Estate planning: 3 worthwhile strategies you need to consider now

Richard and Jenn are concerned about protecting their family’s assets. They’ve worked hard throughout their lives, and want to make sure their estate plan reflects their wishes without burdening their children and grandchildren.

Richard and Jenn aren’t the only ones worried about keeping their assets in the family. Generally speaking, the main concerns I hear are about the tax bill and how to treat all family members fairly.

Here’s what I suggest to deal with these issues:

Make an inventory of your assets

When?

Even before you make your will.

Why? 

• To get an overview of your financial situation
• To draw up a list of your assets and debts
• To ease the burden on your loved ones when it’s time to draw up a list of your assets
• To estimate the net value of the assets you’ll be bequeathing

How? 

List your assets:

• Properties
• Investments
• Cars
• Works of art
• Jewellery

List your liabilities:

• Loans (mortgage, personal loans, auto loans)
• Credit cards

This inventory will help your advisor draw up an estate inventory to estimate the net (after-tax) value of your estate upon your death. Once this inventory has been drawn up, you can then choose the most appropriate way of passing on your assets, both to preserve your wealth and to plan the inheritance you’ll be leaving.

Since all assets are presumed to be sold upon death, it is essential to calculate the tax payable on the amounts in your registered plans, such as RRSPs or RRIFs, and on the appreciation or capital gains of certain assets since you acquired them.

These include:

• Investments in non-registered accounts
• Secondary residences
• Rental properties

This is an excellent way to organize a fair division of your assets. And since the invoice bill may be high upon death, having a clear picture of your situation is the best way to take the next step in estate planning.

To do this, here are 3 worthwhile strategies you should implement today:

1. Spousal rollover

Goal: Postpone paying tax.

How: If you leave assets to your spouse, such as an RRSP or cottage, the tax liability is deferred until they sell or donate the asset, or until their own death. This is known as “spousal rollover”.

Example: Leaving your RRSP or RRIF to your spouse upon your death will allow them to transfer the entire amount to their own RRSP or RRIF, and the tax will be payable the year the funds are withdrawn.

You can also leave your tax-free savings account (TFSA) to your spouse. They can then transfer these amounts to their own TFSA before December 31 of the year after your death without affecting their own contribution room, even if they have reached their maximum contribution limit. This way, the entire TFSA will grow tax-free, and withdrawals will always be tax-free.

2. Take out a life insurance policy

Goal: Cover part of the tax bill when your estate is settled.

How: The life insurance amount could be used to:

• Provide a tax-free amount to the designated beneficiary.
• Cover taxes on capital gains, so that the executor or liquidator doesn’t have to sell assets to generate liquid assets.

Example: You purchased your cottage 25 years ago for $50,000 and estimate that it will be worth $350,000 when you pass it on to your loved ones. If it’s not considered your principal residence at the time of your death, there will be tax to pay on the appreciation in value.

$350,000 (estimated value at death)

- $50,000 (amount paid at time of purchase)

= $300,000 (appreciation in value)

Half of this gain could be taxed ($150,000) at a personal tax rate of nearly 50%, representing a potential tax bill of up to $75,000 for your estate.

3. Make donations to charitable organizations

Goal: Reduce the tax to be paid on your income.

How: A bequest is an intention to make a gift that is included in your will. The advantage of this option is that you benefit from the bequeathed property during your lifetime. A bequest entitles the donor to a donation receipt for the value of the property donated, generating a donation tax credit that may reduce the estate’s tax liability.

There’s more to your estate than the money you’ve saved over the years. It can also include the following:

• Publicly traded stocks
• Properties (houses, cottages, businesses, land)
• Investments (registered, such as an RRSP or RRIF, or non-registered)
• Life insurance policies
• Collections, jewellery, works of art

Example: You can use your life insurance policy to make a donation to a charitable organization by naming it as the beneficiary of your policy. Life insurance proceeds are eligible for a tax credit in the year of your death, which can significantly reduce your taxes upon death.