Tag: tax Planning
As estate litigators, we’ve seen a lot of bad estates and bad estate situations. The good news is because we know the bad, we can advise clients on how to avoid it and make their estate a great one. No uncertainty, no delays, no conflicts, no nasty tax surprises.
If you want to make your estate a great one, here are five essential elements that can make it happen.
- You’ve provided a clear path to the documentation
Ideally, your executor needs the original copy of your will – as do courts to ensure a smooth probate process. So, don’t make your will (and any other estate documents) hard to locate. Whether it’s stored at your lawyer’s office, or registered with the court, or stored in a filing cabinet at home, make sure that you and your loved ones remember where your will is and know how to access it. We discuss this issue in more detail here.
- Your estate assets are easy to identify
Don’t assume your family and your executor know what you own. Many of us scatter our assets and accounts more than we realize. Make a list of all bank and investment accounts, insurance policies, major assets, and any virtual assets of value and keep this list with your will or ensure your named executor has a copy.
- Your executor is trustworthy and can access the help they need
When choosing an executor, trust is essential as the person selected must be capable of acting impartially on behalf of your estate – regardless of their personal feelings about your estate and the beneficiaries.
While your executor doesn’t need to be an accountant or lawyer or investment advisor, they do need to be able to hire the expertise that your estate might require. In other words, they need to know what they don’t know, and have the common sense to seek out the tax, accounting, and legal expertise that may be needed.
This article provides a great “quick list” of things to consider when choosing an executor.
- Everyone knows what’s in your will – in advance
It is dangerous to assume that your intended beneficiaries know what is in your will and have no questions or concerns. Talking today about your intentions and your family members’ expectations lets you address any contentious issues while you’re alive – and avoid potential conflicts after you’re gone.
Even the most well-intentioned gifts – a charitable bequest, the china cabinet to a niece, the vintage hockey cards to a grandson – can lead to questions, hurt feelings and potential conflicts.
Don’t let it happen. Make sure that everyone who might be touched by your will at death knows exactly what’s in it.
- Tax planning in place – if needed
You’re deemed to have disposed of your capital assets at their fair market value when you die. This means your estate is liable for capital gains taxes on assets that have increased in value during your lifetime. Your executors may be forced to sell estate assets to pay for the tax liability – and a forced sale may mean the assets are sold for less than their fair value.
There are many strategies available to help cover an estate’s tax liability, from the use of trusts to the purchase of life insurance. Make sure you’ve considered whether tax planning is needed for your estate, and put a strategy in place if needed.
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A recent article featured in the New York Times highlights the need to reconsider estate planning strategies in light of developments in the law of inheritance taxation.
As our blog has previously reported, during his presidential campaign, Donald Trump vowed to eliminate inheritance taxes, then payable on the value of American estates exceeding $5.45 million, altogether. To the disappointment of many wealthy citizens of the United States, President Trump has not carried out his promise and, while the exemption has been increased, inheritance tax remains payable in the United States in respect of estates of a size greater than $10 million.
The New York Times reports that these changes to the exemption in respect of inheritance taxation are temporary in nature and that the measures currently in effect will expire in 2026. At that time, Americans (and individuals who hold property of significant value in the United States) may need to amend their estate plans with a view to tax efficiency.
Gifts, including testamentary gifts, are not typically subject to taxation in Canada. While there is no Canadian estate or inheritance tax, assets that are distributed in accordance with a Canadian Last Will and Testament or Codicil that is admitted to probate will be subject to an estate administration tax (also known as “probate fees”). Many of our readers will already be aware of the relatively new requirement (as of 2015) that estate trustees in Ontario file an Estate Information Return with the Ontario Ministry of Finance within 90 days of the processing of a probate application. In some circumstances, details regarding both traditional estate assets and assets typically considered to pass outside of the estate are required, notwithstanding that the latter category may nevertheless be exempt from probate fees. Some anticipate that the law in Ontario may at some point be amended to require further details regarding assets passing outside of an estate in Estate Information Returns and/or the payment of estate administration tax or other fees in respect of these assets. Like variations in the exemptions to American inheritance tax, changes to estate administration taxes may in the future necessitate amendments to existing estate plans with a view to limiting the taxes payable on the transfer of wealth.
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The recently proposed tax changes by the federal government have left many Canadians on edge. In particular, tax planning for those owning small business corporations is currently under attack, and changes seem inevitable. (You can get a good overview of the proposed changes here.) As we grapple with the implications of these proposed changes in Canada, it is worth noting that our neighbours to the south are in the midst of a tax battle of their very own.
The United States is currently contemplating the new GOP tax bill, which President Trump aims to sign into law by the end of 2017. While discussing the entire breadth of the bill is beyond the scope of this blog (not to mention my caffeine supply), I think one aspect of the proposed bill is particularly worthy of discussion: the planned changes to estate taxation.
Currently, Americans can leave estates worth up to $5.49 million without passing any federal estate or gift tax. Estates worth more than that are subject to a 40% tax. Congress has already raised the estate assets threshold many times over the years; for example, in 2000, 52,000 estates had to pay the tax; it is now down to 5,000.
Congress is looking to raise the threshold once again, with the proposed GOP tax bill doubling that threshold to $11.2 million in 2018 and then doing away with the tax entirely by 2024. According to the Washington Post, the reduction and ultimate elimination of the estate tax would cost American tax payers $172 billion over a decade.
This provision to slash (and ultimately do away with) the federal estate tax has received a lot of buzz, which is perhaps disproportionate considering the proposal’s negligible impact on the American budget overall. According to Congress’ Joint Committee on Taxation, the vast majority of Americans – 99.8%- are no longer affected by a federal estate tax. Of the .2% of Americans who are affected, nearly all those who do pay are among the wealthiest 5% of Americans, with the richest 0.1% paying 27% of the total tax. Thus, the crux of the debate over this provision would seem to rest on principle.
The Republican party argues that the estate tax, sometimes called a “death tax”, should be repealed because it is unfair by its very nature. In an interview with Fox News last Sunday, Speaker Paul Ryan (R- WI) stated the party position as follows: “We just think it’s unfair. Death should be not a taxable event, and we should not be stopping people from being able to pass their life’s work on to their kids.”
Democrats, on the other hand, are widely rejecting this provision, arguing that the proposed estate tax elimination constitutes a giveaway to the mega-rich, and that the money could be used more appropriately elsewhere.
Whether or not the proposed estate tax deduction will pass as part of the GOP tax plan remains to be seen; however, reports suggest progress is being made towards the goal of having a final bill signed into law by the President before Christmas.
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Suzana Popovic-Montag and Lindsay Anderson (Law Student)
The recent Ontario Superior Court of Justice decision in Ozerdinc Family Trust provides a helpful reminder as to the steps lawyers should take when advising trustees of a Trust with respect to the twenty one year rule against perpetuities.
Under the provisions of the Income Tax Act, capital property is normally taxed upon its “disposition”. In the case of a Trust, according to section 104(4) of the Income Tax Act, there is a deemed disposition every twenty one years after the original settlement of the Trust as long as the Trust holds property that is subject to the rule.
Such property includes: shares of a qualified small business corporation, qualified farm property, and qualified fishing property; marketable securities (including mutual funds and portfolio investments); real and depreciable property; personal-use and listed-personal properties; Canadian and foreign resource properties; and, land held as inventory. At the same time, certain types of capital property are exempt or excluded from the operation of the rule depending on such factors as residency or the nature of the trust.
In order to avoid and/or mitigate any taxes owing as a result of the deemed disposition, there are numerous planning options available to trustees including changing the residency of the trust, or entering into a corporate freeze. Trustees may also simply decide to do nothing.
Therefore, at a minimum, trustees must consider the date of the impending deemed disposition, as well as available tax planning measures to avoid/mitigate any taxes resulting from the deemed disposition. An obligation to advise trustees of these issues often falls on the professional who assisted with the settling of a Trust.
In Ozerdinc Family Trust, Justice Marc R. Labrosse found that the defendant law firm was negligent in failing to advise the trustees of the impending deemed disposition date, as well as the available tax planning measures available to them. Although the facts in this case are nothing novel, it nonetheless acts as a helpful reminder as to the steps lawyers should take when advising trustees of a Trust.
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