owing on the RRIF is going to be $30,000, or $15,000 per beneficiary. Plenty of executors (and beneficiaries for that matter) believe that this means instead of getting $50,000 each, the two beneficiaries are going to receive $35,000 each (50,000 - 15,000 = 35,000). This, however, is not the way the tax is paid.

What happens in reality is that each beneficiary receives his or her full $50,000. The $30,000 tax comes out of the estate itself. This means that the tax on the RRIF is paid from the bank accounts, investments, house or other assets owned by the deceased, even if the estate is being left to other people.

This is because the tax on the RRIF is a debt owed by the person who passed away. The RRIF itself is no smaller on the date of death, and so the whole thing must be given to the person(s) named. The law says that debts of an estate are paid from the residue of the estate first, so that's where the payment must come from.

Many people who do estate-planning without legal or tax advice never realize how easily their intent to treat everyone fairly can be upset by their failure to understand this rule. For example, let's say a mother leaves her $200,000 RRSP to her son, and the rest of her estate, which also adds up to about $200,000, to her daughter. She wants to treat them equally and thinks she has achieved this.

What she doesn't realize is that when she passes away, her son will get the whole $200,000 RRSP. The estate will pay the tax on the RRSP. Let's say the tax is $60,000. This means her daughter will receive $140,000. If there are other bills or taxes, the daughter will receive even less. This isn't even close to what the son will inherit, the mother's wishes don't go as planned, and it's quite possible that a dispute will ensue between the son and daughter.

The same rule applies to other assets that give rise to tax when the owner dies. For example, a person who owns rental properties or a lake cottage will also have tax to pay on death, and these taxes are paid out of the estate.

It's possible to draft a will to state that the person receiving an asset should also pay the tax bill associated with the asset, but almost nobody ever does that. I think more people would do that if they were only aware that it was possible. And if they were only aware of the rule in the first place.

How to reduce taxes on your final tax return

Dealing with tax is often one of the most mysterious and challenging aspects of an estate. I'm always on the lookout for good information and articles that help executors with this area. The following article was recently published in the Vancouver Sun. It talks the reader through an example of reducing capital gains tax on a typical estate. Click here to read the article by John Pin.

Take the Tax Sting Out of an Inherited Property

We hear a lot these days about inherited cottages and their tax implications. Attached is an article from the Globe and Mail's Tim Cestnick that will help clarify this issue. Click here to read it.

Ten reasons you might want a trust in your will

Whether or not a trust in your will would be useful depends only in part on how much money you have to deal with. Trusts in wills (called testamentary trusts) are not only for those with multi-million dollar estates; they can also be very useful for people like you and me. Although many people shy away from the idea of a trust because they believe it must be complicated, in reality it's more simple than you might think.

A trust is created in a will whenever your trustee (usually your executor) holds onto money or property for someone else, i.e. one or more beneficiaries of your estate. The terms of the trust such as when the beneficiaries are paid and how much they are paid are set out in your will, by you.

A trust is put into a will to serve a particular purpose, and in this post I'd like to briefly describe the top ten common purposes:

1.  A child inheriting under a parent's will can inherit the entire share on the day they reach the age of majority. A trust can be used to hold that share,or some part of it, until the child is older and more mature.

2.  A trust can protect a child who is hopeless with handling money by ensuring that a pre-determined amount is paid to the child on a monthly or yearly basis.

3.  A child with a drug addiction can be protected by a trust that pays for basic necessities such as rent, but does not make the whole share available at once.

4.  The share of a handicapped child can be managed for the child's lifetime in a way that brings the parents peace of mind, while at the same time doesn't cause the child to lose valuable provincial health benefits.

5.  A spouse who is already in a high tax bracket may not want the additional income that would be earned once a share of the estate is received. Setting up a trust for the spouse's share allows the tax to be earned (and paid) by the trust rather than the spouse.

6.  In the case of a second marriage, using a trust would allow a person to give a surviving spouse the use of assets (such as the family home) for that spouse's lifetime, after which the assets could go to the children of the first marriage.

7.  A trust can be set up to provide for emergency funds for any vulnerable family member - a child, an elderly parent - to be used when and if they are needed, with any remainder going to the family members you specify.

8.  A trust provides funds for the taxes, insurance and upkeep on an asset that is used by more than one beneficiary, such as a lake cottage.

9.  Funds that are held in a trust are safe from creditors of the beneficiary (except in the case of bankruptcy).

10.  If a beneficiary's marriage breaks down, funds held in trust are generally not held to be matrimonial property, and are therefore not lost to the beneficiary's divorce.

As you can see, these are things that affect even those of us with modest estates. If your lawyer is suggesting a trust for your will, keep an open mind to see if it would work for you.

Who gets their inheritance when debts eat up part of the estate?

Many times in this blog I've talked about how debts and expenses of an estate are to be paid before the beneficiaries receive their inheritances. Now a reader has asked a really good question about the next step in that process, particularly where there might not be enough money in the estate to pay debts and expenses as well as all of the gifts set out in the will.

Here's the question:

"Cash gifts are distributed after the estate has paid expenses. If there are insufficient funds to pay the gifts are the prorated according to the funds available?"

The answer is a bit complicated but I'll do my best to keep it brief. By the way, I addressed this issue in a paper I wrote a couple of years ago for the Legal Education Society of Alberta called "Taxation of the Average Estate", which is available online by clicking here.

The first thing you have to do is read the will carefully to see whether it gives any specific instructions about paying taxes. Most don't, beyond giving a direction to the executor simply to pay debts. If there are specific instructions, then obviously you must follow them. The answer I'm giving below applies when there are no specific instructions in the will.

Let's say that John's will gives $5,000 to his friend Lucy, and divides the rest of the estate among his nephews, Frank, Lloyd and Joe. The gift to Lucy is called a specific gift. The gifts to Frank, Lloyd and Joe are residuary gifts because these three people share the residue, or rest, of the estate. The type of gift matters because debts are paid first from the residue. So if there were only $5,001 in John's estate after payment of debts, Lucy would get the $5,000 and the other three would split the last dollar.

Within the residue itself, personalty would be used up before realty. So if there were cash or vehicles in the residue, they would have to be sold and used to pay debts before real estate in the residue was sold for debts.

I believe this reader's question asks about what to do when there are several specific gifts to be paid and there isn't enough to pay all of them. If some of the gifts were cash and some were realty, cash gifts would have to be completely consumed by debts before realty gifts were used. So it could work out that one person (getting the lake lot for example) might still get that gift even though the next person didn't get their gift because it was cash.

If there were several gifts to be paid - all cash - and none were treated any differently than the others in the will, I would agree with the reader's suggestion to pro-rate them after payment of debts. It would be difficult for any one beneficiary to argue that he or she had been treated unfairly if this approach to division was used.

Keep in mind that if the recipient of any of those gifts is a dependent of the deceased (spouse, minor child, handicapped adult child), he or she might decide to contest the will to get a greater share. They have only a limited time to do this.

The tax benefits of charitable giving explained

Clients often ask me if there is a tax break available if they leave charitable donations in their wills. The answer is yes, and this article from The Financial Post explains how it works. It also talks about donor advised funds work, such as the Aqueduct fund that I work with here at Scotia Trust. Click here to read the article.

Selling Mom's estate? Know the tax rules

This question-and-answer article about capital gains tax was found on http://www.capitalmagazine.ca/ and was originally published at http://www.montrealgazette.com/. This is exactly the kind of question I'm frequently asked by readers on this blog, so I'm sure many of you will be interested in the article. Click here to read it.

Is a beneficiary liable for capital gains tax on a property incurred before he received it?

We all want to know what effect, if any, an inheritance will have on our tax situation. The following is a question received on my blog but it's also one that I'm asked a lot in seminars. I thought I'd share it with you. Here is the question:

If a person inherit a revenue property that was originally purchased many years ago for 100k and is now worth 300k when the beneficiary (that person that inherited)eventually goes to sale the property - say it will be sold for 350k, is he subject to a full capital gain tax, going back to the original purchase price of 100k or just on the gain made from the day he was an owner (50k)?

The fact that the property in question was a revenue property is signficant because it means that the property will be subject to capital gains tax. Let's say the property belonged to Jesse. If it had been Jesse's principal residence, it would have been an exception to the capital gains tax rule, but as it was a revenue property, it will be taxable.

Jesse is responsible for tax on the gain in value from the day he purchased it ($100,000) until the day his estate disposes of it ($300,000). This tax is paid from Jesse's estate. Jesse's executor may not transfer the asset to anyone until the taxes are paid unless he is prepared to risk having to pay those taxes himself.

The property then passes to the beneficiary. Let's call her Laura. When Laura receives the property it's worth $300,000 and when she sells it, it's worth $350,000. Laura is responsible for the tax on this increase in value (i.e. capital gain) only. If I were Laura, I'd want reassurance from the executor of Jesse's estate that all outstanding taxes on the property had been paid in full.

Please understand when reading this post that I have simplified the example to describe how the general rules work. Sometimes there is a delay in an estate and the property ends up sitting in the estate for many months, during which time it increases in value. A beneficiary could be responsible for those taxes. I suggest that executors use experienced estate accountants to deal with capital gains tax questions.

An entrepreneur's guide to giving wealth away

I always like finding articles that can talk about tax in plain language. The attached is one of those, and author Tim Cestnick does a great job explaining how owners of small businesses can get tax breaks both in their lifetimes and at the time of their deaths. Click here to read the article from the Globe and Mail.

Avoid probate and estate tax

This article from http://www.capitalmagazine.ca/ talks about how to avoid certain estate taxes by using various kinds of trusts. Trusts aren't something most people can set up on their own, as there are plenty of rules that apply to them, but they are still very popular and very flexible. Click here to read the article. Maybe you'll find it worthwhile to talk to your own estate-planning lawyer or accountant about trusts.

Inheritance up in flames

As a follow-up to the article I posted right before this one (tax on inheritance) I'm attaching a link to an article in http://www.capitalmagazine.ca/. It's the true story of a family in BC who didn't get tax advice before giving the parent's home to the children as an estate-planning move. After the parents died, this ended up costing the children $700,000 in tax. Whew, not at all what the parents had hoped for. Click here to read the article, especially if you think you don't need legal or accounting advice for estate planning.

Does an executor have to pay estate taxes personally?

The toughest part about being an executor is the learning curve; most executors do the job only once during their lifetimes and frankly most are happy not to have to repeat the role. It may seem relatively straightforward to say that the executor is in charge of the estate, but the details can be very challenging. Tax issues are particularly challenging. A reader has a question about executors and taxes that I thought everyone would find useful:

"My brother is the executor for our father's estate. He left us a RRIF to each of his children (and common law spouse) which is not considered part of the estate. There are potentially large taxes to pay on this plus other taxes. Who is responsible to pay? If there is not enough funds in the estate is the executor responsible for outstanding debts/taxes? He fears he may be made bankrupt from his personal savings."

You're right that assets with designated beneficiaries, such as a RRIF (also including RRSP, life insurance policies, pensions, LIRA, etc) do not fall into the estate. They are paid directly to the beneficiary named.

You're also right that there could well be a big tax hit on the transfer. Money that is contributed to a RRIF is put in on a tax-deferred basis. The income tax is paid on it when the money is taken out of the RRIF. The law says that when you die, your RRIF is deemed to be cashed one minute before your death. Therefore all of the money comes out at once, and the tax all becomes owing.

The portion of the RRIF that is going to your father's common-law wife may be eligible to be rolled over to her without tax being paid.

The taxes must be paid by the estate, even though the RRIF money didn't go into the estate. This is often hard for people to accept, because it may not seem fair that the people inheriting the residue are the ones who basically are paying the tax. However, the tax on the RRIF is a debt of the deceased and his estate is responsible for his debts.

Your brother should work with an accountant or lawyer who specializes in estate and tax matters to ensure that he becomes aware of all elections, deductions, carry-overs or other tools that might be available to minimize the taxes.

Should an estate not have enough assets to pay the taxes, the executor is not personally responsible for paying them. His job is to administer the deceased's affairs, not to involve his own money. This is just one more reason executors are always advised to keep their own funds strictly separate from estate funds. Unless he has been fraudulent or negligent in his administration of the estate, he should have no fear of damaging his own finances.

I appreciate you taking the time to send me a question. Please understand that these are the general rules that apply to estates and taxes, and that specific facts in your case could conceivably bring about a different result. I strongly urge your brother to seek professional guidance.

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