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How do you insure your estate taxes?

Your heirs will inherit certain assets tax-free, but not all. Life insurance can cover estate liabilities which would otherwise leave your beneficiaries with debts rather than an inheritance.

“Are you kidding? I thought I would inherit.” Hopefully your children won’t need to utter these words upon your death. Cash bequests, the house, life insurance proceeds, and heirlooms generally pass to the heirs tax-free. However, capital assets are assumed to have been sold at fair market value immediately before death. Each of these deemed dispositions of capital assets such as a cottage occur even if the asset is willed directly to an heir. But the tax liability remains in the deceased’s final tax return and reduces the value of the estate.

Here is the downside. If there is insufficient cash to pay the taxes due, assets your heirs may expect to inherit must be sold. After the death of a second spouse this can include assets such as: an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares.

Consider taking out life insurance to cover any estate liabilities that could reduce the value of bequests that you want to make to your loved ones. A death benefit is paid out tax-free. Life insurance proceeds can circumvent probate if they are payable directly to a named beneficiary. If the estate is the beneficiary, the life insurance coverage should be raised to cover any probate fees.

How can I make my Will Planning more effective?

Have you decided what will happen to your property after you die? Without a last will and testament (commonly called a ‘will’) the law decides exactly how your estate (the things you own) will be divided among your surviving spouse, children, siblings and parents. When you have your lawyer draft a will, you can make certain your priorities are set forth as directives to be achieved.

• Choose a competent executor. An executor is appointed with the task of administering your will, or carrying out your wishes. You may also want to choose a contingent executor, just in case the first decides not to follow through or is unable to for any reason.

• Incorporate your will with your spouse’s will. This is referred to as a “reciprocal will”. It looks at various potential occurrences such as: “What if my spouse and I die at the same time?”

• Give instructions regarding the type of funeral you desire. Talk with others while living. It is important to visit with your Funeral Director and express to him or her clearly if you would like to be cremated or not, and/or interned at a cemetery, and where (is a plot chosen in advance, say beside a loved one).

• Divide assets specifically amongst chosen heirs. Should you wish to leave specific items to a certain person, make sure this is written in your will. This will avoid confusion amongst your beneficiaries.

• Establish contingent beneficiaries. This can ensure heirlooms pass on to other friends or relatives in the event that current beneficiaries have died.

• Where children are concerned, define legal guardians, and contingent guardians. A will can allow you to choose who will care for your children if both you and your spouse die.

• Outline financial arrangements for your dependents. Review life insurance policies to ensure that they provide adequate capital protection for your loved ones.

• Pre-establish special trust funds, and trustees for dependents, where necessary. Consider how monies are to be invested, and at what age each child should receive his or her share of any monies left to them.

• If divorce is imminent, have your lawyer explain your responsibilities in the Family Law Act and how the law may relate to you and your will. This will define who has a right to financial support after you die. You may want to leave certain assets to the children in trust if a divorce occurs. If you own a life insurance policy, you may be able to change the beneficiary to pass the death benefit to any party tax free, or perhaps pass the funds to your estate and let the will define the beneficiaries of the life insurance.

• Where a spouse is concerned, be careful not to direct a disposition of RRSP assets. Under Canadian Tax Law, RRSP assets are allowed to rollover to a spouse on a tax-free basis. By naming your spouse as your beneficiary, you can ensure that your RRSP assets roll over to your spouse without any complications.

• Consider bequests to charity. Assets such as property or life insurance proceeds can be left to a charity via your will.

Can life insurance solve tax liabilities in my estate?

There are many ways to reduce your estate liabilities. You work hard to earn a living, save for retirement, and own property. It is important to know what your estate liabilities are in relation to: capital gains, mortgage debt, car loans, unpaid taxes, and business-related liabilities. Consider reducing these liabilities:

Reduce the impact of income taxes. Here are some methods to reduce taxes due upon your death:

Use the spousal (and disabled child) rollover provisions of RRSPs or RRIFs.
Leave assets that have accrued capital gains to your spouse to defer tax.
Leave assets without capital gains to other (non-spouse) family members.
While you are alive, gradually sell assets having capital gains, to avoid dealing with the gains all at once in your estate.
Purchase life insurance to cover capital gains taxation in the estate.
Taxes may be payable on gains in relation to:
º income-producing real estate, a second residence, or cottage.
º any other assets left to surviving family members, such as shares of a business.
Consider charitable donations to lessen taxes in the estate.

Reduce probate fees. Probate fees will be based on the value of assets administered through your will. Here are some ways to reduce probate fees:

Establish a spousal trust during your lifetime to hold assets or property for the sole use of your spouse.
Own assets jointly with your spouse.
Distribute assets or cash while alive.
Name a beneficiary (not the estate) on life insurance policies.
Include an alternate beneficiary on your life insurance policies in case your initial beneficiary predeceases you, or dies simultaneously (that way, probate fees will be avoided on the proceeds).

What are my Retirement Income Options?

Retirement Income Options are strategies that provide you with a retirement income paycheque from the funds saved during your working years.

Registered Retirement Income Funds The most common retirement income option is a retirement income fund (RRIF). It is like a registered retirement savings plan (RRSP) in reverse. It has the same tax-deferred growth, flexibility and choices you had in your RRSP, with the added benefit of being able to withdraw a retirement income and have the flexibility to determine the amount of income you withdraw each year (where a minimum annual amount is determined by a federal government schedule).

When you need to begin receiving income, or at the latest by December 31st of the year you turn 71, you must convert your RRSP to a RRIF. A RRIF is designed to provide you with income while keeping the assets retained in your RIFF tax-deferred.

What are the types of Locked-in Retirement Savings Plans (LRSPs)? Locked-in RSPs originate from Registered Pension Plans (RPPs) which are plans where funds are set aside by an employer, and/or employee, to provide a pension when the employee retires.

If you are a member of a fully vested Registered Pension Plan (RPP), once employment is terminated, the proceeds of your RPP will be considered ‘locked-in’ and must be transferred into certain ‘Locked-in Plans’ which include the following Locked-in RSPs and Locked-in Retirement Income Options:

LIRAs and LRSPs Locked-in Retirement Accounts (LIRAs) and Locked-in RSPs (LRSPs) are registered retirement savings plans which are established by the transfer of locked-in pension fund assets from a Registered Pension Plan (RPP) or another locked-in retirement savings or income plan (such as a LIRA, LRSP, Life Income Fund (LIF), Prescribed Retirement Income Fund (PRIF) or Locked-in Retirement Income Fund (LRIF).

Tax on the interest you earn in these plans is deferred until you withdraw the funds, and are only accessible prior to retirement age under certain conditions. Upon reaching retirement age (most are at 55), you can transfer the plan to one or more eligible Retirement Income Options available for a regular RSP.

LIRAs and LRSPs must be converted to a Retirement Income Option such as an Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), or a Prescribed Retirement Income Fund (PRIF) before December 31st of the year you turn 71.

Life Income Funds (LIFs) Life income funds are purchased with a Locked-in RRSP (LRSP). You are required to roll over your LRSP assets into an annuity (Life Annuity in some provinces) or a Life Income Fund (LIF) by the end of the year you turn 71. You will have the ability to withdraw an income and you maintain the flexibility and choices you need within prescribed limits similar to a registered retirement income fund (RRIF). However, the minimum and maximum withdrawal schedule for a LIF is calculated differently and changes each year.
Locked-in Retirement Income Funds (LRIFs) Locked-in Retirement Income Funds are purchased with a Registered Pension Plan (RPP) or a Locked-in Retirement Account (LIRA).

A LRIF is different from a Life Income Fund (LIF). The maximum payments are based on the investment returns, not your age or current interest rates. And there is no requirement to purchase an annuity at age 80. LRIFs are only available in certain provinces.

How can I avoid Financial Internet Scams?

Online Identity theft is any Internet fraud that results in acquiring your data, such as unique Logins and Passwords, usernames, banking information, or credit card numbers. Moreover, it is theft of your financial identity!

How to avoid donation scams Be on guard if you receive an unsolicited email message from a charitable organization asking for money concerning a news event such as a natural disaster, a national election, or a significant change in the world financial system. Don’t open any attachments or click any links. Manually type the charity’s web address into your browser’s address bar and make sure the request is legitimate before donating.
Phoney links in email If you see a link in a suspicious email message, don’t click on it. These links might also lead you to .exe files, known to spread malicious software on your computer.
Fake Alerts and Threats Some thieves use threats that your Hotmail, Google, Facebook or bank account will be closed if you don’t respond to an email message? Internet criminals often use threats that your security has been compromised.
Spoofing popular websites or companies Scam artists use graphics in email that appear to be connected to legitimate websites like Facebook or your bank. How do they achieve this? Using fake logos to request your Login and Password, you are directed to phoney scam sites or legitimate-looking pop-up windows to ask for your financial information.
Fake web addresses Internet criminals also use slightly altered web addresses that resemble the names of well-known companies.
Lies about your computer software Internet criminals might call you on the phone and offer to help solve your unknown computer problems warning of viruses or speed-slow downs. They might try to sell you a software license or an agreement to assist you periodically. In most cases, neither Microsoft nor Apple make unsolicited phone calls to charge you for computer security or software fixes.

Source: Microsoft

Designating your charitable contributions

A charitable contribution is a gift, and, like any gift, is an irrevocable transfer of a donor’s entire interest in the donated cash or property. Hence the donor’s entire interest in the donated property is transferred, and it is for the most part (except for “designated” uses) impossible for the donor to recover the donated property.

Undesignated contributions Most charitable contributions are undesignated, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund or a contribution to the United Way or World Vision. Undesignated contributions are unconditional gifts and there is absolutely no legal obligation to return undesignated contributions to a donor under any circumstances.

Designated contributions A donor can make a “designated” contribution to a charity, where the donor designates how the contribution is to be spent. Where such contributions are held in trust for a specific purpose, and insofar as the charity honors the designation, or plans to do so in the foreseeable future, it has no legal obligation to return a donor’s designated contribution.

Where designated contributions will not be used for the specified project, and donors can be identified, they should be asked if they want their contributions returned or retained by the charity and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. Charities must provide donors with this option in order to avoid violating their legal duty to use “trust funds” only for the purposes specified.

A charity should send a letter to donors who request a refund of a prior designated contribution informing them that (1) there may be tax consequences, (2) they may want to consider filing an amended tax return to remove any claimed deduction, and (3) they should discuss the options with their tax advisor. Charities should consult with an tax attorney when deciding how to dispose of designated funds if the specified purpose has been abandoned or is no longer feasible.

What should I do when a family member dies?

When a family member dies, take these actions immediately.

1. Ascertain who will make the decisions. Where there is a will, the responsibility goes to the named executor who normally consults with the family. If declined, responsibility passes to the alternate executor (where one
is appointed). If there is no will, a mentally competent surviving spouse (or a relative, or friend), may make funeral arrangements, unless he or she is unwilling to take the legal or financial responsibility.

2. Check safety deposit boxes. Call his or her lawyer to access the will and/or any other document stating wishes regarding the funeral, service, or cemetery.

3. Notify any burial or memorial society to which the deceased belonged.

4. Where no funeral arrangements have been made, choose and call a funeral home and make funeral arrangements. Note: It is preferable to plan in advance to avoid the potential of increasing these expenses due to sensitive emotions which may later cloud a decision process. There may be life insurance proceeds associated with pre-funding final expenses. Thus it is important to check for mention of all life insurance policies in the will or an appendix to the will (the executor will need to take this responsibility).

5. Contact a religious leader and/or wise friend for spiritual support. Assess who will deliver the eulogy.

6. Buy a cemetery plot or cremation service if not pre-purchased.

7. Post an obituary in the appropriate newspaper(s).

8. Ask for and make copies of the death certificate.

9. Find out if any commitment was made regarding the use of organs, tissue, or the entire body for medical or research purposes.

10. Call your doctor if you or any other family member experiences nervousness, insomnia, hysteria, anxiety or angina pain.

Note: Executors (or a court appointed administrator) are the only persons entitled to make funeral and burial decisions but they should consult the family for their wishes. If the deceased left instructions in the will or pre-planned the funeral, the executor should, but may not be legally bound to follow the deceased’s wishes. The executor should be involved in the decisions immediately after death. Communicate with people who may have any form of Power of Attorney in relation to the estate. Check with your lawyer regarding laws that may affect you in your province.

What could I miss doing that could ruin my retirement?

Perhaps you haven’t started investing regularly, or the amount you allocate is not enough to reach your retirement goals. Here are a few of the things people are not doing that can ruin otherwise good investment goals.

Not viewing debt as negative investment earnings. If you are paying 18% interest on a credit card while earning 8% in an investment, that immediately places you in a 10% loss position per dollar compared. Moreover, where else can you get such a guarantee on your investment return, as you can by investing in your debt repayment? By paying off $5,000 over one year, you’ll earn $900 risk-free and you won’t have to pay that with after-tax dollars ever again.

Unsecured credit card debt can kill a once-healthy budget, while substantially reducing your income. And opportunities can suffer when your cash flow is crippled by debt. It is harder to solve the need for emergency cash if you are debt-ridden.

Especially look at paying down debts that carry interest that cannot be written off as you are paying for both the principal and the interest with after-tax dollars.

Not putting money away into an emergency fund. If an emergency arises you should be able to access a simple bank account to cover up to three to six months’ worth of living expenses such as your rent or mortgage, food, debt repayment, car payments, etc. Consider using a money market fund for this savings plan.

Not assessing your retirement time horizon. You can analyze what you will need to invest annually, by running calculations to see if you will have sufficient income to live on. Confer also with your advisor about how you can get there over your remaining employment years, by investing with a clear vision.

Not assessing the impact of inflation on your retirement income. Refer to this table to see how inflation can affect your retirement plan.

Planning for your dependants. Make sure you have sufficient life insurance to pay off your total debts such as: credit card balances, car loans, IOUs, and any business-related debt. Incorporate this with sufficient coverage to provide future income for your dependants. This is especially necessary if your debt exceeds your annual income as it does for the average Canadian household where debt runs at 150% of income. Source: The Vanier Institute of the Family, February 2011

How can I minimize the tax paid in my estate?

The need for estate planning is especially evident for those accumulating significant retirement wealth, either in the form of business ownership, real property or investment assets. Though it is true that “You can’t take it with you”; it is possible to reduce your estate taxes enabling you to transfer more money to your heirs. The estate tax is payable on income accrued to the date of death including salary, investment income or dividends.

The Income Tax Act deems that you dispose of all your capital assets, including stocks, bonds and mutual funds, at their fair market value just prior to your death. In the year of your death, gains that have accrued on your investments and other capital property will become taxable, reduced by accrued losses on investments and other capital properties. You will need professional tax advice when developing your estate plan.

Leaving Non-Registered Assets to Your Spouse

A surviving spouse can continue to benefit from your assets. You can defer tax payable on your accrued gains at death if you leave your assets to your surviving spouse or to a spousal trust established for the sole benefit of your spouse during his or her lifetime. The taxes are deferred until the death of your spouse or until he or she sells the assets. The deferral allows your spouse to utilize your investment assets in a tax-efficient manner and to dispose of assets in a way to minimize the taxation.

Leaving RRSPs and RRIFs to Your Spouse

Did you realize that your RRSPs and RRIFs would be subject to immediate tax upon your death unless you have established your spouse or a financially dependent child as your beneficiary, and certain other conditions are met? Tax will be payable when monies are withdrawn as income by your spouse or as annuity payments to financially dependent children. Even if you have not established your spouse as your beneficiary, he or she may be able to legally request a transfer of your RRSP/RRIF funds to his or her RRSP/RRIF and defer the tax that would otherwise be payable upon your death. Further, upon your spouse’s death, any remaining RRSP/RRIF money will be taxed (assuming there are no financially dependent children). Any RRSP/RRIF tax liability could optionally be paid using a special pre-designed life insurance strategy to help maintain your asset base and is transferable to heirs surviving your spouse.