Paying taxes is part of life in Canada. Your estate will have a final tax bill to take care of when you pass away. An estate plan will minimize the amount you owe, leaving more for your beneficiaries. For effective estate planning, Ottawa financial planners play a crucial role in offering strategies for wealth preservation for high-net-worth families to reduce their taxes.
8 Ways to Reduce Estate Taxes: A Path to Financial Security
Your estate may have to pay income tax, capital gains taxes, and probate fees. Your executor will file income taxes for the year you pass away. Your income tax return will include the usual items like income, interest income, capital gains, and any deductions you’re eligible for. The amount of investment plans, such as RRSPs and RRIFs, will be added to your income.
The capital gains tax applies to the sale and disposition of your assets. When you pass away, the government considers all your assets to have been sold. Assets subject to capital gains, such as stocks in non-registered accounts, cottages, or investment properties, will be considered sold, and any capital gains will be taxed.
Probate fees are sometimes referred to as an estate administration tax. Probating a will has two main functions. The first is for a probate court to determine that the presented will is valid.
The second function is to confirm the legitimacy of the executor and that they are still willing and able to perform their duties. The fees for probating a will are based on the size of the estate, so they can be pretty substantial.
To reduce estate taxes, Ontario residents can take advantage of some strategies that are available to them. Some common ones are:
- A spousal rollover
- Designating beneficiaries
- Making assets joint with right of survivorship (JTWROS)
- Gifting assets while you are alive
- Setting up a trust
- Having multiple wills
- Putting a life insurance policy in place
- Charitable donations
A spousal rollover
A spousal rollover is a tax-deferred transfer of assets from one spouse to another. Spouses can use a rollover for assets like your Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and capital assets such as an investment property or cottage.
A spousal rollover can go to a spouse, common-law partner or trust set up for the spouse or common-law partner. No taxes will be owing on the asset until it is sold or redeemed by the beneficiary.
Designate a beneficiary
This option is available for registered plans like the RRSP, RRIF, and Tax Free Savings Account (TFSA). Designating a beneficiary allows you to bypass the will and avoid probate fees. With the exception of the TFSA, if the beneficiary is not a spouse or common-law partner, your estate will pay taxes on the amount of the plan that it pays to the beneficiary, but it will not have to pay probate fees.
With a TFSA, you can designate your spouse or common-law partner as a “successor holder”. The “successor holder” designation allows your partner to combine the plans when you pass away. The advantages are:
- They won’t have two plans
- It doesn’t affect their contribution room
- The assets continue to grow tax-free if they remain in the plan
You also have the option to designate a contingent beneficiary for your TFSA. If, for example, your partner is the successor holder and you pass away at the same time or within days of one another, the TFSA will bypass the will and be distributed to the contingent beneficiary.
Most non-registered investments don’t allow you to designate beneficiaries, although segregated funds are an exception. When you designate a beneficiary for your segregated funds, the money doesn’t go through the will. The funds will avoid probate and taxes.
Joint with right of survivorship
You can make some assets joint with right of survivorship. JTWROS means that if one party passes away, ownership passes to the survivor with no taxes owing. Some examples include a principal residence owned by spouses or common-law partners, as well as certain types of non-registered investments. These assets bypass the will, avoid probate and are not deemed disposed of until the survivor sells them or passes away.
Gift assets before you pass away
Gifting assets allows you to pay taxes before you pass away, potentially lowering your tax bill by spreading the gifting and associated taxes over several years, rather than having your estate pay taxes on all of them at once. These assets can include property, stocks, or other investments. If you gift your assets before you pass away, you will lose control over them because they’ll belong to the new owner.
Setting up a trust
Setting up a trust involves transferring your assets to a legal entity that will manage them for the benefit of your chosen beneficiaries. This can be a living trust (inter vivos) or a trust in your will (testamentary). The trust, not the individual, owns the assets within a trust, so it can continue after the grantor passes away. Trusts have many benefits, including avoiding probate fees and deferring capital gains taxes.
Create multiple wills
You can have more than one will in Ontario. Creating a separate will for property that doesn’t require probate will reduce your probate fees.
Life insurance
Life insurance is an effective tool to help with estate taxes. Proceeds from life insurance policies are not subject to taxes. The amount will go to the beneficiaries directly or to your estate; however, you will owe probate fees if your estate is the beneficiary of your life insurance policy. Your executor or heirs can use life insurance proceeds for many purposes, including paying estate taxes, providing a sense of security and peace of mind.
Charitable donations
Designating a portion of your estate to charity will give your estate a charitable tax deduction, which can lower your tax bill. It’s possible to gift some assets in kind, like property or stocks and bonds, in non-registered accounts. In addition to the tax deduction, your gift will benefit a cause you care about.
How to Plan Your Estate
Reducing taxes is an effective way to ensure wealth preservation for high-net-worth families. Our team of Certified Financial Planners at MDL Financial Group have been working with clients to create financial plans that fulfill their needs, including estate plans, for more than thirty years.
Together with our team of professionals, we will put a plan in place to meet your needs. If you would like to learn more about how we can add value to your estate planning, our Ottawa area advisors would love to work with you! Book an appointment online or call us at 613-416-9649.
We look forward to working with you!
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