Beware the tax traps when passing assets to family

This link goes to an article in the Globe and Mail in which Tim Cestnick talks about parents transferring assets to children, and particularly the issue of selling the children the assets at less than fair market value. I know a lot of parents want to do this, because they suggest it in our planning meetings. They think they are doing their kids a favour by selling something to them at what the kids can afford, rather than what the asset is really worth. They usually change their minds once they find out about the tax consequences to them and to the kids.

Tax information isn't always readable, but this article is. Click here to read it. And I echo Mr. Cestnick's closing tip about getting professional advice. When you're dealing with potential tax bills of tens of thousands, or even hundreds of thousands of dollars, for heaven's sake spring a couple hundred dollars to talk it over with an accountant or tax lawyer.

Tips for an executor on completing an estate inventory

An executor or administrator almost always has to prepare an inventory of assets and debts of the estate, whether he or she is applying for Letters Probate or Letters of Administration. There are other good reasons for preparing an inventory too, such as accounting to the beneficiaries, filing tax returns, and calculating the probate fee, lawyer's fee and executor's compensation.

Though the forms themselves vary from province to province, the principles behind the inventory are the same everywhere. The following are 16 tips to keep in mind as you gather information and fill in the paperwork:

1. All values should be as of the date the deceased died.

2. Use fair market value as a general rule.

3. "Real" property includes land, buildings of all kinds, life estates and mines and minerals titles. All other property is considered "personal" property.

4. When listing real property, include both the civic (street) address and the legal description. The legal description can be found on the title or on the tax notice for the property.

5. Use appraisers to set values on large assets.

6. When listing debts, include a breakdown of funeral expenses.

7. Under debts, include not just current debts but also future tax liability and other future debts.

8. Do not include any real or personal property that the deceased owned jointly with another person.

9. Do not include life insurance that names a beneficiary unless the beneficiary has already passed away, or the policy names the estate as the beneficiary.

10. Do not include financial assets that name a beneficiary, such as RRSP, RRIF, or pension.

11. Do not include anything that comes to an end with the death of the deceased, such as an annuity.

12. List and apply for all government and private death benefits.

13. Household items such as clothing and furniture may be grouped together and described on the inventory as "household and personal items" and given a nominal value such as $200. Assets of higher resale value such as artwork or antiques may be listed and valued separately.

14. Include the deceased's business interests, whether that interest takes the form of shares in a private corporation or a share in a partnership.

15. If your inventory is all ready to be filed except for one value that seems to be taking forever to get, you may give your best guess as to the value SO LONG AS you describe it on the inventory as an estimate, and later file a supplementary document to give the court the missing value.

16. Remember that the inventory is part of sworn evidence, so you will have to swear it in front of a commissioner for oaths. Swearing a false document is perjury.

Hopefully these tips help answer some of your questions.

How does an executor assign values to estate assets?

A task for executors and administrators everywhere is preparing an inventory of assets and debts of the deceased person. This leads to questions about how the executor knows what values to give to items. Some executors make their lives more complicated by simply guessing values, or by giving artificially low values to try to keep fees lower.

When giving value to items and preparing the inventory, keep two things in mind. One is that it's part of a document that you will swear under oath to be true. So if it is found not to be true, you might be getting yourself into trouble. Second is the fact that an inventory of an estate is potentially seen and used not just by the executor but also by the judge, the lawyer, the accountant, the clerks at the Land Titles Office, the beneficiaries (and possibly their lawyers) and the creditors.

So, having been given the above warnings, how do you give value to assets? Some ideas for different types of assets are given here. You'll notice that having written back-up that proves you didn't just pull a number out of a hat is a good idea.

House, cottage - the best source of value is a property appraiser. If that is just not in the budget, also acceptable are estimates by realtors (get a few) and the appraised value given on the annual tax assessment notice.

Farmland - I recommend that you hire a property appraiser for valuation of farmland. Farm equipment should be valued by a farm equipment dealer.

Investments and accounts - for any accounts, investment portfolios, DRIPs, mutual funds, RRSPs, RRIFs, etc. you should rely on the statements provided by the financial institution. Remember that you always have to assign the value as of the date of death, so if possible get a statement dated that day. If not, get one as close to the date of death as possible and choose the balance that applied before the date of death.

Pension - for private pensions, contact the pension administrator (who should be identifiable by looking at stubs or letterhead in the deceased's records, or by calling the employer) and ask. In come circumstances, you may be given a "lump sum" value that would apply if an amount that would otherwise be paid monthly were to be taken all at once.

Life insurance - request a letter from the insurance company by quoting the policy number. Some policies pay only the face value, while others may have a calculation of face value + savings - loans.

Shares of publicly traded companies - you don't have to look up shares that are held in a portfolio as the financial institution or advisor will value the whole portfolio. But if there are shares held outside of a portfolio, you need to put date of death values on them. You can find these values online on sites for transfer agents or financial newspapers (e.g. Wall Street Journal, Globe & Mail). Make sure you get a historical balance that applied on the date of death.

Shares of private companies - depending on the size and complexity of the company, you may wish to bring in a professional business valuator to determine the value. Another good approach is to have the company's accountant value the shares based on the assets and liabilities of the company. If the business is going to be sold, you could contact a business broker.

Vehicles - your provincial motor association will let you know the book value of pretty much any vehicle. If this isn't available, ask for quotes from dealers and look in publications such as the Auto Trader to see what prices are being realized on similar vehicles.

Household goods - this can be the trickiest of all. If there is a collection of artwork, stamps, coins, hockey memorabilia, rare books, etc, have that appraised by someone in that field. If there is jewelry, have it appraised by a jeweler. If there are antiques, have them appraised by an antiques dealer or estate auctioneer. In most homes, however, the majority of household and personal goods are not commercially valuable. For those items, you can assign a more or less arbitrary number such as $1,000, as you are unlikely to obtain more than that for them if they were sold at an estate or garage sale.