Jane Shanks - Writing the Tax Man Out of Your Will

1. Write the Tax Man out of Your Estate Plan
A Wealth Planning Case Study
Jane Shanks, B.A., LL.B., TEP
Regional Vice President, Wealth Planning
United Financial, a division of CI Private Counsel LP

2. Agenda
• Introducing Joe & Susan
• What do they need to consider?
• Gifts and Transfers while Alive
• Tax Savings with Testamentary Trusts
• Strategies to Reduce Probate Fees
• Planning for Second Marriage Concerns

3. Meet Joe & Susan
Joe, 65
&
Susan, 60
Susan’s
Joe’s Susan’s
Son &
Daughter & Joe’s Son Daughter &
Daughter
Son In Law Son In Law
In Law
Grandchild Grandchild Grandchild Grandchild Grandchild Grandchild Grandchild Grandchild
1 2 3 4 5 6 7 8

4. Meet Joe & Susan
RRSP $3,810,000 RRSP
$250,000
$250,000
Pension
$1,100,000
Cottage
$800,000 TFSA
$10,000
TFSA Boat
$10,000 $40,000
$1,060,000 House Non-registered $1,400,000
$750,000 $600,000
$1,350,000

5. Are they ready for retirement?
What do Joe & Susan need to consider?
• Lifestyle planning
• Living arrangements
• Income security
• Investment strategy
• Physical health and care planning
• Wealth preservation and transfer
• Asset protection
• Incapacity planning
• Important causes and charitable giving

6. Considerations
Lifestyle planning
• What does retirement look like?
– Joe continued income from publishing and consulting
• Goals and interests?
• New opportunities?
– Susan piano, interior design (renovate house)
– Consider impact on spending

7. Considerations
Living arrangements
• Home
• Cottage – newly renovated
• Do they need both properties?
– What are the tax considerations for Principal Residence Exemption?

8. Considerations
Income security
• Do Joe & Susan have enough resources to maintain their lifestyle?
– Do they have a financial plan?
– How much can they spend?
– What do they need to earn?
– Annual review to stay on track
• What should Joe do with his various sources of pension income?
• What income splitting opportunities exist?

9. Considerations
Physical health and care planning
• Are Joe & Susan protected in the event of serious illness?
Physical/Mental impairment?
• What is the financial impact on Joe, Susan and their family?
• Will there be enough for Susan in the event Joe dies prematurely?

10. Health and care planning
Other care options
• Should Joe & Susan consider LTC?
– Benefits for assisted living to help preserve their assets for their own use and for a
legacy
– Maintain a sense of independence and standard of living
• Critical illness coverage

11. Considerations
Wealth preservation and transfer
• Should they consider transferring assets to their children and
grandchildren during life? Should they own the cottage jointly with
their children?
• Can their estate plan help minimize tax for the family? Can the plan protect
their children’s assets from marriage breakdown?
• How can they structure their assets to reduce probate fees and income taxes?
• How can Joe and Susan preserve assets for their children from their first
marriage?

12. Wealth preservation and transfer
Transferring assets to children and grandchildren during life
• Common “do it yourself strategy”
• Unintended consequences if not properly thought through
• Understand intentions, timing, financial security
• Consider attribution rules
• Consider capital gains consequences for Joe, Susan and kids
• Any transfer of assets is a taxable event

13. Wealth preservation and transfer
If Joe & Susan transfer assets…
• To their adult children
– No attribution from property transferred
– Deemed disposition of asset at FMV on transfer
– Joe & Susan may incur tax on any capital gain realized
• To their grandchildren (under 18 years)
– Attribution of income, not capital gains
– Deemed disposition of asset at FMV on transfer
– May use “transfer for value” exception

14. Wealth preservation and transfer
Sale for less than FMV
• Common misconception that tax is avoided
• Asset deemed sold at fair market value
• Joe & Susan may incur tax on any capital gain realized
• ITA rule provides one-sided result:
• ACB equal only to what they paid -- double tax results later
• Gift better than sale at less than FMV?

15. Wealth preservation and transfer
What about joint ownership of cottage?
Capital gains
• Common misconception: transfer to joint ownership avoids capital gains
tax
• If Susan “adds” her 2 children as joint owners of the cottage
– Susan disposes 2/3 of the cottage
– Realizes capital gain
– Each of children own 1/3 of the cottage with full cost base for their portion
• General rule: If beneficial ownership has changed, deemed disposition at
FMV

16. Wealth preservation and transfer
Joint ownership: Impact on principal residence exemption
• Recall: children now own 1/3 each with full cost base
• Next 10 years -- cottage increases in value, family decides to sell cottage
• Susan and each of her children will realize capital gain
• Can children’s gains be sheltered with PRE? Maybe...
• Even if they can use PRE, their PRE for other properties for the
“overlapping” years is used up

17. Wealth preservation and transfer
Principal residence exemption: How does it work?
• PR exemption is a fraction – basically:
1 + Number of years you say the property was a PR x Gain = Exempt portion
Number of years you owned the property
• Family unit may only treat one property as a PR in respect of a given year
• Common misconceptions:
– PR definition is rigid, must “declare” PR each year, mailing address determines status,
etc. – really, “ordinarily inhabited” is liberally interpreted
– can pick and choose “which” years to use – really, it’s “how many” years
• Good advice to clients:
– If you own two properties and are selling/transferring one: GET TAX ADVICE

18. Considerations
Wealth preservation and transfer
• Should they consider transferring assets to their children and grandchildren
during life? Should they own the cottage jointly with their children?
• Can their estate plan help minimize tax for the family? Can the plan
protect their children’s assets from marriage breakdown?
• How can they structure their assets to reduce probate fees and income
taxes?
• How can Joe and Susan preserve assets for their children from their first
marriage?

19. Wealth preservation and transfer
Testamentary trusts: How do they save tax?
A. Trust is taxed at marginal rates
– Access to an additional set of marginal tax rates (“tax base”)
– Helps a high-rate beneficiary like Susan’s son the doctor save tax
– Beneficiary can still receive the income net of tax!
B. Alternatively, income may be taxed in low-rate beneficiaries’ hands
– Example - include Susan’s son and his 2 young children as beneficiaries
– Son can pay expenses for his children -- taxed as their income!
– Access to “basic personal amounts” and lowest tax rates
– Very significant savings are possible

20. Wealth preservation and transfer
Testamentary trusts: Tax savings
Trust
Trust
• $700,000 to be inherited by Susan’s son, the doctor
• When invested will produce approximately $35,000 income
• If son inherits outright:
– would pay tax annually at high 43.7% tax rate (BC)
$15,300 tax
• If instead held in trust: Son
His child
His child His child
His child
Pay children’s
A. Use the trust’s marginal rates expenses out of
trust income
– Income all in lowest bracket (20% in BC)
– Son can still receive the income net of tax!
$7,000 tax
– Annual tax saving: $ 8,300

21. Wealth preservation and transfer
Testamentary trusts: Tax savings
Trus
Trus
tt
$700,000 to be inherited by Susan’s son, the doctor
• When invested will produce approximately $35,000 income
• If son inherits outright:
– would pay tax annually at high 43.7% tax rate (BC) $15,300
tax
Son
His child
His child His child
His child
• If instead held in trust:
Pay children’s
expenses out of
B. Tax the income in young beneficiaries’ hands trust income
– Pay their expenses – sports, tuition, etc.
– Both children combined would pay tax of about: $ 3,000 tax
– Annual tax saving: $12,300

22. Wealth preservation and transfer
Testamentary trusts: Protection against marriage breakdown
• Beneficiary does not own the trust property
Trus
Trus
tt
• Beneficiary owns an interest in a discretionary trust
– difficult to value (nil?)
• Family property claims: Protection of testamentary
Son
trust not completely certain, but much better His child
His child His child
His child
protection than leaving assets outright

23. Considerations
Wealth preservation and transfer
• Should they consider transferring assets to their children and
grandchildren during life? Should they own the cottage jointly with their
children?
• Can their estate plan help minimize tax for the family? Can the plan
protect their children’s assets from marriage breakdown?
• How can they structure their assets to reduce probate fees?
• How can Joe and Susan preserve assets for their children from their first
marriage?

24. Wealth preservation and transfer
Structuring assets to avoid probate taxes
• Calculation is based on FMV of property owned at death
• Rates vary by province, particularly high in Ontario, BC and NS
• Some assets excluded from calculation:
– Joint Ownership
– Named Beneficiaries
– In Ontario, consider using multiple wills
– Joint Partner and Alter Ego Trusts

25. Wealth preservation and transfer
Probate Tax: Joint ownership with right of survivorship with spouse?
• Property passes automatically to surviving joint owner without going
through the estate
• Not subject to probate tax
• Recommended for spouses (absent other considerations)
• Simplifies administration of the estate
• Joe & Susan’s investment portfolio and principal residence will pass
without probate taxes at the first death
• But...if a testamentary trust strategy is recommended for income splitting,
would need to sever joint ownership of investment portfolio

26. Wealth preservation and transfer
Probate Tax: Joint ownership with children?
• Immediate tax consequences - disposition for tax purposes at the time the
children become joint owners
• Can produce complications:
– Tax on death of parents still applies, tax payable by estate
– Child predeceases
– Child has creditor issues or other financial difficulties
– Child has marital problems
– Disputes/litigation among children
– Can be difficult to “un-do”
• Not recommended for Joe & Susan - joint ownership is contrary to
objective to provide for spouse while also preserving assets for children of
first marriage

27. Wealth preservation and transfer
Probate Tax: Named Beneficiaries
• Registered Plans, Life Insurance Policies, Segregated Funds, Pensions,
TFSA’s
• Designate beneficiary or successor annuitant in plan or policy documents,
or in the Will
• Consider designations in light of overall Will plan
– If creating testamentary trusts, plan or policy proceeds could be designated to
estate to fund trusts
– Separate insurance trust for large amounts
• Joe & Susan’s registered plans will pass outside of the estate without
probate fees on the first death

28. Considerations
Wealth preservation and transfer
• Should they consider transferring assets to their children and grandchildren
during life? Should they own the cottage jointly with their children?
• Can their estate plan help minimize tax for the family? Can the plan protect
their children’s assets from marriage breakdown?
• How can they structure their assets to reduce probate fees?
• How can Joe and Susan preserve assets for their children from their
first marriage?

29. Wealth preservation and transfer
Joe: Providing for Susan & his children
• Joe may perceive risk that his testamentary intentions will not be realized
• Additional concern: Susan may spend assets imprudently after Joe dies
• Solution:
– provide spousal trust for Susan’s lifetime
– provide support during life, but ensure Joe’s Will provides ultimate distribution of
his estate
– Note spousal rollover requirements do not interfere with ability to limit capital
distributions
• Note spousal trust requires separately owned non-registered assets

30. Wealth preservation and transfer
Susan: Providing for Joe & her children
• If cottage becomes their primary residence, Susan wants Joe to have the right to
live there, but have the kids eventually inherit
• Susan also wants the kids to be able to continue to use the cottage property as they
have in the past
• Concerned about potential conflicts over usage while Joe is living and using the
property as his home
• Possible Solutions:
– Family meeting to discuss options, consider a written agreement to determine periods of usage
– Establish a cottage trust to allow Joe to enjoy during life, but ensure Susan’s Will provides
ultimate distribution to the children
– Consider giving children an option to purchase
– Consider insurance to fund capital gains tax and associated costs of keeping the cottage

31. The plan for Joe and Susan
• Split pension income
• Designate spouse as beneficiary of registered plans
• Spousal trusts for Joe and Susan
• Testamentary trusts for Canadian resident children
• Cottage trust for Joe and Susan's children
• Insurance to provide liquidity to pay CRA

32. Questions?