For many people it doesn’t make sense to work a lifetime to accumulate assets; only to have at least 25% of much of their value confiscated at death or distributed otherwise than in accordance with their wishes.
Hard work is what built this country. The desires to succeed; to raise a family; build a business and excel at a profession are common hopes, regardless of one’s place or station of origin.
You see this commitment in the commuter lines of our major cities; the libraries of our colleges and universities; the extended work weeks of many Canadians and the stories that grandparents tell their grandchildren.
This motivation might spring from childhood deprivations or aspirations; from fears of security to dreams of legacy. No matter – it is real, as is the interest in its future retention.
Generally speaking an ESTATE is the net worth of a person at any point in time whether they are alive or dead. In other words an estate represent the sum of a person’s assets,legal rights, interests and entitlements to property of any kind minus all liabilities.
As Canadians we are privileged to live in an advanced and enlightened country. Accordingly we are all asked to pay our fair share of income tax, sales tax, capital gains tax, health tax, excise tax, corporate tax, etc.
We are encouraged to arrange our affairs in a manner which is in accordance with the laws of our land; but which can result in certain asset taxes being reduced or funded at a discount, thereby reducing the liabilities against our estate and maximizing our estate or net worth.
Paul Brent’s April 3rd, 2017 Globe & Mail article entitled: “Ways to benefit heirs, not the taxman“, addresses certain estate planning strategies.
Here are a few tools:
Wills
If you don’t have one – the government has one for you, or more to the point, for your heirs. This represents the architectural renderings of your life’s work – don’t be like so many Canadians who don’t.
Family Trusts
Allow the creators or inheritors of family wealth to determine how the money is to be passed to succeeding generations; thereby preventing family legal challenges and supporting confidentiality.
Estate Planning
Most assets (investments, corporate equity, property, and works of art) with the exception of principal residences are exposed to a 50% capital gains tax at death (or at second death of spouses) on 50% of the gain. This means that roughly 25% of any gain will be confiscated – thus if you have worked for 40 years to build an estate, your last 10 years of work could be lost. Estate planning refers to understanding the Family’s objectives reference the future direction (family, community, faith, etc. ) of their assets; determining the tax liability; arranging their affairs and anticipating their instructions in the most tax effective manner possible.
Insurance
The insurance principal allows the future tax liability to be paid at a cumulatively lower premium than the ultimate tax obligation owing, with the benefit being paid out tax free. In other words if a future liability can be funded at a guaranteed discount, one is reducing their estate’s net liabilities and therefore increasing the monetary value of their life’s work.
Estate Freezes
A small business owner is allowed a one-time capital gains exemption of $800,000 when a business is sold. Larger family businesses will face significant capital gains taxes at death or second death of a spouse. This tool allows share ownership to be structured in such a way as to “freeze” the owner’s value in the business and accrue future growth to their children.
Individual Pension Plan
Allows incorporated business owners to create a “super RRSP ” based upon a defined benefit type pension payout that can be shared with other family members and essentially serve as a tax effective pool of inter-generational assets.
Planned Giving
See Trusted Advice series:
Philanthropic Giving In Canada Part 1
Philanthropic Giving In Canada Part 2: Immediate or Deferred?
Philanthropic Giving In Canada Part 3: How & Choice
Philanthropic Giving In Canada Part 4: Tax Assistance for Charitable Donation
Philanthropic Giving In Canada Part 5: The Gift That Keeps Giving
Philanthropic Giving In Canada Part 6: Recap
So the “what” in estate planning is the combination of your objectives and net worth and the “why ” is …..as soon as you can. As Confucius wrote: “Life is simple; but we insist upon making it complicated”.
