Estate planning: 3 tax strategies to implement today

Richard and Jenn are concerned about protecting their family's assets. They worked hard to get where they are today and they've started to wonder how they can plan their estate in a way that their children and grandchildren get what they need, without any extra fuss!

Jenn and Richard aren't the only ones worrying about keeping wealth in the family. Generally, the main concerns I hear surround taxation issues and keeping the family united after the fact.

Here are some steps you can take to keep things simple.

Inventory your assets This link will open in a new window.

When? 

Before even drawing up your will.

Why? 

• Get a clearer picture of your finances
• Keep track of your debts and assets
• Make things easier for your loved ones when the time comes to divide your assets
• Determine the net worth of the property you want to pass on

How? 

List your assets

• Property
• Investments
• Vehicles
• Works of art
• Jewellery

List your debts

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

An inventory will help your advisor evaluate your financial situation and assess the net worth (after taxes) of your estate after your passing.

When planning your estate, it's important to take into account the capital gains tax that's applicable to certain assets from the time you first assumed ownership of them. These assets are deemed to be disposed at fair market value. The following assets are subject to such taxation: 

• Non-registered investments
• Vacation properties
• Rental properties

This is an excellent place to start if you want to divide your assets in a way that's fair to your loved ones. Since taxes can start piling up after your passing, having a clear picture of your finances now is the best way to plan for the future.

Here are 3 strategies that you can implement today to get the biggest tax deductions for your buck: 

1. Roll it over to your spouse

Goal:  Defer taxes

How:  When you leave property to your partner, capital gains tax gets deferred to the moment they sell or donate that property, or to their passing. It's called "spousal rollover." 

Example:  If you leave your RRSP or RRIF to your spouse, they'll be able to transfer the funds to their own plan upon your passing. It's tax free as long as they don't withdraw it from their plan; they'll be taxed progressively every time they do.

You can also leave them your tax-free savings account (TFSA). Your spouse will be able to transfer a portion or the totality of your account into their own TFSA before December 31 of the year of your passing without affecting their own contribution ceiling, even if they've maxed it out already. That way, their TFSA will grow tax-free and withdrawals will not be taxable either.

2. Get life insurance

Goal:  Cover the taxes on the liquidation of your assets

How:  Use the money from your life insurance (death) benefits to: 

• pay taxes on your registered investments (RRSP, RRIF) if you didn't roll them over to your spouse 

or

• lower future capital gains taxes, i.e. for your cottage 

Example:  You bought a cottage 25 years ago for $50,000. Its estimated value upon your passing should be about $350,000. If the home isn't listed as your primary residence at the time of death, its appreciation will be taxable.

    $350,000 (estimated sale value)

-       50,000 (purchase price) 

=  $300,000 (appreciation)

Half of these capital gains could be taxed at nearly 50%. Your heirs could get stuck with a $75,000 tax bill.

3. Donate to registered charities

Goal: Save on income tax

How: The charitable bequest is a promise of donation you register in your will. The bequest will provide a tax credit equivalent to the value af the asset given to charity, and reduce taxes payable on your estate

Your wealth is not just about money you've been amassing over the years. It may also include the following: 

• Publicly traded shares
• Properties (houses, cottages, shops, land)
• Investments (registered as an RRSP or RRIF, or not)
• Life insurance policies
• Jewelry, artwork

Example: You can use your life insurance policy to donate to a charity, naming it the beneficiary of your insurance policy. The proceeds of the life insurance is eligible for a tax credit for the year of death, which may result in a significant reduction of taxes payable on death.