Estate Planning and Tax Minimization
Will Your Estate Plan Protect Your Family’s Future?
Picture this—a couple, David and Marie, both age 65, living in Ontario. They’ve worked hard all their lives, raised four children, and saved diligently for retirement. Over and above their expectations for income from CPP and OAS, they’ve built up a substantial retirement income through pensions and RRSPs. On top of that, they’ve accumulated over $2.5 million in non-registered assets and $300,000 in TFSAs.
On the surface, everything seems perfect. But a looming question disrupts their peace: “What will happen to all this wealth when we die?” Taxes and probate fees are waiting in the wings, threatening to diminish the financial legacy they want to leave for their children. Is there a way to protect their hard-earned wealth from the taxman?
Why Taxes Could Take More Than You Expect
The couple knows that, upon death, their estate could be subject to a range of taxes—probate fees (in Ontario, formally known as the estate administration tax), taxes on the remaining assets in their RRIF upon the death of the surviving spouse, and capital gains taxes on their non-registered assets. With over $2.5 million in non-registered assets, they’re especially concerned about these taxes eroding their estate’s value.
This leads to the big dilemma—how can they transfer their wealth smoothly to their children, minimizing their estate’s exposure to probate and taxes? They don’t want their children to face unnecessary financial burdens, but they also don’t want to invite any scrutiny from the Canada Revenue Agency (CRA) by making any wrong moves.
Strategic Estate Planning Can Protect Your Wealth
The answer lies in strategic estate planning. By acting today, David and Marie can significantly reduce taxes and fees on their estate while ensuring their wishes are clearly documented. Here are some key strategies they have employed or can employ:
1. Joint Ownership with Right of Survivorship to bypass probate for their $2.5 million in non-registered assets. Given their other sources of income, they expect that their non-registered accounts will grow over the next decades, so as much as possible, they have made their accounts joint. This means that the surviving spouse can take over their non-registered assets without any tax implications.
2. Gifting Assets During Lifetime to reduce the size of their taxable estate. David and Marie have a few thoughts about this strategy. First, although they intend to give a portion of their assets to charity, the bulk of their estate will be passed onto their children. Since their projections, even in a worst-case scenario give them every confidence that they will be in good financial shape through the remainder of their lives, they plan to continue giving money to their children, a process they began a few years ago. Mindful of triggering capital gains taxes, they have decided to give smaller amounts each year rather than larger lump sums every few years.
3. Beneficiary Designations on RRIFs and TFSAs to avoid probate and ensure a smooth asset transfer to their children. David and Marie have named each other as successor annuitants on their RRIFs and successor holders on their TFSAs. They have also named their children as contingent beneficiaries on the accounts so that at the death of one spouse, the surviving spouse can be confident that the money will go to the right place.
They are aware that at the death of the surviving spouse, the RRIF assets will be distributed evenly among their four children, but they know that this will not avoid taxation since their children are independent adults. Instead, the estate will be responsible for paying those taxes, as the RRIF will be fully taxable. This is among the reasons why they converted their RRSPs to RRIFs and their Defined Contribution pension plans to Life Income Funds (LIFs) this year instead of pushing the transfers out to age 71.
4. Testamentary Trusts for asset protection and providing an alternative way to distribute the assets to their children. David and Marie had included a clause in their wills to establish testamentary trusts when their children were still minors. Now, however, they are wondering about the usefulness of this sort of tool. While they are confident in their children’s management of their finances and choices in spouses, they understand that a trust can be used to protect the assets from creditors or divorce claims among other purposes. They have not yet decided what to do because, among other things, they have to consider the additional costs and complications of having a trust.
5. Using Life Insurance as a tax-efficient way to cover the taxes due at death or provide an additional legacy. David and Marie are considering a joint last-to-die policy that would pay out after the surviving spouse dies. Since taxes like capital gains or RRIF withdrawals only become payable after the death of the second spouse, a joint last-to-die policy perfectly matches the timing of the tax liability. The death benefit is paid at the time when the estate needs liquidity the most to cover those taxes.
6. Charitable Giving to offset taxes with charitable donation credits. David and Marie have supported charities throughout their lives. Although they are more inclined to donate while they are alive, typically donating the securities with the highest unrealized capital gains, they also recognize that they can use charitable giving to reduce the tax on their estate. This could be especially powerful when the surviving spouse between them dies, since there may still be highly taxed RRIF assets that the estate would be responsible for.
The Assurance of a Well-Executed Estate Plan
With several of these strategies in place, and a few others that they are still deliberating on, David and Marie can experience a sense of peace, knowing that they’ve taken concrete steps to safeguard their family’s financial future. By minimizing probate fees and taxes, they can preserve more of their estate for their children and ensure their financial legacy gets passed on. They’ve also reduced the risk of disputes or CRA scrutiny by ensuring proper documentation for every decision they’ve made.
The stress of “what will happen” lifts as they see their estate plan taking shape. They’ve put into place safeguards that will protect their wealth, and that provide not only financial security but emotional relief.
What Happens Next?
As their children receive the assets from a well-constructed estate plan, the family will be spared unnecessary tax burdens. The probate process, streamlined through careful planning, will cost their estate little, and there is unlikely to be a prolonged legal or tax-related turmoil.
The final step? For anyone reading this who’s unsure about how to protect their own estate, now is the time to act. Sitting down with a financial planner and estate lawyer can turn tax concerns into peace of mind. Don’t let uncertainty be your legacy. Start planning today.
Appendix: Is there an Estate Tax in Canada?
In the U.S., people often talk about “estate tax”—a tax on the value of the estate at death. As is often the case, this language has made its way to Canada. However, Canada does not have an estate tax. Instead, when you die in Canada, your estate is subject to a combination of other taxes and fees:
- Deemed Disposition: At death, the CRA treats most assets as if they were sold, which can trigger capital gains taxes on non-registered investments.
- RRIF Taxation: RRIFs and RRSPs are fully taxable as income upon death unless they pass to a spouse or common-law partner, or to a dependent child who is either financially dependent due to a physical or mental impairment or under the age of 18.
- Probate (Estate Administration Tax): In Ontario, this tax applies to the value of the assets that go through probate, and while it’s not an estate tax, it can still reduce the amount your heirs receive.
This is the 265th blog post for Russ Writes, first published on 2024-10-07
If you would like to discuss this or other posts, connect on Facebook, Twitter aka X, LinkedIn, or Instagram.
Click here to contact me for an appointment.
Click here and select FinPlan30: Financial Planning in 30 min under Specific Questions for a 30-minute free no-obligation financial planning conversation.
Click here for a 2-week free trial of the Money Architect Financial Planning platform.
Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.