Tag: Estate Administration Tax
Were you recently appointed as Estate Trustee and needed to obtain a Certificate of Appointment of Estate Trustee (otherwise known as “probate”)? In that case, you need to know that an Estate Information Return must be filed with the Ministry of Finance within 90 days of the date of the appointment, setting out the assets in the Estate and their corresponding date of death values.
Typically when an Application for Certificate of Appointment is filed with the Court, a trustee may not have access to every asset of the Estate such that that the value of the Estate may not necessarily be accurate.
As a result, when an Estate Information Return is filed following the Certificate of Appointment being granted, all of the assets of the Estate must be listed. Depending on the values of the assets as confirmed by the trustee following the Certificate of Appointment being granted, a refund may be issued in the event that Estate Administration Tax was overpaid or additional tax may be payable in the event that the value of the assets as listed on the Application is lower than what was listed on the Estate Information Return.
The Estate Information Return may be audited by the Ministry of Finance for up to four years after it is filed. As such, it is important to retain all relevant records in the event of such an eventuality. Another important consideration is that the Ministry of Finance will not typically provide confirmation of receipt of an Estate Information Return so it is prudent to send it via means that would provide you with confirmation of delivery such as fax.
Finally, if a trustee finds out any additional information regarding the value of the assets of the Estate that has any bearing on the Estate Administration Tax payable, an amended Estate Information Return must be filed within 30 days of the new information being uncovered.
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Previous entries in our blog have covered inheritance taxes in the United States and other jurisdictions and President Trump’s proposed elimination of the tax altogether. Recent news coverage has zeroed in on how the family of the American president has allegedly evaded over half a billion dollars in tax liabilities that should have been paid on the transfer of significant family wealth.
Certain exceptions apply, but inheritance tax (more frequently referred to as “death tax” by President Trump himself) of 40% typically applies to assets of American estates beyond an initial value of $11.18 million. This means that estates up to this size are exempt from inheritance taxes, while the wealthy engage in complex planning strategies to minimize tax liabilities triggered by death (some of which mirror those used by Canadians in an effort to avoid payment of estate administration taxes on assets administered under a probated will).
Despite Trump’s previous statements that he has independently earned his fortune without reliance on prior family wealth, The New York Times reports that he and his siblings together received over $1 billion from their parents’ estates and that $550 million (55% under the old inheritance tax regime) ought to have been paid in taxes. However, in 1999-2004, during which years the estates of Fred and Mary Trump were administered, a rate of closer to 5% was paid in taxes. Whether the tax-minimizing methods used by the Trump family were legitimate or questionable remains unclear:
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes.
Sometimes, the line between legitimate tax-minimizing planning strategies and outright tax evasion can appear thin. It is important to avoid improper strategies that put the assets of an estate and their intended distribution at risk, and which may ultimately serve only to complicate and delay the administration of the estate.
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With his election victory in the not too distant past, President-elect Donald Trump is receiving extensive coverage in the media. Although the issues following him vary widely, as we at Hull & Hull LLP are estates lawyers, our focus is on the effect the President-elect is having in the estates community.
US Estate Tax
As previously blogged by Hull & Hull LLP, the President-elect is considering abolishing estate tax in the United States altogether. This is a departure from the current US model which sees married couples exempt for the first $10.9 million in their estate, with any surplus amount being taxed at 40%. In relation to this current model, recent polls suggest that in 2015 only 10,800 estate returns were filed with about half of those being taxable.
No date has been set for the anticipated repeal.
As well, the President-elect seeks to change capital gains owing at death such that if capital gains are held until death and valued under $10 million, they will not be taxed. Apparently, the rationale is to support small businesses and family farms.
As a result of this change, it is predicted that beneficiaries of large estates will be able to avoid paying capital gains on the inherited asset if they do not sell what they inherit. They can wait to pay the tax when there is an opportune time to do so. Otherwise, those beneficiaries who are in ready need of money, will have to sell the asset, thereby triggering the tax owing.
As a result of the changes to estates and capital gains tax, pundits predict the dawn of dynastic wealth (i.e. monetary inheritance that is passed on to generations that didn’t earn it) in the United States of America.
Now, given what we have learned about the President-elect’s platform regarding estate tax and capital gains tax, consider meeting with a professional advisor to ensure your estate plan is up to date.
Find this topic interesting? Please also consider these related Hull & Hull LLP Blogs:
- Blind Trusts – Who Controls Donald Trump’s Assets While President?
- Estate Issues for Americans to Consider Before Moving North
- S. Inheritance Tax Deductions for Surviving Spouses
Given the intrigue and extensive coverage that the current US election has had north of the border, it is only fitting that we dedicate today’s Hull & Hull Blog to reviewing the position taken by Clinton and Trump with respect to changes to estate tax.
A recent article in Forbes explains that current US laws exempt estates worth $5.45 million or less from paying estate tax. Estates valued higher pay 40% tax.
Hillary Clinton seeks to increase the taxes owing by the wealthiest from 45% to 65% based on the value of the estate, apparently the highest it’s been since 1981. Specifically, estates over $10 million would be taxed at 50%, those over $50 million at 55%, and those exceeding $500 million (for a single person) at 65% As well, Clinton also seeks to lower the exemption for estates valued at $5.45 million to $3.5 million.
Trump, on the other hand, seeks to eliminate the estate tax altogether.
According to the Wall Street Journal, the Republicans see the tax as “a patently unfair confiscation of wealth that punishes family-owned business”, while the Democrats view it as “a levelling tool necessary to combat concentration of wealth”.
In Ontario, while there is no inheritance tax, estate administration tax is charged on the total value of a deceased’s estate. Subject to certain exceptions, this includes the following assets: real estate; bank accounts; investments; vehicles and vessels; all property held in another person’s name; and, all other property, wherever situated, including goods, intangible property, business interests, and insurance proceeds.
As discussed in prior Hull & Hull LLP blogs, new provisions came into force on January 1, 2015, which requires payment of $5.00 for each $1,000, or part thereof, for the first $50,000 and $15 for each $1,000, or part thereof, of the value of the estate exceeding $50,000. There is no estate administration tax payable if the value of the estate is $1,000 or less.
I recently came across an interesting New York Estate Planning Blog, which attempts to address the valuation of intangible property in relation to the payment of estate administration tax.
Although it is rather straightforward that estate trustees are required to value assets of a deceased person, and pay taxes on those assets, the issue posed by the blog is, whether intangible assets are included in the payment of estate administration taxes, and if so, how a valuation is reached.
In Ontario, intangible property is deemed to be owned by the deceased at the time of death, and is therefore included in the calculation of estate administration tax. This has been made clear by the Ministry of Finance.
Valuing intangible property appears to be less clear though. Apparently, in the USA, disputes have arisen between estate trustees and the Internal Revenue Service (IRS), over the valuation of intangible assets, and to the amount of estate administration tax paid.
This dispute seems to be highlighted by the valuation of publicity rights. For example, the estate trustees of Michael Jackson’s estate have valued his estate at $2,105.00, whereas the IRS has attributed a value of $1.125 billion – therefore alleging that an additional $702 million is owned in estate administration tax (based on taxes and penalties). According to the LA Times, most of the dispute is over the price attributable to the King of Pop’s image, and his interest in a Trust which includes the ownership of Beatles songs, including Yesterday, Get Back, and Sgt. Pepper’s Lonely Hearts Club Band.
While most Ontario residents will not be burdened with valuing publicity rights, it is nonetheless important to consider the inclusion of assets, including intangible assets, in calculating estate administration tax, and that a proper valuation is obtained. Otherwise, in reviewing the payment of estate administration tax paid, the CRA may not ‘Let it Be’.
When a life insurance policy’s designated beneficiary is the estate of the policy-holder, the proceeds of the insurance policy will be paid into the deceased’s estate. Usually, the value of the life insurance proceeds are included in the value of the estate when applying for a Certificate of Appointment of Estate Trustee. But there may be a case for not including them.
The Ministry of Finance takes the position that the “total value of the estate is all of the assets owned by the deceased at the time of death, including…insurance, if proceeds pass through the estate, e.g., no named beneficiary other than ‘Estate’.” However, the Estate Administration Tax Act, 1998, S.O. 1998, c. 34 defines ‘value of the estate’ as “all the property that belonged to the deceased person at the time of his or her death”.
Therefore, some have suggested that there can be an argument made that, at the time of the deceased person’s death, they did not actually own the proceeds from the insurance policy. Rather, they owned the contract of insurance. The proceeds are only payable after death and therefore cannot be in the deceased person’s possession when they die. Whether this argument would succeed is uncertain, but it does raise an interesting question of a conflict between the clear wording of a statute and Ministry policy.
Considering that, as discussed in this Toronto Star article, Ontario has the highest estate tax in Canada, the issue of what is and is not to be included in someone’s estate for the purpose of determining the amount of estate administration tax is not insignificant. Currently, the rate of estate administration tax is $5 per $1,000 of the first $50,000 of an estate, and then increases to $15 for each $1,000 after that. Keeping an insurance policy outside of the estate could result in significant tax savings.
Of course, there are other ways to avoid including the value of insurance proceeds in your estate. This includes designating a beneficiary other than the estate. In that case the insurance proceeds would pass entirely outside of the estate and no estate administration tax is payable.
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Many third parties such as banking institutions and the Land Registry Office require probate as proof of authority to act as estate trustee. Unfortunately, the process of probate brings with it the widely unpopular Estate Administration Tax which is calculated on the value of the assets of the estate. As a result, estate planning methods that seek to remove assets from an estate and transfer them directly to a beneficiary are becoming increasingly popular. These include the transfers of title of real property into joint tenancies with rights of survivorship, adding joint account holders to bank accounts, designating beneficiaries in insurance policies, lifetime gifting and the use of multiple wills.
The challenge that some of these techniques brings is that when used in a way that does not ensure an equal distribution of assets among beneficiaries or when the intentions of the testator are later brought into question, they all too often become land mines associated with an increased likelihood of estate litigation.
The question becomes: what is probate and the resulting Estate Administration Tax really costing us? When avoiding probate at all costs begins to encourage risky behaviours that would not have otherwise been taken, we need to start to consider whether certain safeguards need to be implemented.
In looking to the rest of Canada, we can see in both Alberta and Quebec two alternative models. In Alberta, the probate process has created an upper limit or maximum fee that can be payable. This is currently set at $400.00 for estates of $250,000.00 or more. In this way, the incentive to attempt to distribute assets outside of the will has been largely removed.
In Quebec, they have gone even a step further. There is a flat fee for the probate of any estate, regardless of its value, which is currently set at $105.00. However, if the testator has obtained a notarial will, there is no fee at all as notarial wills are not subject to probate. The will is immediately valid upon the death of the testator and is in and of itself valid proof of the authority of the liquidator (i.e. estate trustee) to act.
Aside from the removal of incentives, there are other precautionary measures that can be taken. For instance, public legal education on the effects of lifetime transfers, joint accounts and joint tenancy could be beneficial. These estate planning tools can be effectively and safely used provided that the testator and any joint tenants or account holders have an accurate understanding of the consequences that can arise as a result of these types of transfers.
Furthermore, obtaining proper and independent legal advice beforehand is always recommended. The law with respect to joint assets is still evolving and can give rise to complex issues that can have significant ramifications for the testator, estate and the beneficiaries.
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