Can Probate be Avoided?

Executors often find that the probate process can be both time-consuming and expensive. Planning strategies exist that may eliminate or reduce the requirement of having assets probated.

What is probate?

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes. This provides assurance to third parties such as financial institutions and land registry offices that the executor has the power to deal with assets according to the will.

Are all wills subject to probate?

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate and also, the type of asset involved will generally dictate whether or not probate is required.

What is the cost of probate?

  • This will depend on the province. At the low end, Alberta has a flat maximum fee of $400, while at the upper end Ontario has a levy of $15 per thousand on estates valued in excess of $50,000. British Columbia has fees of $14 per thousand (estates over $50,000) plus a filing fee;

  • Property which is owned in another province may attract fees based on that province’s fee schedule.

What are advantages to probate?

  • When Letters of Probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients;

  • The time frame for any court challenges to the will or estate is usually measured from when the probate was granted. This limits the period of when legal action might be taken.

What are the disadvantages to probate?

  • The process can be time consuming and complex;

  • Depending on the jurisdiction the cost of probate along with the legal fees can be expensive;

  • The process is open to public scrutiny so information about the estate distribution is made public.

7 Tips to avoid probate

There are a number of strategies to, if not avoid probate entirely, reduce the value of the assets that would otherwise be exposed to probate.

  • Make sure you have a will – Probate fees will be applied automatically if you die intestate (without a will);

  • Gifting prior to death – this can reduce the value of the estate, so it has to be done with care. It is important that all control over the gift must be relinquished. Be careful as there may be income tax considerations, (capital gains etc.), as well as possible property transfer taxes;

  • Use named beneficiaries whenever possible – moving assets to vehicles such as life insurance, annuities, and segregated funds is a great way to avoid probate. The bonus here is that it also allows the proceeds to be paid quickly and directly to the beneficiary. This also applies to registered investments such as RRSP’s, RRIF’s, TFSA’s and pensions;

    To avoid the unintended future inclusion of these assets in your estate if the named beneficiary dies, you should consider naming a successor (contingent) beneficiary;

    Named beneficiaries also provide a confidential transfer. The exception to this is in Saskatchewan where probate rules dictate that beneficiaries to insurance products be listed even though the proceeds are not subject to probate;

  • Use of Joint Tenancy – Holding assets in joint tenancy with a spouse, child or other family member will avoid probate as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration as there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors;

  • Use of Trusts – Transferring assets to a trust will remove the asset from the estate. The use of an alter-ego or joint spousal trust can be very effective for this purpose. Be careful of appreciable assets that may attract a taxable disposition upon transfer;

  • Transferring assets to a corporation – Except for outstanding mortgages on real estate which are deductible, generally probate fees are charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a limited company. This will reduce the value of the estate and the company share value will be the asset less the debt used to acquire it;

  • Multiple Wills – Not all assets are subject to probate. It is becoming popular to have two wills – one for those assets that are probatable and one for those that are not. For example, someone who owns private company shares may wish to use a second will to transfer those assets as private company shares are not subject to probate. If assets are held in another province with lower probate fees there may be an advantage to have a separate will dealing with those assets;

    The strategy of multiple wills is not available in all provinces and the use of multiple wills may create problems with the new Graduated Rate Estate tax with respect to testamentary trusts.

Please note that legislation governing probate and the fees that are levied vary by province so not all the ideas presented here will apply to every province. This article does not apply to the province of Quebec. Careful planning is advisable with all estate planning considerations and it is important to seek professional advice when considering these strategies.

We are here to answer any questions you may have on this complicated issue. As always, please feel free to share this article with anyone you think may find it of interest.

Copyright @ 2018 FSB – All Rights Reserved

Estate Equalization for Family Business Owners

In the planning of their estates, most parents might prefer to leave their assets in equal shares to their children. Often, the only complication in this scenario could be how to divide up the family home.

For owners of a family business, however, the concept of treating the children equally can often be much more problematic. This can especially be the case where one or more children are active in the business while others are not.

For many business owners, most of their wealth is linked to their companies and often there are not sufficient assets left over to equalize the estate. Conflicts often arise from estate plans where the corporate shares are split evenly amongst all the children including those who are not involved and unfamiliar with the business. Burdening children actively involved in the company with a sibling shareholder partner who has no experience or interest in the company can create numerous problems – corporately, financially, and emotionally, which could possibly lead to disputes within the family.

Often, a solution could be leaving the non-business child other assets to compensate. This could result in taxes that might have to be paid (such as in the case of RRSPs, cottages, stocks and other equity holdings) reducing the net value received by that heir. In a perfect world, having the exact amount of cash necessary to equalize the estate would be the ideal situation but often there is not enough liquid cash in an estate to cover taxes and proper equalization of assets, especially where those assets are private company shares.

In this situation, life insurance is often recommended to resolve this problem. Life insurance is a cost-effective instrument that creates tax-free cash and is a widely used vehicle for reducing the total cost of settling an estate.

In Canada, taxes arising when we die can often be deferred by leaving assets to our spouse in our will. Since the taxes become payable when our spouse dies or disposes of the assets, joint last-to-die life insurance is a preferred product in estate planning. By adding an additional amount of death benefit to the joint last-to-die policy used to pay taxes at death, estate equalization can be achieved effectively on a tax-free basis.

Here are reasons why life insurance is extremely beneficial in estate equalization for family businesses:

  • If the first generation did an estate freeze, then the future growth of the company shares passes to the next generation involved in the business. The result is that the non-business children will not participate in that growth. Life insurance could be used to create fair, if not equal treatment, for the children not involved in the business;

  • Life insurance provides a guaranteed result and since proceeds flow via a beneficiary designation the arrangement can be completely confidential;

  • Life insurance proceeds payable to a named individual beneficiary do not result in any probate fees or administrative costs. In addition, the proceeds may be exempt from any creditors or litigant claims;

  • With specific planning, the life insurance designated for estate equalization can be owned and paid for by the corporation;

  • Life insurance proceeds paid to the non-business beneficiary can be received by that person promptly without any delay related to required business filings and elections.

As you can see, for the family business owner who is concerned about providing fair and/or equal treatment in estate distribution to any children not involved in the business, life insurance provides tremendous benefits and advantages.

As always, please feel free to share this article with anyone you think would find it of interest.

Now May Be a Good Time to Review your Estate Plan

Prior to the pandemic, the projected deficit for 2020 was estimated to be $20 billion. As a result of Covid-19, the actual deficit in Canada rose to over $300 billion. In 2022, due to pandemic emergency spending being eased the deficit has fallen significantly BUT still sits at almost $100 billion.

Covid-19 and its affects are influencing the way we plan for our future. During the period of lockdown and self-isolation, many people put a great deal of thought as to how to keep themselves and their families safe – not only physically but financially as well.

For some, this meant finally looking at the recommendations they had been considering about their life, critical illness, and disability coverage. For others it became a time to reassess their investment, retirement and savings plans, as we all know the results uncertainty can have on equity markets.

Then, there are the potential long-term consequences that this pandemic may have on estate planning and its primary objective of reducing the impact of taxes during life and at death.

As the national deficit has soared, the logical question remains: where is the money going to come from to help cover this? While the government may be loath to raise taxes, and politically that is something it might wish to avoid, there is no question that increased tax revenues are probably necessary.

For the past year or so, financial pundits have predicted that there may be an increase in the inclusion rate for taxation on capital gains. When the tax on Capital Gains was first introduced in 1972, the inclusion rate was 50%, meaning that amount of the capital gain would be taxed.

Over the years since, the inclusion rate fluctuated from this rate to 66 2/3% and 75%. It was lowered again in October 2000 to the current 50%. With the top personal marginal rate in Canada averaging approximately 50%, this results in the tax payable on a capital gain (realized or deemed at death) to be 25%. It is highly likely, that inclusion rate will be increased soon to help increase tax revenues to combat the huge deficit by which the country is now burdened.

If it increases to 75% (as it was from 1990 to 2000) the effective rate of tax on a capital gain will increase to 37.5%. This assumes that the top marginal income tax rate does not increase and if that is not the case the effective rate would be even higher. This will have a significant impact on the future cost of settling an estate due to the deemed disposition of all assets on death.

There are other steps the government could take to increase tax revenue. The purpose of this article, however, is not to monger fear nor is it to give the government ideas, it is more to alert you to the possibility that taxes will be going up in one form or another.

Why is this important?

It has long been an accepted strategy to provide sufficient estate liquidity to pay taxes due at death from the proceeds of a life insurance policy. In Canada we are fortunate to have permanent life insurance policies that insure an individual for their entire life with a premium that is guaranteed not to increase. It is feasible to be able to use these policies in an effective estate plan.

How will these products be priced in the future?

When pricing the product, life insurance company actuaries, pay particular attention to the prevailing long-term interest rate. For some time now, the long-term interest rate has been extremely low. This resulted in steadily increasing premium costs for permanent life insurance coverage.

Although recent economic circumstances have necessitated the Bank of Canada to increase interest rates, there is great uncertainty as to what impact the large amount of the deficit will have on long term rates.

So far, Canadian life insurance companies have not rushed to lower their premiums as a result of the increases in long term interest rates and it remains to be seen if they will. When the economy stabilizes and the government, under the pressure of the deficit, reduces the cost of its borrowing, low long term interest rates may once again be the norm, potentially increasing the cost of new life insurance.

Other factors that will increase premiums:

  • Aging. Life insurance gets more expensive as you get older.

  • Possible changes in underwriting guidelines could result in higher costs for some individuals.

  • There are also life insurance industry accounting changes coming soon which could result in an increase in the pricing of permanent insurance policies.

How should you prepare?

It is highly probable that taxes, especially taxes on settling an estate, will increase. Combined with the possibility that the cost of new life insurance policies may also increase, now, is a good time to be reviewing your estate planning needs.

As always, please feel free to share this article with anyone you think would find it of interest.

Estate Planning for Blended Families

Avoid Disinheriting Your Children

In today’s family, it is not unusual for spouses to enter a marriage with children from previous relationships. Parents work hard at getting these children to functionally blend together to create a happy family environment. Often overlooked is what happens on the death of one of the parents. In most cases, special consideration for estate planning is needed to avoid relationship loss and possibly legal action.

Typically spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children. The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.

6 Estate Planning Considerations for Blended Families

The Family Home

  • In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately.

  • Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.

Registered Retirement Savings Plans

  • To take advantage of the tax-free rollover from their RRSPs each spouse should consider naming each other as beneficiary. If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.

Other Assets and Investments

  • If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could direct that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs. Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.

Choose a Trustee Carefully

With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee. For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance. Some situations may call for multiple trustees or perhaps the services of a trust company.

Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step-parent. Life insurance may be the ideal solution. Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.

Advantages of Life Insurance for Blended Family Planning:

  • Can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;

  • Death benefit is tax-free and could be creditor and litigation proof;

  • Ability to name contingent owners and beneficiaries (including testamentary trusts);

  • Death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;

  • With a named beneficiary proceeds pass outside of the will so cannot be challenged under any wills variation action;

  • Provides for a significant measure of control and certainty as to when and where the proceeds will end up.

The Elephant in the Room

It is important to remember that whatever planning options are used, total and open communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs. Full discussion will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.

Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children. Call me if you require help in this area or as always, please feel free to share this article with anyone you think would find it of interest.

Copyright @ 2021 FSB – All Rights Reserved

Having Your Cake and Eating it Too

Having Your Cake and Eating it Too: Seg Funds in an Uncertain Market

Investing in an uncertain stock market is not for the faint of heart. However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investors.

Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

While many companies have reduced their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit. The 100% guarantee offers these advantages:

  • At the maturity date, the value of the investment will be the greater of the market value or 100% of the sum of deposits less any withdrawals taken. In other words, at maturity (minimum 15 years), your worst-case scenario is receiving full value for all of your deposits.

  • At death, the 100% guarantee will ensure that your beneficiary receives the greater of the market value of your Segregated Fund or the sum of all your deposits less any withdrawals taken.

Reset Feature for Maturity and Death Benefit Guarantee

Resets can have significant value in a volatile market. With this feature, you have the ability to:

  • Reset the maturity guarantee value (usually more than once per year). Accordingly, you can lock in your investment gains at maturity. With each reset, you also have the option of designating a new maturity date.

  • Automatically reset the death benefit guarantee, locking in your investment gains at death. (The frequency of the reset varies by company).

How Significant are Reset Options? You Decide.

  • In 2004, John invested $500,000 in a segregated fund and selected a first quartile but highly volatile equity fund as the investment choice.

  • Over the next few years, John’s fund performed very well and his investment grew to $750,000.

  • In late 2007, John exercised his reset option.

  • The market collapse of 2008 saw John’s investment value fall to $380,000.

  • This same collapse devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $750,000 at his maturity date.

As you can see, reset options give you the ability to lock-in gains. Implementing a reset when prices peak, the guaranteed amount of your seg fund will be increased.

Designation of Beneficiaries Enables Protection

One fact about Segregated Funds that is often overlooked is that as a product of a life insurance company, you can name a beneficiary for the proceeds at your death. This creates the potential that your segregated fund investment may be free from the claims of creditors or potential litigants.

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil, particularly amongst older investors. The closer you get to retirement, the higher the stakes. Therefore, many investors have forsaken the potential of higher returns for a significant portion of their portfolio. While this does reduce risk, it probably will result in lower returns.

By using Segregated Funds and taking advantage of the 100% Maturity Guarantee and reset options, one could achieve balance in their portfolio without necessarily locking in low yields.

Estate Conservation for Mature Investors

The 100% death benefit guarantee means that you can remain invested in an equity portfolio while not risking the estate value of your investment portfolio. Regardless of what happens in the market, your investment fund is totally guaranteed at your death. This guarantee is available for deposits made p until age 90.

By naming a beneficiary, upon your death, all of your segregated fund investments will flow to your beneficiary without any probate fees, administrative costs or risk of any Wills Variation Act litigation.

Capital Protection

Market downturn is not the only risk to which capital can be exposed. For many professionals and business owners, there are situations that may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets. By naming a preferred beneficiary, this risk is potentially eliminated.

Complicated Estate Protection

For domestic situations involving previous marriages and the desire to protect capital for present or previous family members, the beneficiary designation could be made irrevocable. The irrevocable beneficiary designation confers rights and protection on the beneficiary, which would not be as enjoyable through the “primary beneficiary” title.

Another advantage of Segregated Funds is that the use of named beneficiaries allows for a confidential transfer of wealth at death. In uncertain times having the comfort of a maturity and death benefit guarantee provides investors with a significant safety net.

Let’s connect to discuss if Segregated Funds will complement your current investment strategy. As always, please feel free to share this article with anyone you think would find it of interest.

Copyright © 2021 FSB Content Marketing – All Rights Reserved

Pay Attention to your Beneficiary

Pay Attention to Your Beneficiary Designation

It’s more important than you think

Naming a beneficiary is a valuable feature of life insurance and segregated funds policies so it is important to carefully choose your beneficiaries.

Estate – the default choice

Many people choose to name their “estate” as their beneficiary. Although this is an easy short-term solution, it is important to review the risks of doing this. If you are stuck for a significant “other” beneficiary, don’t forget to change it to a more appropriate option later. Why?

  • The proceeds will be subjected to probate fees and the benefits received will be co-mingled with all the other estate assets which may be exposed to various third parties.

What’s in a name?

Simply naming an individual or trust as beneficiary will keep the proceeds out of the insured’s estate and also protect the death benefit from the claims of creditors or litigants.

VIP Beneficiary

A “preferred beneficiary” is a spouse, parent, child or grandchild and receives VIP treatment in the form of protection. All the proceeds of the life insurance product (including Segregated Funds) are protected against claims of the creditors or litigants of the life insured not only upon his or her death, but any cash values in that policy are also protected during the lifetime of the insured.

  • A minor “preferred beneficiary” will require a trustee for their portion until they reach the age of majority.

  • Note that the preferred beneficiary status does not apply to siblings.

Trust your trustee

Think carefully about to whom you assign the task of trustee. It can be a difficult role to fill, often challenged by trying relationships. Be sure to discuss the role with your intended trustee and make sure they are comfortable with it and understand the responsibilities of the role.

Contingency Plan

Often parents of minor children are concerned about what would happen should they both tragically pass away at the same time. For this reason, the children are often named as “contingent beneficiaries”. If the children are minors, the trustee named to act on their behalf will receive the proceeds directly upon the death of their parents avoiding any estate considerations.

As life changes, so do beneficiaries

If you have an older life insurance policy it is probably a good idea to review the named beneficiary as your circumstances may have changed.

It may be time for a change if…

  • You have divorced – if you have a divorce agreement that required you to maintain your spouse as the beneficiary, have the conditions of that requirement now expired (e.g. children are now of age) and is no longer required?

  • If you have remarried – is your ex-spouse still named as the beneficiary?

  • If a policy was assigned to the bank or other lending institution – have the assignment removed if the loan is paid off.

  • If you have new dependents – children, grandchildren or even dependent parents.

  • If your children are now grown up – and have families of their own, does this change how you want your life insurance proceeds to be paid?

  • If your children are married, their spouses may have access to these proceeds too. Is their relationship solid, or is there a risk of half of your life insurance proceeds being paid out as part of a divorce settlement? Perhaps you should consider naming your grandchildren as beneficiaries instead?

The need for life insurance no longer exists

Often, older individuals find they have no one to whom they wish to leave their insurance proceeds. In this situation, naming a registered charity will provide a charitable tax deduction in the full amount of the proceeds at death.

Let’s review your beneficiary designations and make sure your life insurance proceeds end up where you want them to be. As always, feel free to use the share button to forward this article to someone who might find it of interest.

Copyright © 2020 FSB Content Marketing – All Rights Reserved

How To Protect Your Estate

You have spent your life working hard and accumulating wealth for you and your family to enjoy. While you are living you pay taxes annually on both your earned and investment income. But did you know that your assets may also result in a tax liability upon your death or the death of your spouse? In Canada, a taxpayer is deemed to dispose of all of his or her assets at death. If the value of these assets exceeds their cost, then, without proper planning, taxes could be payable.

But the good news is, it might be possible to reduce or at least delay the payment of this tax by organizing or re-allocating certain assets that would result in a tax liability at your death. There is also a way to cost-effectively accumulate tax-free funds to pay all or part of any taxes that may become due upon your death.

Of course, every situation is different, so you should consult with a financial advisor before making any big decisions. Below is a simple guide that will help you structure your estate in the most tax-advantageous method.


Most people are aware of what assets they own, but let’s separate them into two different groups to better understand how they are treated at death.

Assets That Could Result In A Tax Liability

Real estate, other than your principal residence, for instance, is subject to capital gains tax on your final tax return. For example, perhaps you bought a vacation home in 1990 for $100,000, but when you die it is valued at $500,000. There is a deemed disposition resulting in a capital gain of $400,000 of which half is taxable in the year of your death. If your real estate was rental or commercial property, you may also be subject to additional tax at death in the form of recaptured depreciation.

Other assets that give rise to capital gains at death include shares in public and private corporations, farms, antiques and other collectables. If the private company shares are of a Qualifying Small Business Corporation, the first approximately $900,000 of capital gains could be received by a Canadian resident tax-free. For qualifying farm or fishing property, the first $1,000,000 of capital gains may be tax-free.

There is a provision under the Income Tax Act that states that the taxes arising from capital gains at death can be delayed by leaving the assets to a spouse. In doing so, the tax will be deferred until the spouse disposes of the assets or dies.

Registered assets such as RRSPs, RRIFs, pension plans are also deemed to be disposed of at death with the full balance being taxable as income. This is in addition to any withdrawals or income payments made in the year of death. Again, a taxpayer can name a spouse as beneficiary to allow those registered plans to be rolled over into the spouse’s registered plan avoiding tax in the year of death.

Assets That Do Not Result In A Tax Liability

There are generally four types of assets that are not subject to tax at death. These are your principal residence, Tax-Free Savings Accounts, the tax-free portion of capital gains, and the death benefit of a life insurance policy.

Financial vehicles such as TFSAs, RSPs, and life insurance allow for the naming of a beneficiary. When this is done, the proceeds at death pass directly to the named beneficiary outside of the will. This results in no probate fees or administrative costs being assessed on the value of these assets as well.

Death And Taxes

It is difficult to completely eliminate a tax liability upon death. However, there are options you have to help the estate pay your final tax bill, while still providing for your heirs. Below are some common strategies for dealing with the ultimate tax bill.

Building a Cash Reserve

There is nothing wrong with saving money. Saving money or building a cash reserve to pay taxes at death, however, is not a very viable option. For one thing, you don’t know for certain when the funds are going to be needed or how long you have to save for it. Saving doesn’t buy you time and often the money doesn’t stay saved. If you are looking to save specifically to pay for taxes at death, you would be much better off paying life insurance premiums.

Selling Assets

Needing to sell assets to pay taxes at death can result in a “fire sale”, with property realizing less than their full value. Another consequence of liquidation is that the asset is no longer available for future growth and income for the benefit of the heirs. Often the sale of an asset results in even more taxes and expenses. Unfortunately, without adequate life insurance, there may not be any other option.

Life Insurance

The death benefit of your life insurance is paid tax-free to your beneficiary, and your policy could provide liquidity to your estate when your heirs need it to pay the tax liability associated with other assets. This is a solid strategy used to mitigate tax burdens associated with an estate while at the same time providing for last expenses, such as debt and funeral costs, in addition to creating future income for the family.

Freezing the Estate

For larger estates, an estate freeze might be implemented which “freezes” the value of the estate and passes the future growth onto the next generation. This can be a complicated and expensive process but for significant estates, the future tax savings can be substantial.

Borrowing to Pay the Tax

On those occasions where no prior planning has been implemented, an executor might seek to borrow in order to pay the taxes due at death. Apart from the necessary collateral that would have to be pledged, one big downside to this option is the fact that the loan has to be repaid with interest. At the end of the day, the loan and interest payments would total much more than the amount of the tax. This might be an option if none other was available but it is definitely not a desirable one.

Questions about your estate?

Your estate having to pay taxes upon your death is a testament to your success. That’s the good news. How much bad news there is can be greatly reduced or even eliminated by proper estate planning that an experienced financial advisor can help provide. Remember, the sooner the planning begins the better the results that can be achieved.

As always, please feel free to share this article with anyone you think would find it of interest.

Have You Overlooked Assets in Your Estate Planning?

Have You Overlooked Assets in Your Estate Planning?

We have bad news for all the Luddites out there: Technology is here to stay. That means computers and cellphones, and all the software and apps that come with them, are going to become more and more prevalent in the future. 

Technology has infiltrated our daily lives on such a granular level that most of us don’t even realize how much we rely on technology in our day-to-day activities. COVID-19 has made it more difficult to see loved ones in person and even trips to the grocery store carry risks of infection, so many of us have taken to Zoom-happy hours with friends and ordering our groceries online. Whether it is our work meetings, completing tasks and chores, and even social gatherings, technology is everywhere.

How we use technology will continue to expand in the future, but what does that have to do with your estate? Well, as it turns out, a lot. Before we get into the details, let’s discuss what digital assets are. 

Digital assets are essentially anything that has inherent worth that is also in digital form. What establishes their status as an asset is the fact that they come with a “right to use” (e.g. a password). Without a right to use, they are just considered data. Digital assets could include family photos, air miles, hotel rewards, grocery store points, and especially cryptocurrency.

In estate planning, you would keep a list of all your valuable physical assets and you would also consider what would happen to these assets upon your death. Your executor would know these details and would be able to locate these items in your home or safety deposit box and ensure that they are passed on to the right people.  

The same holds true for your digital assets. In your estate plan, you should make a list of all your assets, including your digital assets, and ensure that your executor knows what digital assets you own, where to find them, and how to access them. Remember to include your username and password to all of your accounts on the list, and update that list frequently as your passwords are going to change from time to time.

Additionally, when you are considering your estate and your legacy, you need to decide what you would like to do with your social media profiles. Perhaps you have become a prolific tweeter through your Twitter account, or maybe you use Facebook to remain connected to your long-distance friends and family. Either way, your social media profiles could remain online forever, or they could be deleted per your wishes. Make a decision now about what you would like to do with your social media accounts so that there is no ambiguity regarding how your family should handle them when dealing with your estate. 

Digital assets have been overlooked in the past to the frustration of many estate executors. But as the world continues to evolve, people will rely more and more heavily on technology. This means that people’s wealth and valuables may be held digitally, and therefore, these assets should be included in your estate planning. 

If you are not sure where to start, talk to your trusted executor and write down some notes related to the following information:

  1. What are your digital assets?

  2. Where can your executor find them? 

  3. Update your usernames and passwords regularly. 

  4. Share this information and any updated information with your executor.

As always, please feel free to share this article with anyone you think would find it of interest. 

All in the Family: Estate Planning for Farmers

Many farmers find it difficult to get any interest from their children in continuing to run the farm business – which can cause some complications when developing the best estate plan for farmers looking to retire.

In general, farmers are in an interesting position: they are asset rich due to the increased value of their land but struggle with the increasing costs related to their farming activities.

However, if the farm holds significant value but the children are not interested in working the land, what is a farmer to do?

In some cases, at least one child is interested in farming having grown up in it. If there is only one child interested in taking over the farm, the solution may be simple: gift the farm to the child.

If a child is taking over the business, parents should consider the following:

  • The timing of when the parents will retire.

  • When they will transfer the ownership.

  • Where they will live after retirement.

  • Whether or not they have enough retirement savings without relying on farm income.

If no children are willing to take over the farm business, estate planning and the tax implications become more complicated. However, farmers have some tax planning tools they can use that are unavailable to most people:

  • There is actually a higher exemption from capital gains for both farming and fishing individuals. While qualified small business corporations can claim about $892,218 against capital gains on shares, farmers have an exemption of up to $1 million on either qualified farm property or shares in a qualified farm corporation. This is a really great benefit for sole proprietors or partners in a farming operation.

  • In addition, if a farmer is passing farm property over to a child, they may elect to transfer at the original cost base, rather than the current fair market value. This is essentially passing the gains over to the next generation – much like an estate freeze without all the documentation.

Qualified Farm Property

In order to receive the right exemptions for your situation, it is also beneficial to understand what is considered qualified farm property.

In order to receive the right exemptions for your situation, the property must be used for active farming activities – not rented out or sharecropped.

It is also important to consider who actually owns the farm and if they are actively farming the property. For example, if two spouses own the farm property and farm it then they both get $1 million of exemption. If a spouse is not an owner but is actively farming the property, the current owner can transfer farm property over to the spouse at cost to allow for the use of the exemption. Children may also qualify for this exemption.

The current rules have two important provisions:

  • The owner must be actively farming for two years before selling or gifting the property, and the owner must have earned most of their income from farming during those two years.

  • Any other income earned from other sources has to be significantly less than the total gross income earned from farming.

If this is not the case, then there may be no exemption and no ability to gift the farm to a child at cost.

It is also important to consider what year the farming property was first acquired, as the rules prior to 1987 were significantly different.

The rules after 1987 state that farm property must be used to conduct farming, and it must be owned for two years prior by the individual, spouse, common law partner, children or parent of the individual, a trust or partnership.

However, if a farmer owned the property prior to 1987, then the rules are a bit more generous. For farms acquired prior to 1987, the tax authorities allow you to use the tax benefits if you used the property “principally” for active farming in the year you sold or gifted it, or in at least five years during which the property was owned.

Questions to Outline Future Goals

Finally, probably the most important step a farmer can take in planning their estate is to determine their own goals and ask their children about theirs. Some questions to consider:

  • If the children are interested in farming, can the parents afford to retire without farm income and if not, how many people can the farm support financially?

  • If there are both farming and non-farming children are there other non-farming assets that the parents can leave to the non-farming children to equalize the estate? Would life insurance be useful to provide equalization?

  • Do the parents need the children to “buy” the property, for at least $1 million of it to take advantage of the exemption and get the parents retirement funds? And can the children afford to do that?

Questions? Reach out if you are interested in exploring estate planning options.

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Impact of Recent Events On Your Estate Plan

A year ago, the projected deficit for 2020 was estimated to be $20 billion. Shockingly, as a result of Covid-19, this projection has risen to over $380 billion by the end of the year. So, what does that mean for tax rates and how will this affect your estate plan?

Even as they continue to unfold, the Covid-19 pandemic and its effects are influencing the way we plan for our future. During the period of lockdown and self-isolation, many people put a great deal of thought as to how to keep themselves and their families safe – not only physically but financially as well. For some, this meant finally looking at the recommendations they had been considering about their life, critical illness and disability coverage. For others, it became a time to reassess their investment, retirement and savings plans, as we all know the results uncertainty can have on the equity markets.

Then, there are the potential long-term effects that this pandemic may have on estate planning and its primary objective of reducing the impact of taxes during life and at death.

As the national deficit continues to balloon, the logical question remains: where is the money going to come from to help cover this? While the government may be loath to raise taxes, and politically that is something it might wish to avoid, there is no question that increased tax revenues are probably necessary.

For the past year or so, financial pundits have predicted that there may be an increase in the inclusion rate for taxation on capital gains. However, there is speculation on the actual amount of inclusion because this percentage has fluctuated historically. For example, when the tax on capital gains was first introduced in 1972, the inclusion rate was 50 per cent, meaning this amount of the capital gain would be taxed. Over the years since, the inclusion rate fluctuated between 50 per cent to 75 per cent. It was lowered again in 2000 to the current inclusion rate of 50 per cent.

In Canada, the top personal marginal rate in most provinces exceeds 50 per cent. This means that the tax payable on a capital gain, realized or deemed at death, could be over 25 per cent. It is highly possible that the inclusion rate will soon be increased to help augment tax revenues to combat the huge deficit. If it increases to 75 per cent, as it was from 1990 to 2000, the effective rate of tax on a capital gain will increase to almost 40 per cent. This assumes that the top marginal income tax rate also does not increase. This will have a significant impact on the future cost of settling an estate due to the deemed disposition of all assets upon death.

One beneficial strategy to avoid leaving family members with an insurmountable tax bill, is to provide sufficient estate liquidity to pay taxes due at death from the proceeds of a life insurance policy. In Canada, we are fortunate to have permanent life insurance policies that insure an individual for their entire life with a premium that is guaranteed not to increase.

In its handling of its $380 billion deficit, the Canadian government could borrow money, and if they do, it is a real incentive to keep long-term interest rates as low as possible. The current yield for 10-year Canadian Bonds is less than 1 per cent, and it is clear that a low interest rate environment will persist for a considerable period of time. This is significant because the life insurance company actuaries pay particular attention to the prevailing long-term interest rates when pricing a product. This current era of low-interest rates indicate that the price of permanent life insurance will increase in the near future.

While Covid-19 is not expected to have a general impact on the cost of life insurance, it is unclear whether possible changes in underwriting guidelines could also result in higher costs for certain individuals. Another factor that could increase life insurance premiums are changes to industry accounting practices in the near future, which would require life insurance companies to modify the disclosures about long-duration contracts, such as permanent life insurance.

The bottom line is this: With higher taxes and increased life insurance premiums on the horizon, now is the time to review your estate planning needs and implement or increase your life insurance. Putting off this important task will increase costs for you – or your family – down the line.