Over the course of our lives, we evolve through difference stages. When we are born, we rely on others to feed us, take care of us, and provide us with life’s necessities to survive. As we grow and learn we develop the skills and acumen to support ourselves and often others. Many will build their overall wealth through the growth of their income, investment portfolios, real estate, or inheritance, to name a few. Much time is spent on the accumulation years, but often little thought or planning is given to how that wealth will be ultimately disbursed. One of our previous blogs titled “Protecting and Growing Generational Wealth” focused on preserving, growing and ensuring you don’t lose your wealth. This blog brings us to the following question, “Who Could Inherit Your Wealth and What to Consider?”
The Government
Many Canadians may be surprised to know that the biggest tax bill may result postmortem. When someone dies there is a deemed disposition of their assets at fair market value. Depending on your situation the tax bill may be deferred to your surviving spouse but will ultimately be realized on their death. Depending on the nature of the asset or investment, tax may not be realized in the present, but may be pushed forward to the future. If you are like most people, you will want to limit the amount of your wealth the government gets upon death in favour of increasing your endowment to the next generation or charities of your choice. Is there a way that we can transfer more of our wealth to the people and places we want to receive it and less to the government? The answer is yes and is discussed below.
Family
Things to consider when passing wealth onto your family:
- Have you taken care of YOU? – Some want to see their children enjoy wealth while they are alive, so they may gift money to help a child buy a house, pay for a wedding, or start saving for grandkids’ education. It is important to ensure you have protected yourself first against the risks that life may bring: market fluctuations, sickness, expenses in retirement, to name a few.
- What is the difference between fair and equal?
If you have several children you want to leave assets, you need to consider how to divide those assets. We’ll use the example of a $1,000,000 RRSP and a $1,000,000 personal residence. If one were to divide assets between two children, at face value this would seem fair as both are valued at $1,000,000. However, at death the RRSP would be taxed; whereas, a primary residence would not be subject to any taxable gains upon death. After taxation, the difference could be up to $500,000. One strategy to be used to provide liquidity to pay taxes and more fairly equalize the net estate would be to use permanent life insurance.
- What type of control do you want?
Families can have multiple layers — children and their spouses, grandchildren, blended families due to divorce and remarriage. A testamentary trust helps alleviate some concerns in the event you pass away while your kids are still young, or you want to avoid giving adult children all the money at once because they are not financially responsible, or you have a blended family. This helps someone be specific when thinking about who could inherit their wealth. For example, if there is a blended family, a trust could dictate that your current spouse can continue to receive the benefits from the estate and upon the spouse’s death, the estate is then distributed among the testator’s children from the previous marriage.
- What if you own shares of a private company or rental properties?
If you own rental properties or private company shares and want to transfer the wealth to your children, it is important to help alleviate the potential of double or triple taxation through postmortem planning.
Example:
Mr. Smith dies owning shares worth $1M with an adjusted cost base (ACB) of $0. All his shares are left to his adult daughter, Mary. At the time of death there will be a capital gain of $1M, and half will be taxable resulting on a tax bill for Mr. Smith of $250,000 (first layer of taxes) The shares will assume a new ACB of $1M and, if the daughter decides to sell the shares in the future, no tax is payable on the first $1M. Let’s say his daughter decides to wind up the company, assuming a 48% tax rate on the dividend payable:
Tax payable on death of Mr. Smith = $250,000
Tax payable on dividend to Mary on wind up = $480,000
Total tax payable of $730,000 or 73% of the $1M.
This is why postmortem planning is so important. A properly structured pipeline plan or loss carry back can eliminate a layer of tax allowing less leakage to the government and more being left to your children or estate.
Charitable Giving or Community
There is the option of leaving some or all your wealth to a cause, be it a charity or your community. You can do this while you are living or after you are deceased.
- What can you give? – Many people think it is just excess cash, but one could leave investments such as stocks, bonds, or life insurance in-kind to a charity.
- What are the advantages? – This will help eliminate capital gains taxation and gives the estate a charitable donation receipt for the fair market value of the shares, creating significant tax savings for an estate.
- Flexibility for your Executor – Many times these gifts are planned well ahead of time. If a financial situation changes the estate may have options at the time of death to satisfy the gift and allow the trustee to make decisions that greatly improve the tax efficiency. Less to the government and more to the beneficiaries of your estate.
Planning your estate can start at any point in your life. A plan is a living, breathing document that should be changed as your life changes over time. The important thing is to have a working plan in place. At Tall Oak Private Wealth, we work with clients throughout the different stages of life, planning for retirement and wealth transition.
Reach out to us to start your plan today.
This material is provided for general information and is subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact Tall Oak Private Wealth of Raymond James Ltd., for individual financial advice based on your personal circumstances. Raymond James Ltd. – Member – Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a member – Canadian Investor Protection Fund.
The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.
