A proper estate plan will include an updated Will and a plan to avoid paying too much tax on investment assets such as stocks, bonds, mutual funds, and other properties that may have accrued capital gains. It will seek to minimise probate, pay off debts and prepare to meet specific family income needs. Estate planning often includes detailed life insurance planning designed to pay out a benefit upon the death of one whose estate is about to wind down.
When transferring your assets, including mutual funds, using a Will (also referred to as a Testamentary Trust), the key is to position as much of your wealth as possible to pass to your heirs. If you hold equity mutual funds that buy and hold stocks, they may have accrued capital gains. There will be a deemed disposition of all your property at fair market value at your death. For some, this could mean that there may be an existing capital gains tax liability. There are a few things to assess as you begin an estate plan.
Assess your tax liability. List each separate asset you own, the purchase price and date, and its current value. Include your non-registered investments in stocks, bonds, and mutual funds. Have your accountant assess what the tax liability will be.
Assess how you and your spouse can defer taxes Property willed to your spouse can be rolled over tax-free on your death. Your spouse will inherit the assets at the property’s entire adjusted cost base (cost amount). The taxation of the investment will then occur when your spouse disposes of the property or at the spouse’s death. This tax deferral is beneficial, especially if you have significant holdings in equity mutual funds invested for value as in large-cap or blue-chip stocks. Alternatively, you can choose to transfer any asset to your spouse at fair market value on death and recognise the accrued gain or loss.
Assess RRSPs if you have dependent children RRSPs can be transferred tax-deferred to your dependent children or grandchildren, even if a spouse survives you.
Assess income splitting using a testamentary trust By establishing a testamentary trust in your will, you will be able to maintain control during your lifetime over the use of your assets such as a mutual fund investment portfolio. The trust can provide guidelines for the treatment of these assets after your death. The trust document can specify the split of income among heirs. Carefully planned income splitting may allow for significant tax savings.
Assess insurance solutions There are estate planning solutions that only insurance can offer, providing both personal and business solutions to ensure you have financial security. First, assess your tax liabilities with an estate lawyer and/or accountant and make estate plans to determine how to pay them. Consider the following various insurance plans, such as life insurance where the capital gains tax liabilities are substantial.
Personal insurance solutions to protect you and your family include:
• Life Insurance
• Critical Illness Insurance (CI)
• Long Term Care Insurance (LTC)
• Estate Preservation
• Individual Health and Dental plans
If you own a business, insurance solutions include:
• Partnership Insurance
• Buy/Sell Agreements
• Key Person Insurance
• Business Disability Insurance
• Business Office Overhead
• Collateral Loan Insurance
• Group Health Benefits