Take Control of Your Estate

For some, estate planning is difficult to think about, let alone engage in. While we understand the vital importance of getting our finances and legal affairs in order for our heirs, few of us make the time. It’s easy to put off — and besides, the term “estate planning” can conjure up notions of greater wealth than we feel we possess.

But all of us will have an estate to pass on, and want our cherished beneficiaries — be they family or a favourite charity — to receive their inheritance according to our own intentions.

Estate planning is a process

Estate planning is more than simply preparing a Will. It begins with reviewing your current situation by listing both assets and liabilities. Assets include such things as your residence, investments and life insurance. Examples of liabilities are your mortgage, taxes due at death and funeral expenses.

You should also review your Will and powers of attorney (a Mandate in Quebec), both of which need to be current and easy to understand for your wishes to be clear and carried out properly. A Will can become outdated over time, so check at least every three years that it conforms to your current situation or, after a major family event such as marriage or birth of a child.

If you don’t have a power of attorney, consider having one prepared. If you become mentally or physically incapacitated, your Will does not apply, and only a pre-arranged power of attorney can guarantee someone you trust will be able to act on your behalf in overseeing your affairs.

The next step is to determine your goals and objectives for your estate. In some cases, tax planning will be a priority. In others, the timing of income to beneficiaries is essential. It’s helpful to walk through the possibilities with expert advice, develop priorities, and identify any gaps between your current situation and your ultimate goals.

Filling the gaps

For many, life insurance is a useful way to fill any gaps. Younger individuals without significant assets can use life insurance to create an estate that will provide their beneficiaries with security. Older individuals who have already accumulated other assets can use life insurance to help preserve the value of their estate. Often, taking the first step to prepare an estate plan is the most difficult. But once you get started, you’ll find it’s not as hard as you expected.

The Butler / Laing Group has the knowledge, resources and teams of experts to guide you through the estate planning process, and give you the comfort of knowing that you have prepared for the future.  Contact us at (604) 535-4749, or use our contact page.

Joint Accounts: What You Need to Know

Establishing a joint account may seem like a great strategy at first glance. However, there are many factors that must be considered before taking this action. This article will explore the use of ‘joint accounts’ and the related estate planning, control and tax issues and consequences related to these types of accounts.

What are Joint Accounts?

There are two types of joint accounts:

Joint Accounts with Tenancy in Common

With tenancy in common arrangements, each joint owner may or may not own equal parts of the assets. When one joint owner passes away, their share is left to their beneficiaries as designated in their will or the rules pertaining to intestacy.

Joint Accounts with Right of Survivorship (JTWROS)

The most common type of joint ownership is joint tenants with rights of survivorship where each individual has equal ownership and control of the assets. The joint owners do not have to be related, however, often they are spouses or parents/adult children. Upon the death of one joint owner, the surviving joint owners automatically receive ownership of the deceased’s portion of the assets. It should be noted that this type of ownership is not available in Quebec.

Why Open a Joint Account WROS?

There are several reasons people consider joint accounts. One being the administration of the estate becomes a lot easier because the “right of survivor” clause allows for the assets in the account to pass directly to the surviving joint owner. This results in the assets essentially bypassing the deceased’s estate. For this reason, many people open joint accounts to minimize or avoid having to pay probate fees (probate varies from province to province). Before placing accounts in joint ownership careful consideration must be taken. When joint accounts are set up any joint owner is able to withdraw funds from the joint account at any time and does not need the permission of the other joint owner to do so.

As well, assets held in a joint account may form part of creditor proceedings if one of the joint account holders becomes insolvent or declares bankruptcy. These issues raise many questions that should be addressed before setting up this type of account. For example, in many cases spouses may be comfortable with this arrangement now, but if they were to experience marital problems a few years down the road, would each spouse still be comfortable with the arrangement? What if son or daughter was to experience marital problems of his or her own?

Another major area of concern revolves around parents naming their children as joint
owners believing this is efficient from an estate planning perspective. The parents need to understand that they will give up full control of the account to their children? What if the children were to experience marital problems of their own?

Tax Implications – Deemed disposition and income tax consequences

The tax implications of setting up joint accounts are different if they are set up with adult children or spouses. This is discussed in more detail below.
According to CCRA, under the tax rules, a ‘disposition’ occurs when there has been a change in ‘beneficial’ ownership as opposed to a change in ‘legal’ ownership. While legal ownership implies ownership or title over certain assets, beneficial ownership differs in that it suggests that certain owners will derive some type of benefit (e.g. income) from the assets.

Where legal owners have beneficial ownership, each joint account holder is equally responsible for the tax liability and each owner will report earnings based on their portion of ownership (attribution rules may apply between spouses, as discussed below).

Setting up a Joint Account with a Spouse or Common-law Partner

If a joint account is set up with a spouse, the tax consequences of a deemed disposition are avoided because federal tax laws permit property to be transferred between spouses at the adjusted cost base (instead of FMV). In this situation, tax on the appreciated value of the asset can be deferred until the asset is actually sold. At that time, the gains would be attributed back to the spouse who contributed the assets to the account. Also, assets would pass directly to the surviving spouse, not pass through the estate and not be subject to probate.

Reporting income on joint accounts between spouses seems to cause many misconceptions. Although an asset may be a joint account for legal purposes, CRA looks to beneficial ownership (not legal ownership) when determining who should pay tax on any income generated in the account. So, although a married couple may have a ‘joint account’, income or growth is to be reported for tax purposes according to the proportion of funds that each spouse contributed to that account.
Setting up Joint Account with an Adult child (over 18)

A transfer of property to someone other than your spouse or common-law partner may trigger immediate capital gains tax. For example, if three adult children became joint owners with a parent, ¾ of the asset would be deemed sold by the parent. If the asset had appreciated in value the parent would owe taxes in the current year. The future capital gains and losses on the asset and any future income on the assets would be reported proportionately for tax purposes by the parent and the three children. Note that in the case of bank accounts, GICs, T-Bills or similar fixed income investments there would be no tax consequences as a result of a ‘deemed disposition.’ Taxes are paid on these assets each year.

The Controversy…CRA vs. provincial legislation

Controversy revolves around whether or not the strategy actually avoids probate fees on assets that have been placed in joint tenancy with someone other than a spouse, when no disposition for tax purposes was claimed at the time of the change. CRA states that if there was no transfer of beneficial ownership and no disposition for tax purposes when the child’s name was added, then on the parent’s death the entire asset was owned by the parent and therefore should be included in probate. In fact, the child is acting as a trustee and not as a joint tenant.

However, the legal community will argue that since the administration of probate is provincially mandated, it has nothing to do with income taxes or CRA. In fact, legislation states that the value of an estate for the calculation of fees ‘does not include…property held in joint tenancy’ since they pass outside of the estate. But this brings back the issue of CRA claiming that a true joint tenancy arrangement does not exist if you merely add a child’s name to the title of the asset, so reducing probate fees is not achieved. (Interpretation Bulletin IT-437R paragraphs 2 to 5)

Conclusion

While avoiding probate may seem like a great objective, individuals must be aware of the deemed disposition and attribution rules and must completely understand the control implications of establishing joint accounts. For this reason, transferring assets into joint ownership should never be done without professional tax and legal advice.  Contact us at (604) 535-4749, or use our contact page.

The Estate Reallocation Strategy

The key to effective estate planning is to minimize estate tax and maximize the amount of wealth that is transferred to the next generation. But how? Life insurance offers a unique strategy.

Investments and Taxes

While registered assets, such as those within RRSPs, RRIFs, and pension plans allow for immediate tax deductions and tax-deferred savings for retirement, any withdrawals will be fully taxed as income at your marginal tax rate. Furthermore, any income or growth from most non-registered investments such as GICs, stocks, bonds, real estate, and cash will be taxable to some extent, either as it is earned or upon the sale of the asset. Even upon death, you are deemed to have sold all of your assets at their fair market value for tax purposes, which can result in some significant liabilities for your estate.

Tax Minimization, Estate Maximization

Many individuals view life insurance as simply a necessary expense for managing risk. This is part of its purpose, but it can be much more than that. The Estate Reallocation strategy involves shifting a portion of your assets (say 5%) from fully taxable positions into a tax-exempt insurance policy, resulting in a
significantly enhanced estate plan.

The investments you make in a Universal Life or Participating Whole Life policy are exempt from accrual taxation during your lifetime. With this permanent, tax-exempt insurance, you can pay a premium that is far in excess of what is necessary; the difference is invested on your behalf and the growth is tax-deferred,
just like registered assets. This strategy also allows for the potential for tax-free retirement income.

Through the years, as your policy grows, your ultimate estate benefit builds as well. Eventually, the proceeds are distributed tax-free to your beneficiaries when you die, eliminating probate fees and delays.

Universal Life (UL)
In a UL policy, the investments are tracked separately from your insurance coverage. You are in control of how your additional premiums are allocated (restricted only by the investment options available to you) and you have a great deal of flexibility with respect to when and how those premiums are paid. Investments typically “mirror” equity and bond indices, and sometimes even reflect the returns of certain mutual funds. Unlike the underlying positions, the UL investments are not taxable as they grow, however there is a management fee, much like most mutual funds. Upon death, both the investment value and the insurance coverage are paid out to the beneficiaries tax-free.

Participating Whole Life (PAR)

PAR is a more inflexible product than UL, without as much transparency. The insurer itself invests your additional premiums – you have no control. The growth is achieved through the crediting of dividends, which strongly reflect the returns that the insurer achieves with your money, and which are used to buy additional amounts of permanent insurance coverage. The dividends have traditionally been quite stable, and cannot ever be negative. PAR policies fully guarantee the level of premiums you pay, the death benefit, and minimum level of cash value. The dividend scale in a PAR policy is the only feature that is
not guaranteed.

Summary

Tax-exempt life insurance allows individuals to maximize the estate value that they pass on to future generations. It allows for tax-sheltered growth and a tax-free payout at death that typically far outweighs achievable returns in a taxable investment account. Both UL and PAR policies are excellent products; whether you choose one or the other will be based mostly on your comfort level and investment style.

Contact us at (604) 535-4749, or use our contact page.