The Core Issues Concerning Estate Taxes – Hull on Estates and Succession Planning Podcast # 91
Listen to The Core Issues Concerning Estate Taxes
This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the core issues surrounding estate taxes.
The Core Issues Concerning Estate Taxes – Hull on Estate and Succession Planning Podcast #91
Posted on December 18th, 2007 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #91 of our podcast on Tuesday, December 18th, 2007.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by
Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there, Ian. How are you today?
Ian Hull: I’m fantastic.
Suzana Popovic-Montag: That’s good. How’s your Christmas shopping coming along?
Ian Hull: Yeah.
Suzana Popovic-Montag: One week till Christmas. And the countdown begins.
Ian Hull: Yeah, good question and it hasn’t even begun the shopping, so the stores will hear from me. I remember one Christmas I shopped so fast that Visa called me because I had gone to 3 stores so quickly they thought that I was a thief and took my card. So that we have to look forward to.
But it’s a good time, I think, certainly this time of the year. And more importantly, we’ve been working through some of the estate planning questions. We got a little bit more complex as we moved along in this what we call “mini series” of tax planning the Wills and looking at the tax issues. And I thought today what we could do is just spend a few minutes really just doing a bit of an overview of what we’ve accomplished. I was struck by the fact that recently I was listening to Terry Fallis’ Inside PR and he and Dave Jones are great podcasters. We’ve talked about them in our podcasts from time to time and Episode #87 was one which they were talking about, and it sort of struck me about how we’ve been trying to approach this little mini series on tax planning. They were talking about what is social media and what sort of good does it bring to the process and what kind of…what are the positives and negatives. And clearly, the positive is hopefully an exchange of information that we want to foster and encourage. And certainly through this series, one of the things that I know you and I want to work on in ’08 to enhance this podcast is to get a little bit more exchange. We’re going to set up a 206 number or whatever, a call in number in the new year, encourage people to call in and make some comment if they think it’s appropriate. But, you know, when we were, you and I were working through these tax planning issues, we looked at sort of the three core areas that we find is the most feedback that we’re getting, from both our clients and from counsel and from the public so to speak, talking about avoiding estate planning tax, the Estate Act tax, which is a tax that everybody knows is the probate fee tax. That’s something that the feedback is consistent, although not on a 206 number, but in the informal discussion we have from day-to-day. Talking about how we deal with the capital gains tax. And then thirdly, how we manage US assets and sort of can start to consider the basic issues surrounding US estate taxes.
And so we hope that…Suzana and I certainly hope that we’ve managed to at least talk about these issues at a fairly sophisticated level in the sense that I hope we haven’t been too complex about the issues. But I think that we’ve tried to sort of cover these areas. And so I thought we’d spend a couple of minutes today just talking about, in general terms, those three concepts again and highlighting some of the core issues that we manage to work through over, I would say, I don’t know how many podcasts this mini series has been, but probably there’ve been 10 at least, I would think.
Suzana Popovic-Montag: That sounds about right, Ian.
Ian Hull: So remembering…I try to remember on the estate tax the first thing, being that let’s not…and I think that the core theme was with this tax planning series, was to refocus our attention to away from the soft issues and really spend some time on what are the tax issues. And clearly, avoiding the estate administration tax in Ontario tends to be a fundamental estate planning tool that people undertake. It’s 1.5% of the assets so, as we’ve continued to say, we don’t want to over exaggerate it.
Suzana Popovic-Montag: On our companion podcast last week, Ian, we know that David Smith and Allan Socken were speaking about probate and issues that arise in estate administrations. And one of the things that Dave said is that it’s just remarkable how often and how prevalent the fact that people are trying to avoid a 1.5% tax leads to a whole bunch of issues from a litigation perspective, that people wouldn’t otherwise have expected. It’s just really quite remarkable that when you really think about that number, it’s not as significant, I would suggest, as what other people might think. And the hoops and the lengths that people will go to, to avoid that, it just sometimes just doesn’t warrant it.
Ian Hull: Absolutely. Now remember we had some good discussions on how we manage the capital gains tax. And one of the ways that we talked about managing it was creating the trust environments, both testamentary trusts and inter vivos trusts, so trusts during the lifetime. So on estate administration tax, the simple answer to avoiding it in a large part is the primary and secondary Will, creating two Wills; one dealing with issues that will be taxed, and others dealing with assets that will not be taxes, typically corporations and the like.
Suzana Popovic-Montag: Another thing that we talked about was the use of beneficiary designations in either RRSPs or in life insurance policies and those kinds of instruments.
Ian Hull: So we don’t want to forget the two different trusts because that does help us defer the capital gain. And the capital gain, that terrible moment in time when finally Revenue Canada catches up to us and forces us to pay the tax that we owe. Now, again, just talking about what we wanted to accomplish on the trust analysis that we did was to emphasize that trusts that are created during lifetime create a different, entirely different tax structure too. And they don’t…you’re taxed at different rates as opposed to testamentary trusts. And so there is often an advantage to do the classic scenario where we have a husband and wife who are married. On the death of the first spouse, roll it over into a testamentary trust. It’s taxed at the lightest rate that can be taxed in Canada. That trust then stays alive, so to speak, during the surviving spouse’s lifetime. And then on his or her death, it finally falls into the next generation, the kids. And that’s a really simple but effective way of deferring the capital gains tax.
Another thing we talked about with the capital gains tax was how to offset it through uses of certain products, like you talk about when you can designate the RRSPs and so on, or a RIF or something to an individual who is going to receive a cottage, for example, say there’s a big tax hit. Another option we talked about was putting insurance instruments together even later in life, putting a joint last to die policy together where the two spouses buy a policy even late in life, where the last to die pays it out. And if you dovetail that into a spousal rollover or the spousal trust arrangement that we just talked about, you allow for easy transition into the next generation because you deferred the capital gains tax as far as you can and then on the death of the last spouse, a reasonable premium has been paid for the life insurance and then you have enough funds there, new funds essentially, to pay for this big capital gains tax.
The other area that we talked about finally was just dealing with and managing US assets. And the key issues there being that one that I always want to talk to my clients about is I make sure I want to double-check if they’re US citizens. And there was an interesting legislation that…I don’t know if it actually passed last week or not…but it was right up to the wire. In Canada, where if there was legislation that came about and it reminded me of these tax situations, it came about as a result of the fact this gentleman lived in rural Manitoba, was born actually in a US hospital. It was the closest hospital to where they lived in Manitoba. He was 40 years old now, so 40 years ago, his mother had to have, wanted to give birth somewhere and the closest hospital was a US hospital. He was born there and this gentleman, it’s a little off topic but it ties into the same sort of scenarios that we see in estate planning, and this gentleman ended up getting himself into some trouble with the law. And there was a threat that he was going to be deported or sent back to the US to face US time for his activity, his criminal activity or alleged criminal activity. And it was fascinating because the legislation in Canada now where they’re trying to fix that so that that little loophole won’t happen, that someone who really was almost a US citizen…he may or may not even remember that he was obviously a US citizen. And I use that illustration because we run into this a lot of the time with clients who will say, oh yeah, my Mom did live in the US when she was little. And then you find out, gee, you know, was she filing tax returns? Well yeah, because she got this small pension from this one thing and so she didn’t file or did file, depending on the circumstances, and it creates a whole new layer of estate planning problems. So our third part of this was dealing with, not just those kinds of creative situations, but dealing with that very prevalent situation where you’re either a US citizen or you have US assets and you live in Canada. How do you manage that from a tax planning standpoint? And I hope some of our talk about that was helpful as well.
So I think this was…today’s podcast was really to recap and I guess in some ways, we’re going to…we’re just putting together our next mini series right now. And in some ways, what we’re going to try to keep doing is encapsulating sort of core issues, talking about them over a series of podcasts to the extent that we can, so that we can make sure that we drill down on these issues beyond just sort of superficial comment.
Suzana Popovic-Montag: That’s great, Ian. Thank you very much for that summary. I think you really did sum up everything that we’ve talked about and I do look forward to our next mini series.
Ian Hull: So thanks again for listening to Hull on Estate and Succession Planning. It’s Ian Hull.
Suzana Popovic-Montag: And Suzana Popovic-Montag.
Ian Hull: Thank you.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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