Probate and Tax Planning for High Net Worth Clients

Alaina Spec

400 – 1565 Carling Avenue | Ottawa | Canada | K1Z 8R1 | T: (613)236-9442 | F: (613)236-7942 | TF: (888) 909-9442

Overview

• Estate Planning - who, what, where, when, why…• Strategies to minimize probate tax on death• Strategies to minimize tax liabilities on death• Most importantly, how to accomplish your goals for your

Estate planning in an effective manner

Who

• Everyone 18 and over may prepare a Will and dispose of their property

• Must be done in writing• Must be witnessed by two people – certain restrictions apply• Must be of sound mind, capable and not under duress

What

• Name executors and beneficiaries • Dispose of all of your assets• Assess any liabilities including tax• Consider minor beneficiaries• Consider disabled beneficiaries • Deal with guardianship• Trusts

• Think about personal items • Consider family dynamics• Succession planning • International assets • Charitable donations • Funeral wishes • Organ donation

Where • Will Kits• Holograph Wills• At your Lawyers

Office!

When• Review every 5 years or major life

circumstance • Before getting married – make in

contemplation of marriage, otherwise revokes your Will

• After getting separated or divorced• When executors or beneficiaries move

jurisdictions or pass away• Don’t wait until you are too ill, incapable,

or in hospital

WhySo you can avoid the Succession Law Reform Act telling you what will happen with your assetsSo you can state your wishes clearlySo you can protect your loved ones So you can do some tax planningSo you can control from the grave!

When you die… what happens next? • All of your assets are given into the care of your executors • They must have legal authority to deal with your assets including

banks accounts, real estate, corporations, life insurance, and pensions as well as liabilities like bills and taxes.

• They must know what to do with your assets

Without a Will…

Where do your assets go?

… the Government doesn’t get everything! • But, the SLRA does determine what happens with your assets.

• The spouse of a person who dies intestate receives the first $200,000.00 of assets from the deceased’s Estate

• The remainder is shared between the spouse and children according to a formula prescribed by law, depending on how many children there are, and who is alive at your death

• Common-law spouses have no right to a share of a deceased’s Estate under the SLRA, without making a claim

If no spouse, no children… then who?• SLRA says you follow down the family tree until you find someone• Start with grandchildren, and if none, then your parents, equally, or the

survivor – keep in mind if they are no longer together!• If parents are gone, to your siblings, equally, and if one is gone, to their

children• If no siblings left, to nieces and nephews • If no nieces and nephews, then to your next of kin in equal degree of

consanguinity (blood relation, same kinship as another) to the Estate • If no one, then the government!

With a Will – the Sky’s the Limit• Assets are distributed according to the deceased’s wishes, by an

individual chosen by the deceased, take the guess work out

• Children may be provided for: guardianship and trusts

• Charitable donations may be made

• Tax saving (probate and income) measures may be implemented

• One can rest comfortably knowing one hasn’t left a mess for one’s family to deal with

What is Probate?

• Probate is the process of going to the Superior Court of Justice in the jurisdiction in which the person lived at the time of death, and asking the Court to confirm that this is the person’s last Will, and that you, as executor can rely on it.

• It gives you the legal authority as executor• It also means that anyone dealing with the executor under a probated

Will can rely on that authority

But it’s always thought of as just … TAX!

• At the time you make the application to the Court to have the Will recognized, you pay a tax on the fair market value of the deceased’s assets, more commonly referred to as Probate Tax

• It’s actually properly called the Estate Administration Tax, governed by the Act of the same name

Estate Administration Tax (Probate)• Just to clear up just how much we are actually taking about

• Has changed incrementally since implementation, $2.50/$1,000 before 1960, $3/$1,000 before 1966, $5/$1,000 before1992

• And now (since June 1992): • $5.00 per $1,000.00 or part thereof of the first $50,000.00 of the value

of the Estate; and• $15.00 per $1,000.00 or part thereof by which the value of the Estate

exceeds $50,000.00

‘New’ Estate Administration Tax Return • At the beginning of 2015, new requirement introduced that where

Probate is applied for, a ‘return’ must be filed confirming the value of the assets submitted for probate

• Have auditors standing by to review/assess• Serious penalties if not done and implications for executors personally• Suggestion this will be the precursor to an increase in probate tax

Value of Estate – How to Determine• Ideally in your planning stages, you want to minimize the value of the

assets that Will fall into the Estate, to minimize the amount of probate tax your client has to pay.

• Of course, in doing so you want to be mindful that the plan you craft still meets all of the objectives of the client

• We never recommend implementing any plans, just to avoid probate

What’s in, and What’s Out?

• There are certain exclusions from Probate to utilize in planning an Estate • Inter Vivos Gifts• Beneficiary designated assets • Real Property in very limited circumstances • Jointly held assets • Assets forming part of an Inter Vivos trust• Corporate Assets in limited circumstances• All should be used/reviewed carefully!!!

The Simplest Way To Avoid Probate…

Just Give It ALL Away

While you are Still Alive!

Fantastic Idea Mom and Dad!!!

Absolute Gifts – What’s in it for you? • If you give everything away, there Will be no probate tax! So, a benefit

for your Estate, but not you personally. But the beneficiaries will be happy!

• You will see the beneficiaries of your gifts enjoy the gifts during your life time.

• You can clearly benefit the people you wish, and there can be no mistaking your intentions, so long as you are capable!

Absolute Gifts: 99 Problems...

• Typically there will be tax payable on transfer of asset, depending on type

• Loss of control over property, you can’t take it back when you want to or feel like it, or when the beneficiary wants to blow it all on a Porsche.

• Property exposed to claims by the recipient’s creditors or spouse if you gave it all to someone else to defeat creditors

• May hurt the gift giver’s ability to provide for him/herself, you don’t know when you are going to die, so how do you know how much money you need to live until then

Continued…

• Whatever assets you do have left may be subject to Probate anyways • There may be deemed distributions, capital gains, taxable events, income

attribution anyways, meaning your beneficiaries get the asset, and you get stuck with the bill!

• You may change your mind, but you can’t really• The beneficiary you gave it to might die, or marry someone you don’t like,

leaving your gift to them.• And on, and on, and on….

When Absolute Gifts Make Sense in the Context of Estate and Probate Planning• When you have sentimental items that you want to see someone

enjoy• When you want to help someone out with a specific cost that is

important to you, buying a house, a wedding, school, travel, a Porsche• When you truly have more than you will ever need, and have a

reasonable understanding of what that means • When you make that choice fully aware of impacts

I know, I’ll just put my ___’s name on it. • More and more we see families

change title to real property or bank accounts to joint tenancy to ‘avoid’ probate.

• But, if you look carefully at what “Joint Tenancy with Right of Survivorship” means, it means:

• Assets pass directly to the other joint owner(s) at the time of death

So what does that mean?

• It DOES NOT mean, the joint owner will secretly keep it when the other dies, and then give it to the Estate when no one is looking.

• It means that the asset actually has to PASS to the joint owner and become their property, and that was the intention of the joint owner.

• It will NOT form part of the Estate • The asset will not be used to satisfy liabilities of the deceased, nor will

they be distributed to beneficiaries

Joint Ownership – Benefits

• Avoid probate• Simple and inexpensive• Immediate access to assets after death for remaining owner• Can do with some assets, including financial instruments,

and real estate

Joint Ownership – Drawbacks

• Tax payable on transfer, particularly if other than to spouse• Legal fees can be payable, or administrative work involved• Loss of control of property• Property exposed to claims by the recipient’s creditors or spouse• Transfer may be frustrated, fraudulent, matrimonial • Testamentary wishes may be frustrated if no clear understanding• Risk of Elder Abuse, POAs.

When is Joint Ownership Right For You? • Matrimonial Situations • Where the true intention is for the asset to be left to that joint owner • Where there is a trust declaration in place declaring the intentions of

the person what is to happen to the asset upon death, confirming joint owner is true joint ownership

Designate, designate, designate… beneficiaries on everything! • If designated beneficiary, asset will move directly to the beneficiary who

has been designated, without probate

• Can be done on life insurance policies, RRSP, RRIF, TFSA, pensions, or other “plan” benefits

• Beneficiaries can be designated (and revoked unless irrevocable)• By Will; OR• By instrument

• If no beneficiary is assigned, the assets will form part of the deceased’s Estate, meaning subject to probate.

Designated Beneficiaries – Benefits • No probate • Clear intentions • Money usually flows

quicker, not tied up waiting for probate

Drawbacks of Designated Beneficiaries • Money moves to designated beneficiary, but Estate does not get

benefit of money, and will likely be left with the tax burden, not always the same beneficiaries

• Be mindful when a particular asset is left for intended purpose that it gets where it needs to go

• Be mindful of designating informal Trustees for minor intended beneficiaries – one of the most common issues we see

Corporation? No problem! • Create two Wills in an Estate plan. There should be a probatable Will and a

non-probatable Will. Non-probatable Will not be subject to EAT or probate. • Assets in personal Will must go through probate, assets in non probatable

will, do not. Examples of what assets to put in non-probatable Wills: shares of a privately held company, personal possessions, artwork, real estate not required to go through probate.

• Granovsky Estate v Ontario confirms that probate tax is payable only on the value of assets in the will submitted for probate

• Must ensure that one Will doesn’t revoke the other

When a Second Will is Right for You?• If the corporation has sufficient assets, retained earnings or value, or

privacy of corporation is important• If you have a lot of expensive jewelry, cars or paintings• If you have owned your real estate for a long time, with no ‘dealings’• Wills need to be carefully drafted to be effective and recognized• Suggestions have been made that this may be the next Estate

planning technique to go with no grandfathering

Trusts – What are They? • Trust – a legal relationship

whereby one or more persons (“Trustees”) hold legal ownership and control of property for one or more other persons (“Beneficiaries”).

• Set up by “settlor”

• Types• Inter Vivos • Testamentary

Trusts: Tax Considerations

• Deemed to be an individual for tax purposes

• Pays tax on all income earned at the top federal and provincial rate – starting in 2016 for both Inter Vivos and Testamentary Trust

• If certain conditions are met, trust income may be taxed in the hands of the beneficiaries

• 21 year rule to be mindful of

Why and when you would use a Trust • Probate Planning• Privacy and confidentiality• Creditor protection• Blended Families• Disabled Beneficiaries • Capital Gains Exemption

• Minor Children• Spendthrift Beneficiaries • Protect Elderly Individuals• Designate Capable Trustees • Tax Planning• Provide for loved ones in a

careful way

Additional advantages of Inter Vivos trusts

• Settlor can see the trust in operation and make adjustments, so long as trust permits and legislation allows

• Passes burden of investment management to Trustee• Can be used to avoid administration of an Estate in different places• Death does not disrupt trust administration• Less vulnerable to attack on the grounds of lack of capacity than testamentary

trust

Disadvantages of Trusts

• Tax payable on transfer

• High tax rate

• Loss of control of assets

• Choosing capable trustees

• Initial and ongoing costs associated with set up and administration

• 21 year deemed disposition rule

Common Inter Vivos Trusts

• Spousal, Joint Partner, and Common Law Partner trusts • Alter ego trusts • Deemed disposition rules do not apply, assets are received on a roll-

over basis allowing for the realization of capital gains to be deferred • Trusts must be created, and then assets actually moved into the trust,

to be managed by the trustee(s)

Some Specifics: Spousal and Common-law Partner Trusts• Spousal Trust: the settlor’s spouse must be entitled to receive all

of the income and capital of the trust which arises before the spouse’s death.

• Joint Spousal or Partner Trust: Settlor must be 65, must be for the benefit of the spouse and or partners to receive all income and capital of the trust before the death of the last spouse or partner

• No other person may receive or otherwise obtain the use of the income or capital of the trust until death.

Alter Ego Trusts

• The settlor must be be at least 65 years of age

• The settlor must be entitled to all the income and capital from the trust arising prior to the settlor’s death

• No other person may receive or otherwise obtain the use of the income or capital of the trust.

Testamentary Trusts – Changes!

• New tax legislation has eliminated advantageous tax treatment as of January 2016

• Many changes to how Testamentary Trusts will work, but will largely be treated like Inter Vivos Trusts

• There are still many continuing benefits of using testamentary trusts in Estate planning, but must be weighed against just simply the tax planning

When is a Trust right for you?

• Analysis must be done with your professional advisory team to determine if it is right for you

• Consider all of the costs, benefits, taxes, and added administration before making a choice

• Consider whether it meets your goals • Consider whether it is right for your intended beneficiaries, although

it is ultimately your choice!

Estate Freezes

• Estate Freeze - a technique used to freeze the value of someone’s business interest, pass the future growth in that business to someone else, and yet still control the business

• Allows a person to lock in capital gains

• Corporations, partnerships, family trusts can be used as a vehicle to effect an Estate Freeze

• Particularly effective for multi-generational businesses

Graduated Rate Estate (GRE) – New! • A GRE is an Estate

• Conditions for an Estate to be a GRE• no more than 36 months have passed since death• Estate is a testamentary trust• Estate designates itself as the GRE in its first tax return• deceased’s SIN provided in Estate tax return• no other Estate is designated as the GRE of the deceased

• No grandfathering of existing trusts or Estates

GRE Continued

• Why GRE status is important:• graduated tax rates on income earned and retained in the Estate • no tax instalment obligations• off calendar year end permitted• access to new flexible donation credit rules • nil capital gains inclusion for donation of shares on death • availability of 164(6) and 112(3.2) loss carry back rule

GRE Continued

• Important to make sure that where possible you take advantage of this designation and that there is language in the Will to provide for it.

• Once assets transferred from the Estate to a testamentary trust, favourable tax benefits cease

• Different rules apply in terms of year ends that may be more favourable

Questions?

Thank you!

Alaina SpecLow Murchison Radnoff LLP

1565 Carling Avenue, Suite 400Ottawa, Ontario, K1Z 8R1aspec@lmrlawyers.com

613.696.1312