Professional Advisors Section
Ask A Local Expert
The following questions reflect often-asked questions by donors, prospective donors, and professional advisors alike. Please use our contact page to submit any other questions you may have.
Do you have some suggestions for how to talk about leaving an inheritance?
What should I consider when I am selected an Executor of my estate?
What do I need to do as I get older to ensure everything is in order when I pass away?
I hear a lot about avoiding probate. Is this something I should be concerned about?
I am worried about getting Alzheimer disease and what might happen to my will.
How should my RRSP's be handled in my will?
The news is full of stories about the elderly being scammed. What can I do to protect myself?
How do Charitable Remainder Trusts work?
Is a power of attorney really necessary?
My
spouse died several years ago and I am now
blessed with having a second chance at
marital bliss. As this is a second marriage
for both of us and we are both in our 70s,
do you have some estate planning advis
Question: I’ve heard that some people
donate their residence, get a charitable donation
receipt, and still live in the house. Is that
possible? Answer: Have you ever wondered how to
get a big charitable donation tax receipt without
writing a big cheque? You could, for example, give your house or
condo to your favourite charity that allows you to
continue living in it for the rest of your life.
You could set up a Gift of a Residual Interest (GRI).
A GRI lets you prearrange a future condo title
transfer to charity upon your death. How big would the tax receipt be? Suppose, for
example, that your condo is worth $150,000. We'll
assume that mortality tables show someone your age
can expect to live for 10 more years on average.
We'll also assume that the interest rate for a
10-year bond is 4 percent. You could therefore receive an immediate
charitable donation receipt for about $100,000 for
your gift worth $150,000 since it's expected to
take place in 10 years' time. What are some advantages of a GRI?
** You would simplify your estate. You reduce
probate and estate administration costs. Your
executor won't even have to list your condo as an
estate asset once the title transfer has been
prearranged. ** You create a huge tax credit that does not
require any cash outlay. You don't have to sell
your condo. You can continue to occupy the same
condo for the rest of your life. ** With today's low inflation we have extremely
low interest rates. That's good for a GRI donor.
The lower the discount rate, the bigger the
donation receipt will be. ** By donating your principal residence you do
not trigger any income tax since the capital gain
is exempt. ** Your GRI can lock in a high price in today's
hot real estate market. What if millions of baby
boomers retire and downsize their homes to tap
into the equity because their RRSPs are too tiny?
It's possible that real estate prices could
decline in the years 2010 to 2030 as the wave of
baby boomers reach 65. Isn't this the same age
wave that helped drive house prices upwards in the
1970s and 1980s when they were first buying homes?
What are some disadvantages of a GRI?
** Heirs could be upset. Fearing the loss of
their inheritance they could question the legality
of the GRI if they suspect there was undue
influence or you lacked mental capacity. To keep heirs happy you could use the estimated
$44,000 of tax savings to buy a new life insurance
policy that's payable to them. ** Can you actually make full use of a $100,000
charitable donation receipt? You can only carry
unused donation credits forward 5 years. That
means you could claim an average of $16,666 per
year for 6 years thereby saving about $7,333 tax
per year. If necessary you could take extra RRIF
withdrawals but not enough to trigger Old Age
Security (OAS) clawback. ** A GRI is not like a will. You cannot change
your mind. To be eligible for a donation receipt
your gift must be irrevocable. Once set up, the
GRI prevents you from taking a reverse mortgage.
Anyone tying up capital in a GRI needs to have
plenty of other savings or a good company pension.
Forget about a GRI if selling your home may
eventually be required to help cover future
long-term care costs. ** The tax credit has no effect on OAS clawback.
** The mortality table for calculating the
present value of your future gift does not take
into account the donor's health. What if your
health is so poor that your life expectancy is
shortened? You cannot get the tax benefit of a
larger charitable donation receipt. If you like the idea of a Gift of a Residual
Interest, talk to your lawyer and financial
adviser. You can be sure your charity would like
to assist you with this planned giving strategy.
Question: Do you have some suggestions
for how to talk about leaving an inheritance?
Answer: Discussing inheritance is hard
"Who gets Grandma's ring?" can be a touchy
estate issue if Grandma never discussed the idea
with anyone while she was alive. Too often, after
someone dies, the most heated family squabbles are
about personal items that have only modest
monetary value. That is one of the conclusions of the recently
released Allianz American Legacies Study. In fact,
distributing personal possessions of emotional
value was five times more likely to be the
greatest source of family conflict than the
division of finances according to baby boomers
whose parents are not alive. Allianz Life Insurance Company hired Age Wave
market research consultants to design a
comprehensive survey about intergenerational
wealth transfer. They surveyed about 2,500
individuals this past spring. About half were
boomers (age 40 to 59) and half were from their
parents' generation (age 65 and over). The research found that both boomers and the
elder generation were uncomfortable discussing the
topic of leaving an "inheritance." Discussing
dollar amounts and dying is seen as being greedy.
However, both generations enthusiastically
welcomed the idea of leaving a "legacy" because
that concept captures all facets of an
individual's life -- including family traditions
and history, sharing stories, values and wishes.
The life insurance company wanted to learn
about emotional and financial implications of
intergenerational wealth transfers because that is
their business. But the researchers found that non-financial
leave-behinds -- like ethics, morality, faith and
religion -- are 10 times more important to both
boomers and elders with children than the
financial aspects of a legacy transfer. Although both boomers and those in their
parents' generation say they are having in-depth
conversations about legacy and inheritance, most
of these conversations are not happening in a
truly meaningful way. Sixty-eight percent of boomers and 71 percent
of those in their parents' generation say they are
very comfortable discussing legacy and
inheritance. Yet only 31 percent of elders and 29
percent of boomers have actually had a thorough
discussion that includes values and life lessons,
instructions and wishes to be fulfilled, personal
possessions of emotional value, and financial
assets or real estate. The study also looked at whether elders thought
estate property should be divided equally among
all children. Seventy-one percent of elders with a lower net
worth felt that distribution should be equal. Only
54 percent of higher net worth elders agreed.
The elders with higher net worth are more
likely to favour performance-based distribution
than those with lower net worth. They would like
to give more to the child that has cared for the
parent and less to the children that caused stress
and conflict. Some want to include grandchildren.
Parents need to explain such unequal distributions
with their children to avoid hurt feelings and
feuds. The good news is that 89 percent of the elder
generation has made some plans for legacy
transfer. Furthermore, 67 per cent of elders have
sought assistance from a professional advisor.
What are the qualities of the ideal legacy
advisor? Both generations look for a legacy advisor who
is honest, trustworthy and compassionate. They
want a good listener and a clear communicator.
Being able to explain things easily was more
important than knowledge of how to minimize taxes.
Families need to have important conversations
about their family legacy as soon as possible.
Parents and children who don't talk about legacy
issues may be setting the stage for feuding after
the parents' deaths. They also miss a great
opportunity for sharing their thoughts on family
traditions and values. Where do you begin? You can start by finding a
professional advisor. Among the designations to
look for are Chartered Life Underwriter (CLU) and
Trust and Estate Practitioner (TEP). These
credentials indicate the advisor knows the basic
technical aspects of estate planning. But you will
have to interview the advisor yourself to see if
they have the personal qualities you desire.
Question: What should I consider when I
am selected an Executor of my estate? Answer: When you write your will, you
need someone to carry out your instructions after
you're gone. That person is called your executor.
Who would make a good executor?
You want someone who is trustworthy with good
business sense. If you're over 50, it helps to
name an executor who is younger than you are. I
recently heard of someone dying with a will from
the 1960s that appointed executors who have long
since predeceased. If you choose a family member, such as your
spouse, to be your executor you can keep costs
down. A beneficiary who inherits surely won't
charge a fee. (Taking a fee creates taxable
income.) Actually the role of executor is usually
considered more of a chore than an honour. Remember that you'd be asking a loved one to
make important business decisions at an emotional
time. Think of the unresolved issues that can
arouse anger, guilt and pain. Grief can cause
depression and memory lapses. Your executor must
be attentive when signing applications and
affidavits. If you would rather not burden a family member
with the responsibility of being executor, then
you can always name a trust company to be
executor. Alternatively, you can recommend in your will
that the family member who is executor hire a
trust company as agent. Fees for a professional to
take care of all the paperwork are usually no
higher than 4 or 5 percent of the value of your
estate. According to Mary Beckett, Director of Trust
Services Policy at Concentra Financial, a trust
company is a very appropriate choice for the
parents of small children in case both die in a
common disaster. That's when typically hundreds of
thousands of dollars from life insurance would
need to be held in trust for those children.
Hiring a professional trustee may be especially
worthwhile if your children have all moved out of
province. A trust company is also a really good idea if
you need someone who is neutral in a second
marriage situation involving two sets of adult
children from previous marriages. If you intend to
leave a large legacy to a charity, for example, a
jealous relative may resent the expectation to
work free of charge. A single parent may appoint
an ex-spouse as guardian for children but prefer
to have a corporate trustee handle the trust
funds. Remember that the difficult task of settling
your estate can arise at a very inconvenient time.
What if your executor is a farmer in the midst of
harvest or an accountant in April? If your estate
is not the top priority on the "to do" list, your
executor may even resign. If you are retired and live in a condo, your
executor probably doesn't need to live nearby.
Telephones, faxes, couriers and e-mail make
long-distance estate administration easy for an
executor who lives in another province. In fact,
it might even help to have an executor living in
Alberta since your estate T3 return would be taxed
according to the executor's province of residence.
These days it helps to pick an executor who is
computer savvy. Could your executor find your passwords for
online accounts? Could your executor locate prior
year tax returns that were net-filed? Keeping all beneficiaries informed about the
progress of the estate administration should be
easy if they all have email addresses. After you die, electronic fund transfers may
continue to go in and out of your bank account.
Once the bank learns of our death, though, your
account is frozen. Your bank may even reverse
electronic deposits and payments retroactively to
the date of death. Take time each year to find your will and
review your choice of executor. Tell your executor
about important concerns. Either write a letter of
direction, or, better yet, meet with your executor
to have a good discussion about your estate plan.
Question: What do I need to do as I get
older to ensure everything is in order when I pass
away? Answer: If you're a single senior, age
80 and healthy, living in Saskatchewan, you would
be considered reasonably financially independent
if you own a $150,000 house and a $200,000 RRIF.
But that doesn't mean you can just sit back.
You need to ensure that your affairs remain in
order. Here is a checklist to help. Get a will. Don't register your house in joint names just
to save probate costs. Designate "estate" as
beneficiary of your Registered Retirement Income
Fund (RRIF). In most cases it is prudent for a
single or widowed person to bequeath a house and
RRIF by will. Get a Power of Attorney (POA).
A head injury can happen at any age. If the
unthinkable happens and you lose your mental
capacity, who would pay your bills and make
investment decisions? Would you rather have an
employee from the office of the Public Trustee
take over? Or, would you prefer a responsible
family member? Without a POA, your relative would need to
spend about $2,000 to apply to the court for
authority to take charge of your finances. A Power
of Attorney is an inexpensive remedy. Even if you already have a Power of Attorney,
make sure it is up to date. Saskatchewan POA laws
changed in 2002. With a new POA you can appoint an
alternate attorney to act in case your first
choice is unable or unwilling to act. Plus, you
may wish to specify particular, responsible
people, whom you trust, to be entitled to know how
much money you have. Otherwise, any curious
relative can ask for an accounting. Many retirees worry about the huge tax bill on
their RRIFs when they die. If you don't have a
spouse or common-law partner, for a tax-free
rollover, there are various ways to defuse your
RRIF tax time bomb. ** If you bequeath your RRIF to charity there
should be enough tax savings (mostly at the top 44
percent rate) from the charitable donation credits
to eliminate the tax on the RRIF. ** While you're alive, withdraw enough from
your RRIF to raise your taxable income to the top
of the lowest bracket each year. For 2004, the
federal government hiked the threshold for the
lowest tax bracket to $35,000. ** If you're not concerned about leaving an
estate, you could convert your RRIF to a life
annuity. Once you outlive the annuity's guarantee
period, there would be zero commuted value left --
and, thus, no additional tax to pay on death.
Suppose you sell your house and move into an
assisted living apartment complex for seniors.
The proceeds from the sale of your $150,000
house could provide an income stream from a
non-registered portfolio. You could buy bonds for
interest and blue chip shares for dividends. The
new cash flow might allow you to reduce RRIF
withdrawals, so you could defer tax longer. You could use some of your new cash flow, from
the house sale proceeds, to pay for Long Term Care
(LTC) insurance premiums. Even if your savings
dwindle, you would have LTC insurance available to
help pay nursing home or personal care home fees.
As a renter, you would be vulnerable to rent
hikes by your landlord. On the other hand, when
you move to an apartment suite, you no longer have
to shovel the snow or mow the lawn. As a single senior, who would know about your
personal finances if something happens to you? To
assist your executor (named in your will) or the
attorney (named in your POA), complete a personal
directory with names of key contact people. Make
it easy to locate your lawyer, accountant,
financial advisor and banker. Autumn is a good time to review your estate
plan. When you tally your net worth, you will be
ready to do some year-end tax planning soon, too.
Question: I hear a lot about avoiding
probate. Is this something I should be concerned
about? Answer: Let me tell you a story about
Mary, a 78-year-old widow, who has "probate
phobia." Probate is the process of proving to the court
that her will is valid after she dies. In
Saskatchewan this requires paying court fees and
legal fees that usually total about 2 percent of
the value of the particular property governed by
her will. To minimize probate costs on her death, Mary
has tried to arrange her affairs so that as little
of what she owns as possible is actually governed
by her will. Mary wants her cottage, her RRIF and
her life insurance to bypass her will. Mary has registered the title to her $100,000
cottage in joint names with 3 of her children. She
also designated the same 3 children as
beneficiaries of her $500,000 Registered
Retirement Income Fund (RRIF). Mary has a fourth child named David who is the
beneficiary of Mary’s $200,000 life insurance
policy. David is a dependant adult receiving
social assistance. Unfortunately, as you will soon discover,
Mary’s plan to minimize probate costs can produce
some undesirable side effects. Mary is a character in a fictional case study
presented at a recent seminar in Saskatoon hosted
by Advocis (The Financial Advisors Association of
Canada) for Leave a Legacy Week. At this event,
many professional advisors offered suggestions.
They collectively agreed that Mary’s estate
plan needs an overhaul. ** Because Mary rents an apartment in
Saskatoon, she could have designated her cottage
to be her principal residence as long as she
“ordinarily inhabited” the cottage. That could
have made most of the capital gains exempt from
income tax on her death. However, by adding 3 children’s names to the
title as joint co-owners, Mary has effectively
given away three-quarters of the cottage value to
her children. Because she no longer owns
three-quarters of the cottage, Mary’s principal
residence exemption can only apply to her
remaining one-quarter share of ownership. It is
conceivable that income tax on the capital gain on
the non-exempt portion owned by her children could
exceed what they save in probate costs. Other frustrating things can happen when there
are four names on a title. Co-owners can
predecease Mary, divorce, go bankrupt, have bitter
disagreements or lose mental capacity. Mary cannot
sell the cottage without the consent of her three
co-owners. ** Designating David’s three siblings as
beneficiaries of Mary’s $500,000 RRIF could leave
the executor stuck with a tax bill of as much as
44 percent or $220,000. Unfortunately for the
child who is executor there is no tax withheld at
source whenever a RRIF is distributed to
beneficiaries on death. That could force the
executor to liquidate other estate investments to
pay the tax bill. On the other hand, the RRIF beneficiaries might
be convinced to contribute cash to help the
executor pay the tax. They need to realize that,
if necessary, Canada Revenue Agency can trace the
RRIF payout and take the beneficiaries’ inherited
funds to collect unpaid tax owed by the estate.
** Under the laws of Saskatchewan, as soon as
David inherits $200,000 he will be cut off social
assistance until he has spent this money. Either
the Public Trustee or a sibling would have to
manage the money for him. As an alternative strategy, Mary can write a
new will to create a discretionary trust. By
ensuring that the trust would hold no more than
$100,000 for David, she can help him keep his
social assistance entitlement. She could appoint
one of David’s siblings as trustee to use the
trust fund to pay for nice things and special
treats that would enhance David's quality of life.
Even though this is a fictional case, it offers
some valuable lessons in estate planning. Thanks to Kevin Rogers of the Leland Kimpinski
law firm who was a panel member offering helpful
tips for the financial advisors who discussed the
case study.
Question: I am well into my 90s now and
am worried about running out of money before I
die. Others in my family have lived beyond 100!
Answer: Saskatchewan is 100 years old.
That's young for a province. For an individual to
be 100, that's considered very old. There were 3,795 Canadians aged 100 and over in
2001. Statistics Canada says centenarians are the
fastest growing age group in Canada. With rising
life expectancy rates, what financial advice is
appropriate if you were born in 1905? Your planning horizon is short. Be prepared for
rising expenditures for health care in your
remaining years of life expectancy. Having lived longer than the average person,
you may have depleted your retirement savings.
Will you sell your home to pay rent in an
"assisted living" seniors residence, personal care
home or nursing care facility? A 100-year-old would have converted RRSP
savings to a life annuity long ago. (The
Registered Retirement Income Fund option first
became available in 1978.) Fortunately life
annuity benefits continue for as long as you live.
But, since RRSP annuity benefits are not indexed,
they buy less and less each year. The government provides fully indexed Old Age
Security and Canada Pension Plan (CPP) benefits
that do maintain their purchasing power. Someone who is 100 today probably retired
shortly after the CPP started. Initially the CPP
was phased in with subsidized benefits outweighing
the contributions made from 1966 to 1976. A
Canadian now 100 likely contributed to the CPP
during that special 10-year start-up period.
If your taxable income is low, you might
qualify for some Guaranteed Income Supplement
(GIS). Submit an application to begin receiving
benefits. Then, once you've begun to receive GIS
benefits, the government simply checks your tax
return each year to verify that you continue to
qualify. Each July, adjustments are made
automatically for the level of GIS benefits
payable for the following year. Besides reviewing your available income sources
and cash needed to cover health care costs, your
financial advisor should ensure that you're
claiming all the personal income tax credits that
you and your caregiver are entitled to. Are you
claiming all of your medical expenses? Read the questions on the T2201 Disability Tax
Credit Certificate. Lack of hearing or inability
to walk, for example, may mean you would qualify
for this tax credit worth up to $1,780 (using
Saskatchewan tax rates). Finally, your financial advisor should review
your estate planning objectives. Update your will. At 100, you may well have
outlived your executor and even some
beneficiaries. You can also explore ways to avoid
probate costs and simplify your estate by giving
away heirlooms and property while you are alive.
Update your Power of Attorney. Saskatchewan law
now allows you to include a successor in case the
first person you name is unable or unwilling to
carry on as your representative. As a way to
prevent elder abuse, concerned family members or
the Public Trustee can demand an accounting of
your finances. You may wish to name specific
individuals who alone would be entitled to receive
an accounting. An Advanced Health Care directive (living will)
can help your family make difficult decisions.
Should they discontinue life support if you have
no chance of recovering because of irreparable
brain damage? Consider setting up a joint bank account with
one of your children to pay household bills if you
cannot write cheques any more. Alternatively you
can authorize regular transfers out of your bank
account to automatically pay for cable TV,
telephone and condo fees, for example. Register your safety deposit box in joint
names, too. Prearranging your funeral makes things easier
for your family at a time of grief. You can save
income tax since you don't have to report interest
earned on money contractually earmarked to prepay
a funeral. Too often children become involved only after
an elderly parent has lost mental capacity, when
it's likely too late to change anything. Get your
affairs in order while your faculties are still
intact.
Question: I am worried about getting
Alzheimer disease and what might happen to my
will. Answer: Simply put, dementia limits
estate options. Take this story as an example.
Margaret, a 90-year-old nursing home resident,
has a will that bequeaths certain quarter sections
of farmland to three children. She leaves a token
$5,000 to her son, Eddie, who is the "black sheep"
in the family. Everything else that she owns
passes to her favourite charity. Unfortunately, as you will soon discover,
Margaret made a mistake when she wrote her will.
Margaret is a character in a fictional case
study that was part of a recent seminar hosted by
a group of charities for Leave a Legacy Week. At
this event, over 50 professional advisors offered
suggestions. They collectively agreed that Margaret's estate
plan needs a major overhaul but not much can be
done about it now. That's because Margaret has
dementia. She lacks legal capacity to write a new
will. The problem is that, before she wrote her will,
Margaret had already sold her farmland under an
Agreement for Sale. Although her name remains on
the titles she cannot actually bequeath the
farmland to anyone. She is no longer the
"beneficial owner." After she receives two more
payments she must transfer title to the purchaser.
Because Margaret had accumulated and invested
the proceeds from the Agreement for Sale she now
has a $300,000 bond portfolio. That's why Eddie
has been regularly visiting the nursing home and
has arranged several $1,000 "loans" from his
mother. Due to her dementia, Margaret relies on
guidance from her daughter, Deborah, to whom she
had given a Power of Attorney long ago. Deborah is
painfully aware of the flaw in Margaret's will
that effectively disinherits three children.
Incredibly, brother Eddie is the only one of
the four children likely to inherit. After the
executor pays taxes and funeral expenses, and
$5,000 to Eddie, the charity should inherit most,
if not all, of the $300,000 bond portfolio. While she is responsible for safeguarding
Margaret's $300,000 savings, Deborah wonders if
she can use her Power of Attorney to re-register
Margaret's bond portfolio jointly with right of
survivorship. The purpose of adding three names to
the account is to allow those children to inherit
the bond portfolio. After all the capital came
from selling the farmland they were supposed to
inherit. At the same time the three children plan to
enter into a side agreement so that the bond
interest can continue to be reported on Margaret's
tax return. Adding joint names would not trigger
capital gains. Upon death, the bonds would then be
shared equally with Deborah and two of her
siblings -- but not Eddie. What's wrong with putting the bond portfolio
into joint names? First, after Margaret dies and it becomes
necessary to probate her estate, Deborah would
need to hide the side agreement because it would
nullify the right of survivorship. If anyone ever
learns that the side agreement causes Margaret to
retain beneficial ownership in the bond portfolio,
then the $300,000 would fall back into the residue
of the estate and go to the charity. Secondly, if the right of survivorship works
and they do avoid probate, Deborah could be sued
by the charity for abusing her Power of Attorney.
Deborah has a duty as trustee not to take personal
advantage of her mother's money. By naming herself
as a joint co-owner of the bond portfolio, Deborah
would be overstepping the authority given under
the Power of Attorney. Even though this is a fictional case, it offers
valuable lessons in estate planning. Your children
cannot use a Power of Attorney to revise a poorly
drafted will once you lack mental capacity. A
better idea might have been to divide the residue
rather than bequeathing specific assets.
Question: I just found out that I am my
uncle's executor. His estate is pretty
simple, except for some rental property he owned.
What should I do? Answer: As executor, be prepared to cope
with lots of red tape. Two big challenges are
probating the will and finding cash to pay the
income tax. After the funeral, the executor normally hires
a lawyer to probate the deceased landlord's will.
You need a probated will to gain the authority to
transfer title to a new owner. Probate can take
several months. To probate a will, the executor must prove to
the court that it is the deceased's last will. A
witness must vouch for its authenticity. If
witness' signatures are illegible doodles it helps
if their names are printed clearly alongside their
signatures. The executor must compile a list of property
owned by the deceased. Include the value of each
item. You may need to hire an appraiser for the
rental property. The values of other assets such
as an automobile or a Registered Retirement Income
Fund (RRIF) are normally easier to find. The executor should wait until the court
documents (Letters Probate) have been issued
before selling real estate. Saskatchewan law also
requires the executor to obtain the consent of all
beneficiaries for the sale price before a deal can
proceed. Such red tape can cause prospective
buyers to become impatient. Other questions arise. Does the executor have
sufficient powers in the will to lease real
property or hire a tradesperson to do repairs?
Without power to borrow how can the executor renew
an existing mortgage? Did the deceased landlord specifically bequeath
the rental property to one beneficiary? Otherwise,
if the property was not mentioned, does the
executor divide everything equally among several
people? The estate lawyer can help answer these
questions. But the biggest challenge is usually
how to raise the cash to pay the tax bill. If one beneficiary wants title to the property
the executor must first be certain that the estate
has enough readily available cash to cover the
income tax owing by the estate. What income has to be reported when a
landlord dies? First, report the rental income from January 1
to the date of death. Secondly, the executor must report the accrued
capital gain by assuming the landlord had sold the
property for full market value immediately before
death. This capital gain is half taxable. Finally, report recaptured capital cost
allowance (CCA) from the "deemed disposition" of
the building. CCA deductions that had been claimed
can come back, like a boomerang, as fully taxable
income in the year of death if the building kept
its value. Calculating the tax bill is easy if the
landlord kept good records of CCA claims and
building improvements. In addition to reporting the capital gain and
recaptured CCA from the rental property, the
executor must also report the full market value of
any RRSPs or RRIFs as income on the deceased's
final tax return. Consequently, the income tax
owing on the terminal tax return can be the
largest tax bill of the landlord's life (assuming
no spousal rollover opportunity). Sometimes the tax bill is so big that any
beneficiary who wants to acquire the rental
property has to arrange mortgage financing to
inject cash into the estate. Too often, though,
the executor must sell the rental property to pay
the tax bill. In such a distress sale, expect
lowball bids. The landlord could have made the executor's
chore of estate settlement much simpler by using
life insurance to pay the tax. But it's too late
after the fact. The final step in settling the estate is the
distribution of cash after Canada Revenue Agency (CRA)
has issued the clearance certificate. Because of the red tape involved, the process
of winding up an estate, from probate to
clearance, is not easy and may take a year or
longer.
Question: My husband and I are both in
our twenties but we’ve been taught the importance
of estate planning. What do we need to do? Answer: When you write a will or buy
life insurance, it doesn't mean you are going to
die soon. Getting your affairs in order means that
you care for your loved ones. For a young couple, here is a 10-point
checklist for your estate plan. ** When buying a house, register the title in
joint names so that the survivor can become sole
owner with minimal expense. ** Review your life insurance coverage. You
could increase your total coverage to, say, 10
times your annual salary. With the cash death
benefits, the survivor can pay off the mortgage
and establish an education fund for children. With
enough cash the survivor, as a single parent, can
afford to spend precious time with young children.
** Joint ownership and life insurance are not
enough. Think of what could happen if both
partners die. Suppose you have no children and one
partner outlives the other by one month. According
to Saskatchewan 's Survivorship Act, the
survivor's parents could inherit everything. To
ensure both sets of parents inherit, you need to
have wills. ** Appoint guardians for your children in case
both partners die. Does that mean your guardians
can use your life insurance money to buy a new van
or renovate their house to accommodate your
children? If you are concerned how your guardians
might spend your children's inheritance, you can
separate the role of trustee from guardian.
Appoint a different person as trustee in charge of
the money. ** Would your orphaned children receive all
their trust fund money as soon as they turn 18? Is
that too young to handle a large sum of money?
Would they buy cars and host extravagant parties
with friends? You can do them a favour by paying
out their trust funds in several stages or at the
executor's discretion. To delay entitlement to the trust fund, you can
name an alternate beneficiary in case your primary
beneficiary fails to reach a specified age. ** Do you want to create one trust fund per
child? Or, would a single, large, discretionary
trust for all of your children be fairer? Pooling
the money may be appropriate if you have both
minor children and adult children. Your younger
children may suffer a greater loss of opportunity
when you die. Maybe they'd need more financial
assistance than an older sibling who is already in
the work force. ** Should you list your children by name or
should you simply refer to "my children" in case
you expect more to be born after you draw up your
wills? ** You would normally appoint your spouse to be
executor to settle your estate. In case something
happens to your spouse, name an alternate executor
such as a sibling. It is more of a chore than an
honour to settle an estate, especially for someone
who does not inherit. When your children become
adults, you can revise your wills to name them as
alternate executors. ** Did you know that you can transfer RRSPs
tax-free to minor children when you die? On the
other hand there's no such tax-free rollover to
adult children. Therefore, to be fair when you are
dividing assets, you may need to provide a formula
for your executor to adjust the size of tax-paid
bequests since they are worth more than taxable
bequests. ** Consider a life insurance trust to save
income tax. You can include a declaration in your
will so that a testamentary trust receives your
life insurance death benefits. In that way
investment income can be taxed at the lowest
bracket rate. Where the trustee also has
discretion to channel payments to children, to use
their basic personal credits, the family as a
whole can pay less tax. You should see your lawyer about changing your
will if these estate-planning ideas appeal to you.
Question: How should my RRSP's be
handled in my will? Answer: A Registered Retirement Savings
Plan (RRSP) helps you accumulate money to pay for
your retirement lifestyle expenses. But what
happens to your RRSP money if you die before
you've been able to spend it all? Upon your death, your RRSP money will pass to
the person whom you have designated as beneficiary
in the RRSP contract. If you don't designate a beneficiary, then, by
default, your RRSP forms part of your estate.
Therefore, whatever instructions you give in your
will determines who receives your RRSP. If you fail to designate an RRSP beneficiary
and don't have a valid will, your RRSP money
passes to your next of kin according to rules
found in provincial statutes. On your death Canada Revenue Agency will expect
your executor (the person in charge of
administering your estate) to pay income tax when
RRSP money passes to anyone other than a spouse or
dependent minor children. Suppose, for example, that your RRSP is worth
$50,000 when you die. The full $50,000 becomes
taxable income. Your executor would have to pay as
much as $22,000 income tax (using Saskatchewan
rates). You may be surprised to learn that there is no
tax deducted at source for payouts on death. That
means your executor needs to find sufficient cash
to pay your final tax bill. When you designate your RRSP beneficiary it is
best to name your spouse if you have one.
Otherwise, it's usually best to name your estate.
If you have no spouse and no dependants, you
could designate a parent, a friend or a charity as
your RRSP beneficiary. You are free to designate
anyone you want. By designating a beneficiary in the RRSP
contract itself, you can reduce probate costs
because your RRSP would bypass your estate. In
Saskatchewan, probate costs include court fees of
7/10ths of 1 percent of the value of the RRSP.
Including lawyer's fees, you can estimate that
total probate costs should be roughly 2 percent of
the RRSP value. A potential problem with designating a
beneficiary other than "estate" is that your
executor loses control of your RRSP money, which
bypasses your estate. Suppose you name your sister to be executor but
designate your brother as RRSP beneficiary. Your
sister may need to sell your car and other
property to raise the cash to pay the estate's tax
bill if your brother decides he won't help out.
How does the individual responsible for paying
the tax get access to the money? The simplest
solution is to let your estate inherit your RRSP.
Say how to divide your estate in your will. Even if you designate an RRSP beneficiary
contractually, your RRSP trustee may still insist
that your executor probate your will, especially
if the RRSP has a large value. Probating a will
means having the court verify that the will is
indeed authentic and it's the last one you wrote.
The RRSP trustee wants to be very certain that
there are no contrary directions in your will that
could overrule your RRSP designation. If you are married (or have been living with a
common-law partner for at least one year), then
you would normally name your spouse as your RRSP
beneficiary. In that way you can not only avoid
probate costs, but you can also defer the tax on
the RRSP until your spouse's death. Note that the same tax and probate avoidance
issues apply to a Registered Retirement Income
Fund (RRIF), a Locked-In Retirement Account
(LIRA), a Prescribed Retirement Income Fund (PRIF)
or a Life Income Fund (LIF). I have simply
referred to an RRSP throughout this discussion.
The next time you review your RRSP statements
look for the beneficiary designation. If you have
designated anyone other than your spouse or your
estate, please talk to your financial advisor
about your choice.
Question: What happens to your RRSP
money if you die before you've been able to spend
it all? Will the government take half of it --
some for probate fees and lots for income tax?
Answer: Upon your death, your RRSP money
passes to the person whom you have designated as
beneficiary in the RRSP contract. Otherwise, your
RRSP forms part of your estate, to be divided
according to the terms of your will. If you don't
have your own will, then provincial statutes
divide your estate (including RRSP) among
next-of-kin. ** A married person (or someone living in a
common law relationship over one year) usually
designates his or her spouse as beneficiary. Upon
death, the RRSP goes tax-free to the beneficiary
spouse. This "rollover" maximizes tax deferral and
tax-sheltered growth opportunities. What if a deceased RRSP owner has zero income
in the year of death? This is rare but can happen
when someone dies in January or has large losses
to deduct. In that case, would a full, tax-free
RRSP rollover be desirable? Why let the deceased
person's personal credits and losses go to waste?
If the executor recognizes the tax planning
opportunity, the beneficiary spouse might ask if
it's possible to renounce the RRSP designation in
order to inherit under the will. Most wills leave
everything outright to spouse anyway. Allowing the RRSP to fall into the estate might
give the executor a chance to report some of the
RRSP value as income on the deceased's tax return.
Using appropriate tax forms, it should still be
possible for the balance of the RRSP to be "rolled
over" to the beneficiary on a tax-deferred basis.
** A single or widowed person, who regularly
donates significant sums to charity, might wish to
designate a charity as beneficiary. Ordinarily
there would be a very large tax bill for the
executor to pay. After all, an RRSP (or RRIF) is
money that has never been taxed before. The entire
tax time bomb can be defused if your executor can
claim a charitable donation tax credit that equals
or exceeds the amount of tax owing on the RRSP.
** If you have no spouse, should you designate
your adult children as RRSP (or RRIF)
beneficiaries to avoid probate costs? Be careful.
The income tax bill can create a very awkward cash
flow problem for your executor. On your death the
RRSP issuer would promptly redeem your RRSP and
mail cheques to beneficiaries. The problem arises because there is no income
tax deducted at source. Your executor has to find
the cash to pay the tax. The money to pay the tax
might have to come from selling your house or
anything else. It might not be easy to convince all the
beneficiaries to contribute money back to the
estate to cover the tax bill. Think of the hard
feelings if one beneficiary has spent the
inheritance and leaves the others stuck with the
tax burden. What if one beneficiary predeceases the RRSP
owner? Beware that the RRSP would be divided
equally among the surviving designated
beneficiaries -- with nothing available to
children of the deceased beneficiary. The safest, simplest solution for a widow with
adult children is to designate "estate" as RRSP
beneficiary even though this costs the estate more
in probate fees. In Saskatchewan, probate costs
are roughly 2 percent of the value of the assets
governed by the will. That 2 percent may be a
small price to pay to preserve family harmony.
Designating "estate" also opens up the door to
more creative, long-term tax planning if you
decide to establish testamentary trusts in your
will. Rather than inheriting money outright, the
adult children can keep their money in separate
income-splitting trusts. The resulting annual tax
savings can recoup the probate costs. Take time to review your RRSP or RRIF
beneficiary designations.
Question: The news is full of stories
about the elderly being scammed. What can I
do to protect myself? Answer: Financial abuse of the elderly
is a crime affecting about two percent of seniors.
The average loss is about $20,000. If you are vulnerable, what can you do to
protect your retirement savings? You can be vulnerable for many reasons. A toxic
buildup of a drug can cause confusion, for
example. Mental capability can deteriorate
following a change in medication. Even if your mental faculties are intact, you
can still be vulnerable if you lack mobility and
need someone to help you with your finances.
Here are some ways to arrange your finances to
help protect yourself from financial abuse. ** Have monthly Old Age Security (OAS) and
Canada Pension Plan (CPP) payments deposited into
your bank account by electronic funds transfer. Do
the same for other pension and annuity payments.
Ask Canada Revenue Agency (CRA) to deposit your
GST credits and tax refunds directly into your
bank account. By handling as little cash as possible, there
is less opportunity for your money to mysteriously
go missing. ** You can also pay your bills by electronic
funds transfer. Arrange to pay for your telephone,
cable TV, electricity, medical insurance premiums,
condo fees and property taxes by automatic
withdrawals from your bank account. Rather than writing cheques for quarterly
income tax installments, you could instead arrange
for the equivalent amount of tax to be deducted at
source from your pension payments, such as OAS and
CPP, for example. ** Rather than carrying cash or plastic cards
when purchasing medications at the drug store, you
can leave your credit card number with the
pharmacist so that your payments can be processed
automatically. ** Either destroy your credit cards or else
lower the limits on your cards in case they are
used for the wrong reasons. ** Consider buying a life annuity that will pay
you a guaranteed monthly income for the remainder
of your life. Maybe it is time to convert your
Registered Retirement Income Fund (RRIF) or
Prescribed Retirement Income Fund (PRIF) into a
life annuity. You win if you live a long time; the
insurance company wins if you don’t. The important
thing, though, is to make sure the annuity cannot
be redeemed so it cannot be misappropriated by
anyone who may want to take advantage of you.
** Buying your cemetery plot and prepaying your
funeral can help prevent someone from embezzling
that money. In Saskatchewan, new rules protecting
vulnerable adults were introduced in 2005. When
you or your family suspect that financial abuse is
occurring you can make a written request for your
bank to freeze your account and only process
payments for necessities. Instruct your financial
institution to freeze your investments and not
allow them to be redeemed. Beware of joint bank accounts. Too often
seniors are convinced to set up a joint account,
as a way to avoid probate fees costing thousands
of dollars. “Actually,” says Ronald Kruzeniski,
Public Guardian and Trustee of Saskatchewan,
“probate fees are cheap insurance to make sure you
have money when you need it.” If your bank account is already in joint names
and you question how it got into joint names, you
can make a written request for your bank or credit
union to suspend either party dealing with the
account until there is a settlement agreement.
Instead of having a joint bank account, you can
appoint someone you trust to act on your behalf by
using a Power of Attorney. Although this legal
document can give your representative (attorney)
full access to your investments, you can add a
safeguard by appointing certain family members who
can demand a quarterly accounting. You can also
stipulate that failure to provide the accounting
within a certain number of days will cause the
Power of Attorney to be revoked. For advice on protecting yourself or a loved
one from financial abuse, see your lawyer.
Question: How do Charitable Remainder
Trusts work? Answer: A Charitable Remainder Trust
(CRT) is a way to make a large donation to your
favourite charity without sacrificing a good
source of income. You would place your investment portfolio (or a
rental property) in trust for your favourite
charity. The property goes to the charity when you
die. Meanwhile, you'd receive a steady cash flow
from the CRT for the rest of your life. Suppose, for example, that you own a stock
portfolio worth $150,000. Assume that someone your
age should expect to live 10 more years on
average. Also, let's assume a 10-year government
bond yields 4 percent interest. Under these assumptions you would be entitled
to a charitable donation receipt for about
$100,000 for a gift worth $150,000 that is
expected to occur when you die, 10 years later.
What are the advantages of a CRT?
** You'd simplify your estate and reduce
probate costs. The ultimate ownership transfer
would be prearranged by the CRT contract rather
than through your will. The CRT property bypasses
your estate. ** You could take advantage of today's low
interest rates. The lower the discount rate, the
bigger the donation receipt you can expect. ** As soon as you enter into the CRT
arrangement the charity issues a large donation
tax receipt that you can claim immediately. You
can carry forward the tax credit for up to 5
years. ** Of course, you'd trigger some taxable
capital gains on appreciated securities by placing
them in the CRT. However, because you'd retain an
"income interest" in the CRT, capital gains are
reduced. A good time to set up a CRT is when you are
already thinking of making a change in your asset
mix, from stocks to bonds (or from rental
properties to bonds). Setting up the CRT can help
cut the tax bill on your capital gains. The big
charitable donation receipt should also further
offset much of the tax bill on any taxable capital
gains. ** The CRT trustee could select income-yielding
securities, such as bonds or income trusts, to
provide you with cash flow for as long as you
live. What are some disadvantages of a CRT?
** Family heirs could be upset. Fearing the
loss of their inheritance they may well question
the legality of the CRT if they suspect there was
undue influence or you lacked mental capacity.
To pacify jealous heirs you could use the
estimated $44,000 of tax savings (from the
$100,000 donation receipt) to buy a new life
insurance policy and designate your heirs as
beneficiaries. Yes, it is still possible for
healthy applicants in their eighties to get life
insurance. Of course, only very healthy donors are
likely going to consider a CRT anyway. ** Can you actually make full use of a $100,000
charitable donation receipt? Remember that you can
only carry unused donation credits forward 5
years. It may be tempting to accelerate RRIF
withdrawals, keeping in mind that you would
trigger Old Age Security (OAS) clawback when your
income exceeds $60,806. ** A CRT is not as flexible as making a bequest
in a will. With a will you can keep your heirs
guessing by changing your beneficiaries once a
month if you really wanted to. To be eligible for a donation receipt your CRT
arrangement must be irrevocable. Once set up, the
CRT prevents you from ever using the capital to
buy a condo or to pay for long-term care, for
example. The capital belongs to the charity after
you enter into the CRT arrangement. You are only
entitled to income. ** The charitable donation tax credit would
have no effect on OAS clawback, which could easily
be triggered when you report lots of capital gains
in the year you set up your CRT. Before you establish a Charitable Remainder
Trust ask your financial advisor if it is suitable
for you.
Question: Is a power of attorney really
necessary? Answer: Anybody, young or old, can
suffer from mental incapacity due to a head injury
or disease. But more likely we may lose control
over our personal finances due to dementia in old
age. If that happens to you, who would pay your
bills, make insurance claims, sell your car or
file your tax returns? Be prepared for mental incapacity by signing a
power of attorney to appoint someone you trust to
look after your property and investments. Are you thinking of filling in a stationery
form or using computer software to draw up your
own document? If so, please note that
Saskatchewan’s Powers of Attorney Act was
extensively revised as of April 1, 2003. New
formalities are required to make an enduring power
of attorney (EPA) document valid. Saskatchewan now prevents certain people from
being appointed as your decision-maker. Ask your
lawyer about a “springing power of attorney” that
allows you to specify when the power can be used.
New statutory safeguards make your appointed
decision-maker much more accountable to the rest
of the family. According to Saskatoon lawyer Allan Haubrich of
Robertson Stromberg the new rules remedy some
deficiencies. Suppose you’ve named your spouse to be your
attorney. Now you can name a child, for example,
as an alternate decision-maker in case your spouse
dies, signs off in writing or is declared mentally
incompetent. Under the rules that existed before
April, if your spouse were to die while you were
incapacitated in a nursing home, your power of
attorney would have been useless. Now your power
of attorney is still good if you’ve named an
alternate. Suppose you’re a widow and you’ve named two
children to be your co-attorneys. By having them
act together you have some protection from
financial abuse. Under the old rules, if one
co-attorney died, the power of attorney would have
become unusable. Now a power of attorney can
provide for the surviving co-attorney to act
alone. What happens if you become incapacitated and
you don’t have a power of attorney? There is a Saskatchewan statute designed to
protect your finances if you become a helpless
dependent adult. It’s called the Adult
Guardianship and Co-Decision Making Act. A
concerned family member can apply to the court for
authority to control your finances. Alas, the
legal procedures may take several months and can
cost thousands of dollars. Proving mental
incompetence can also be humiliating. If no family member wants the job, the Public
Guardian and Trustee would take over once a
certificate of incompetence has been issued under
The Mentally Disordered Persons Act. Doing nothing is expensive, time consuming and
embarrassing. Compared to the cost of an EPA
prepared by a lawyer while you have capacity, you
can expect to have to pay 30 times as much to have
your spouse appointed as your decision-maker after
you’ve lost your mental capacity. Getting the court and medical paperwork can
take months. With an EPA, your chosen
decision-maker can act immediately. What if you’d rather keep your finances private
and remain as independent as possible? You may
feel you’re not ready to give a family member
carte blanche to meddle in your affairs. If that’s the case, you might hire a
professional portfolio manager for your
investments and set up electronic funds transfer
arrangements to pay for rent, utilities, telephone
and cable TV payments. Still, no matter how hard you try to think of
every asset and every contingency, there’s usually
some aspect that you simply cannot adequately
prearrange. For instance, if you’d rather not
convert your Registered Retirement Income Fund (RRIF)
to an annuity, someone still needs to make ongoing
management decisions. A power of attorney puts someone in charge to
look after those things you cannot otherwise
pre-arrange. Why not choose your own back-up
decision-maker instead of leaving the choice to
the court?
Question:
I would like to leave some money to
charity when I die. However, I’m not sure I can do
that if I am ill and require nursing assistance or
care of some kind in my later years. Answer:
Insurance can keep long-term care costs
at bay. If you have a million dollars of savings you
may not need to buy insurance. You can afford to
pay for nurses and helpers to come into your home
when your health fails. In other words, you can
self-insure. If you’re broke, you’ll likely have to rely on
family. Guaranteed Income Supplement can help pay
rent in a government-subsidized nursing home.
But if you’re somewhere in the middle, with a
RRIF worth, say, $200,000, then long-term care (LTC)
insurance can help pay the cost of care at home or
in a nursing home. With coverage of, say, $50 per
day for a period of five years, you can remove
some of the burden you’d otherwise place on your
family. Having LTC insurance could mean you
wouldn’t rapidly drain your RRIF. When you’re earning a paycheque, you may see
little need for LTC insurance. If you’re
struggling to make RRSP and RESP deposits and
repay a mortgage then LTC insurance may rank as a
low priority. But suppose your grown children have left home.
After you’ve retired you no longer have disability
insurance. You might not need life insurance. You
may have no more RRSP contribution room. That’s
when you may decide to buy some LTC coverage --
especially if you believe you don’t have enough
savings to self-insure. Did you know that two-thirds of caregivers are
wives and daughters? Would you want them to
sacrifice their careers to look after you? Women
caregivers lose out at work by forgoing
promotions, pay raises, pension contributions and
training opportunities. Actually, less than one percent of households
in North American have LTC coverage. It’s still
quite new. Only a handful of companies in Canada
offer LTC insurance. They are Clarica, RBC, Penn
Corp and Manulife. Many people simply cannot qualify for LTC
insurance. You need to be healthy when you apply.
Your application will be declined if you show any
signs of degenerative disease such as Multiple
Sclerosis, Parkinson’s or Alzheimer’s. What should you look for in a LTC insurance
policy? ** What are the benefit triggers? Your policy
describes the “activities of daily living” in
detail. Coverage typically begins when you need
“substantial physical assistance” with certain
activities such as bathing or dressing yourself.
Look for a definition of “substantial assistance.”
** Is there inflation protection? What if you
get a policy at age 50 but you don’t make a claim
until you’re 85? What if inflation averages 2
percent per year over the intervening 35 years? By
the time you make your claim, LTC costs could
double. Some policies let you buy additional
coverage, without any medical questions asked, at
certain policy anniversaries. ** What happens if you forget or can’t afford
to make your premium payments? Does coverage cease
immediately? Your policy should provide a paid-up
benefit to extend the coverage for a certain
number of months. In fact, some policies become totally paid-up
after 20 years. You may also want to make sure
your premiums are waived after you have made a
claim and have started to receive benefits. ** Does your LTC insurance policy offer home
health care options? Typically, most companies
only reimburse “facility care” – that is care
provided by a nursing home. Normally you’d have to
pay a higher premium to also be reimbursed for
care provided in your own home. Another type of coverage does not reimburse you
for particular receipts you submit. Instead, your
policy can pay you a flat monthly allowance that
you can spend as you please. You decide whether to
pay for home care by a family member or for care
in a nursing home. Examine the options. Your insurance advisor can
tailor your coverage to suit your particular
needs. The time to talk about long-term care
insurance is well before your health deteriorates.
Question: We have a cottage that we longer use
and were thinking of leaving it to our children in
our will. Friends have suggested this isn’t a good
idea. Could you give us some advise? Answer: The family cabin at the lake can be a
divisive estate issue. Which of your children will
inherit the cabin title after you die? What if your children cannot agree whose name
should be on the title? A child who resides
outside the province might show little interest.
But what if the one with a young family really
wants the cabin but cannot afford to buy out
siblings? Ideally, if your estate is big enough, one
child can take the cabin title. Treat the other
children fairly by giving them cash or other
property of equivalent value. Putting all your children’s names on the title
only creates new problems. How would they share
the cabin? How do they allocate the cost of upkeep
and property taxes? By planning ahead, you can avoid potential
conflicts. Why not have your lawyer make a draft
will? Invite comments on the choice of executor
and ask who wants the family cottage. Say you have three children. What if the value
of the cottage exceeds one-third of your estate
and your will gives children one year to buy the
cottage from the estate. But how do you supply the cash? One way is to
own life insurance on the lives of both parents on
a joint last-to-die basis. The child who wants the
cabin can pay the premiums and be designated as
the beneficiary. When the second parent dies, the
will would make the title transfer only after the
insurance proceeds are paid to siblings who don’t
want to inherit the cabin. What about the tax bill when there’s a shortage
of cash or other liquid assets in your estate?
Maybe your executor will have to sell your cottage
anyway. Suppose your adjusted cost base (ACB) was
stepped up to $40,000 because of the exemption
claimed on your 1994 tax return. Counting $10,000
improvements since then your ACB is $50,000.
Because of the good location of your cabin, a
realtor knows a wealthy Albertan who’d pay
$110,000. Even without any actual sale, Canada
Custom and Revenue Agency charges tax on the
accrued gain -- as if the cottage had been sold
just before you died. How much tax must your estate pay? The capital
gains inclusion rate is now 50 percent. That means
$30,000 taxable income. At the top (45 percent)
rate in Saskatchewan, your estate owes $13,500
tax. Of course, if you have a surviving spouse, the
tax is deferred. If your executor can claim the
principal residence exemption (say, because you’ve
been renting an apartment in the city) there would
be no tax to pay. There is no tax-free rollover when children
inherit your estate. The $13,500 tax must be paid
in cash before your executor can transfer the
cottage title. Your executor might look for money in your RRSP
to pay the tax. But what if your RRSP is entirely
invested in equities? What if you were to die in
the midst of a long-drawn-out bear market when
stock prices are temporarily down by 30 or 40
percent? As if the depressed value is not bad enough,
the RRSP itself would also be fully taxable on
death (assuming no spousal rollover opportunity).
If your RRSP is worth $60,000 at your death then
add $60,000 taxable income to your final return.
At 45 percent, that’s another $27,000 of tax to
pay. An all-equity RRSP is not the best source of
cash to pay a tax bill during a bear market.
To remedy this potential cash flow quandary,
you can buy more life insurance on the lives of
both parents on a joint last-to-die basis.
Designate “estate” as beneficiary so the executor
has immediate cash to pay the tax bill. Rather than leaving the problem until your
death you might want to simplify your estate
sooner. Sell your cottage to one of your children.
Pay the tax and get it over with. Ask a
professional about an “estate freeze.”
Question: My spouse died several years ago and
I am now blessed with having a second chance at
marital bliss. As this is a second marriage for
both of us and we are both in our 70s, do you have
some estate planning advise? Answer: Estate planning can be especially
difficult in second marriage situations. It’s tough enough to deal with thorny family
property issues while you are alive; but it can be
overwhelming for a blended family to divide an
estate after a spouse dies. Meet a fictional couple -- Bernie and Lucy --
who are facing these issues. Bernie, 77, and Lucy 74, have been married for
10 years. It is a second marriage for both of
them. They each have grown children from previous
marriages. After her first husband died, Lucy sold
her home and invested the money. Now they live in
Bernie's house. Bernie, also widowed, wants to leave his house
and his RRIF to his daughter when he dies. He
believes that his wife, Lucy, has all the
financial security she needs with her pensions and
investments. Bernie is worried that his house and RRIF will
ultimately go to Lucy’s heirs instead of to his
daughter whom he believes needs the money more.
Bernie’s lawyer advised him to discuss his
concerns with Lucy. Hopefully Lucy will sign her
consent to pass the house and RRIF on to Bernie’s
daughter. Bernie has several options. It’s important to
seek professional advice to choose the best
solution for Bernie, his daughter and Lucy. Bernie and Lucy’s estate planning would have
been simpler if they had signed a prenuptial
agreement. The best time to fully disclose their
respective assets, debts and pensions was before
they wed. Guided by independent legal advice, they
could have made business-like decisions about
their rights and responsibilities. Discussions about death, disability and divorce
may be the least romantic conversations Bernie and
Lucy will ever have. Unfortunately, commingled
assets and debts can become a source of irritation
in a blended family. By removing uncertainty,
Bernie and Lucy can improve their relationships
with their children and stepchildren. Let’s look at what people typically own and the
trade-offs that are required. How do you provide a
comfortable standard of living for your new
spouse? How do you also make sure that your
children ultimately inherit your property? ** Do you register the house title in joint
names to guarantee your spouse has a place to
live? Otherwise, to ensure your own children
inherit half the value, would ownership as
“tenants in common” be more appropriate? ** RRIFs pass to the individuals whom you
designate as beneficiaries. Any portion of the
RRIF you bequeath to a child becomes income that
is taxable immediately. But leaving the RRIF to
your spouse nicely defers the tax. ** You must designate your spouse as
beneficiary of any Locked-In Retirement Account
(LIRA) and Prescribed Retirement Income Fund (PRIF).
Pension legislation in Saskatchewan gives you no
choice. ** If the marriage preceded retirement,
employer pension plans can provide continuing
survivor annuity benefits to the spouse. On the
other hand, marrying after retirement normally
means that payments cease entirely at the
pensioner’s death. ** Non-registered savings can be held in a
testamentary trust that pays interest and
dividends to the surviving spouse for life. The
trust would pay tax at low-bracket rates. At the
survivor’s death, all remaining trust capital
would be distributed to the children. ** Life insurance can provide cash to children
on the first death to alleviate concerns that
there will be nothing left to inherit after the
second death. If you want to name your spouse as RRIF
beneficiary to take advantage of the rollover
opportunity, consider buying joint-last-to-die
coverage to guarantee that you will leave a
certain amount of cash for children on the second
death. ** Sometimes monetary items don’t cause
friction. The biggest concern may be who gets
personal belongings such as a ring or an heirloom
with great sentimental value. Either state your
wishes clearly in a letter of direction or make
the gift while you’re still alive. Now is the time to get your affairs in order.
