[Tax-Effective Estate Planning]
December 13, 2017
Hello everyone. Thank you for taking the time to join us today. On behalf of CIBC investors edge I would like to welcome everyone to the webinar with Jamie Golombek. My name is Ammar and I will be your host for this event. Now just a few things to note before we get started.
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Also, CIBC Investor Services Inc does not provide investment or tax advice or recommendation, so, everything we share today is for education purpose only. We are recording today's session and a link to the replay will be emailed to anyone that registered.
We are happy to present tax-effective estate planning, where we will share basic steps that will allow for tax-effective estate planning and minimizing taxes on debt. We are thrilled to have Jamie Golombek as our speaker. Jamie is managing director, tax and estate planning with CIBC. Jamie works closely with advisers from across CIBC to support their clients and delivery integrated financial planning and strong advisory solutions. Jamie is quoted frequently in the national media as an expert on taxation, (and) writes a weekly column called "Tax expert" in the National Post. With great pleasure, please... ...join me in welcoming Jamie Golombek.
Thanks very much and thanks to everyone joining us today on this webinar. We have people calling in from all over Canada and signed in online.
[Tax-Effective Estate Planning]
And I just want to make a comment, that of course, we are going to be talking in general terms about estate planning and there are some provincial differences so for example, in Quebec, where the civil court has quite a few differences, but I will try to point out throughout the webinar, where maybe the differences. I have used Ontario just as an example, a couple of times. But the basic themes that we are going to cover today are universal. In other words, when we talk about the importance of having a will and things like powers of attorney, well the names might vary from one province to the other, it's very important that, if you want to have a tax-effective will, that you get your own independent advice to make sure that the concepts that we are talking about today work perfectly in your province as well. So, let's get started. The impetus for this seminar is that we have received many, many questions over the past year on "tell me more about estate planning". Is estate planning as simple as just having a will or does that go beyond that? So, over the past decade or so we have been using what we call a ten-step program.
[The 10 Steps to Successful Estate Planning]
A ten-step to successful estate planning. What I am going to do today in the next 40 minutes is walk you through each of these ten steps spending a couple of minutes on each one, giving you my thoughts about this and how to make your estate the most tax-effective as possible. So, I will read them and we will go through them one at a time. First, designate a team of professionals. Number two, draw up the household balance sheet. Number three understand your life insurance needs, if any. Step four is draw up a will. Step five and six are powers of attorney, one for property and one for personal care. Step seven is minimize your taxes and other fees like many provinces have probate fees. We will talk about that. Number eight, keep track of your accounts and your important information. Number nine, review and update your plan regularly and finally number ten, share your plan with others. So, let's jump right in.
[Step 1: Designate a team of Professionals]
The first step is designate a team of professionals. Now there are many professionals that you may or may not wish to engage. From the legal adviser that could be your lawyer, your financial adviser if you have one, your banking representative, or your tax adviser. And I think it's important to have a team of experts that make sure that the effective plan is not just legally effective, but tax-effective as well. As you will see in few minutes there are certain assets that are desirable to leave to a spouse or a partner. There are other assets that might be more desirable to leave to charity. And it's only when you are getting the right advice when it comes to tax planning or estate planning you can achieve the most tax-effective estate possible. In fact, some provinces have rules that require you to leave certain amounts to certain children no matter what age. And that's why I think it's important to speak to a lawyer, get some legal advice, and make sure that you are doing works. So, it doesn't get challenged later on. That's the first step.
[Step 2: Draw up a Household Balance Sheet]
The second step is draw up a household balance sheet. This is a list of your assets and your liabilities. And right now, I am talking about listing every single stock or security that you own in your account. What I am referring to is making a list of all your accounts. So, I have for example an Investor's Edge account, this is the number. I have an RRSP account, TFSA account, I have bank accounts. So, you list all that on asset side. Similarly, with liabilities. If you have got lines of credit, got margin, if you have got, maybe family debt that's owing to someone else, it's important to put those on a piece of paper as well. And again, what this will do is give you an idea of how much you have, because not only can that help you decide how much or how large an estate that you can leave to others, that may also allow you to decide how much money you have for your own retirement because if you find out that at the end of the day, you have got excess money maybe you decide to spend some of that in retirement rather than leaving a larger inheritance. Of course, that is a personal decision.
[Step 3: Understand Your Life Insurance Needs]
Step number three is life insurance. Now life insurance has many needs and there are different types of life insurance. So, for example, if you have young children people that are dependent on you, it's a good idea in my opinion to have lots of cheap term insurance because if something happens to you, the amount gets paid in, tax-free, to your estate and can be used as a pool that can be reinvested and producing regular income to replace the income that you can no longer provide. And that's just a very simple basic use of term insurance. Other people are using life insurance to do more sophisticated planning. Some people are buying insurance to pay the estate expenses. So, this could be the tax bill on death, It could be probate fees, it could also be used to equalize an estate. So, for example, let's say you've got a vacation property and you've got two children. Child one lives near home, near the vacation property, child two lives overseas. Child one wants the vacation property. How do you equalize your estate if you want to be fair (to) the child leaving overseas? One of the most cost-effective ways to do it is using permanent life insurance where you buy a permanent life insurance policy that pays out a guaranteed amount on death, tax-free that can then be used to equalize the estate. The third idea that we have been seeing recently is some people decide that they want to buy insurance simply to leave an inheritance. So, in other words, they are going to enjoy the retirement, they are going to use every cent that they have, leave nothing to the kids, and one day they feel guilty. They say well, maybe we should leave the kids something. So, they buy permanent policy that pays out a tax-free inheritance directly to the kids. Goes outside the estate, provinces like Ontario and BC and Nova Scotia with high probate taxes, name the beneficiary on the life insurance, goes outside the estate. And there is no probate either. So, life insurance can play an important role in an effective estate plan.
[Step 4: Draw Up Your Will]
Step number four is probably one of the most important steps. Now, it's "draw up a will". A lot of people think that the estate planning is as simple as having a will. But as you can see today hopefully, there are ten steps as part of an effective estate plan and only one of them is a will. Now what a will does, is it forces, it legally forces - as long as the will is drawn up properly - your executor to follow your instructions. Let me give you an example. I am using Ontario - every province is different. If you die in Ontario - you die without a will - that's called dying intestate. Your spouse gets the first $200,000 of your estate and if you have got two kids, the remaining estate is divided one third to your spouse and two thirds to the kids, and you have no say whatsoever about the money going to the kids. So, it's very important if you want to say on what happens upon death, it's important to have a will and it's important to have a will drawn up by a lawyer, a lawyer - not just your real estate lawyer, not just your commercial and business lawyer, but a lawyer who specializes in estate planning.
[Planning a Will Involves...]
So, planning a lawyer involves a number of things. And I am joined now by my colleague Debbie Pearl-Weinberg, she also works at CIBC. She is a lawyer. She has over 30 years’ experience and she is going to comment a little bit about what planning a will involves and some of the things to think about. Debbie?
Thanks very much Jamie. So, yes, planning a will is definitely something that you need to do. You need to think about who you are going to name as the beneficiaries of your will. So, these are the people who you want to receive your property on your death. And it's up to you to decide who that is. You need to think about who you are going to name as the executors and trustees of your will. These need to be people that you not only trust are going to carry out your wishes but also, people who you think have the necessary skills and the necessary time to do what will be required at that time. Next if you have minor children, think about who you want to name as the guardians for these minor children in the event that you do pass away before they become adults. This is not a decision obviously to be taken lightly - you need to give some thought towards it. And I would highly recommend that whoever you are considering naming, you speak to them before you name them in your will to make sure that they are willing to take on this great honour and responsibility. Think about who you want to transfer assets to directly on your death. That means after you pass away they will receive those items outright. Alternatively, you can think about setting up what's called the testamentary trust. So that will be a trust that is set up on your death, and there can be a number of reasons for using a testamentary trust.
Thanks Debbie. Let's talk about some of those reasons right now. You see in the old days like two years ago, people used to setup testamentary trust for tax planning purposes because in the old days the testamentary trust got graduated tax rates. Right now other than very limited situations there is really no tax advantage, in most cases, of a testamentary trust.
[Non-Tax Reasons for Testamentary Trusts]
However, there are many non-tax reasons why you might consider a testamentary trust in your will. So, for example, like Debbie said there is minor children you may not want to leave them millions of dollars of life insurance on the day they reach the age of majority. So, what you can do is set up a life insurance testamentary trust where the assets go into that trust and then you can arrange in your will stage distributions. Maybe you give them half at age 25, and half at age 35. Maybe you have got beneficiaries that we call spendthrift beneficiaries. You are worried that beneficiaries are not good with money management. They are not like you. They may have various addiction problems: gambling, recreational drugs, alcohol - you don't want to leave them any money directly. Using a testamentary trust can allow someone else to control those assets for the benefit of those kids and have rules on when they get the money, and for what purpose they get the money: housing, education, etc. A recent development in the area of testamentary trust is something that we like to call the matching incentive testamentary trust. And this stems from the fact that when some families are worried that if they leave the kids large, particularly large inheritances, that's it. The kids will stop working - drop out of the workforce, start living on these trust funds. I am sure we have all seen examples of that in our community. In matching incentive trust has the following: kids, if you want to get any money from my estate you have to prove each year that you have earned at least that much yourself. So, in other words, every year after your death, kid brings the copy of their tax return to the trustee. If the kid earns $50,000 of the employment income, business income, professional income, whatever, the trust will match that with another 50 or sometimes a ratio 2:1, 3:1. You make 150, we will give you 150. So, it's a way of incenting the kids to not give up, and continue working. And I can tell you parents love this idea, kids not as much. And then finally, I think one of the most powerful reasons to consider a testamentary trust is to protect your kid's inheritance - especially in the case of remarriage, on a second marriage scenario.
[Inheritance Protection Using a Trust]
So typically, most Canadians that we speak to, if they are married, or if they are living common law decide to leave all the money to their spouse. And then on the second to die, the money is left to the kids. One concern I always had is what if I leave all the money to my wife and after I am gone, my wife decides to remarry and then she dies. Well she can end up leaving all my money to this new guy who I never even met - hopefully, never even met - and my kids could end up with nothing. A simple way to avoid this type of planning is to set up a testamentary trust. In my will I leave the assets to the trust and make my wife the surviving income beneficiary of that trust, I make sure that she is still entitled to, or she'd be entitled to under the family law rules in the province, so in those cases 50% of my assets, but the rest of the money is in that trust, and is available to the kids of that first marriage. You see how there are no arrows anywhere to the second family because I've cut them off completely from the value of my estate. So those are some very simple non-tax reasons for using a testamentary trust.
[Step 5 and 6: Establish Powers of Attorney]
Debbie, I am turn it back to you to talk a little bit about powers of attorney.
Thanks Jamie. So, there is two types of powers of attorney, and what a power of attorney does is that you designate someone else that's going to handle your affairs in the event that you are no longer able to. Now, this can save time and it can save confusion later on at the time some decisions have to be made and it also can prevent a lot of family conflict in the events that there is a disagreement within family members on what is to be done. Because the person or the people with the power of attorney are the ones who ultimately make the decisions. So, there is two different types of powers of attorney. There is a power of attorney over property, and that's for financial matters. So, there you know, again, think of somebody, as similar to an executor, someone who would have the ability to manage your property in the event that you are no longer able to and also that has the time and the power of attorney for personal care. This is someone who will have the decision-making power for end of life wishes. Now you can also designate- no, indicate what you would like to be done in certain situations but that will be the person that they will be looking towards to make those decisions when you no longer can make decisions due to lack of capacity.
Of course it's important to point out that there is different terminology in every province. So here we are talking as Ontario as an example, but you may have different terminology other provinces use things like representation agreement, Quebec has different mandates, things like that. So, again, it gets important to get legal advice in your own province when making sure that these concepts of powers of attorney are drafted properly.
[Step 7: Minimize Taxes and Administration]
Now we are going to take some extra time on this step. This is my favourite step is the step number seven. And this is minimizing the taxes and other fees and just sort of to introduce this and I will turn it back to Debbie to talk about some of the tax issues but there are really two concerns. The first concern, is of course, income taxes and that's what we are going to spend most of the time on but I will mention briefly the concept of probate fees or probate taxes depending on the province. Now not every province has these, like Quebec doesn't have probate taxes. But in provinces like Ontario, British Columbia, Nova Scotia, you are looking at probate fees of approximately 1.5% of the value for your estate. And again, if the estate is significant, this could be thousands of dollars. There are very simple probate avoiding strategies, something as simple as naming a beneficiary. So, naming a beneficiary on RRSP, RRIFs, TFSA, life insurance, avoids probate by having the asset pass outside the estate. Then there are more complex strategies, (where it is) very important to get necessary legal and tax advice. Common strategies people often talk about is joint with right of survivorship. Again, you are doing this with your spouse or partner probably not a bad idea but when you are talking about making an account join with an adult child there are concerns. Is it a gift? Is it a transfer? Is it disposition? There are tax issues. There are legal issues. So, I caution you, we have got lots of material on this but just be very careful when doing some probate planning because again at the end of the day you are talking about 1.5% onetime fee. But the tax issues are much more significant.
[Tax Implications of Death]
And that's really where I want to spend the bulk of our time on now is talking about the tax implications at death.
So, Canada doesn't have what United States has in terms of an actual estate tax. But there are other taxes that do arise at the time of death. The first is that any income that you have received or is receivable to you, up until the time of your death will be taxed in your final year on what is called your terminal tax return. In addition, you are going to have what's called the deemed disposition of all your property, all your capital property at what its fair market value is at the time of your death and then finally, Jamie was talking about registered plans, the fair market value of registered plans come into your income, RRSPs and the RRIFs especially. TFSAs do not but these plans do.
[Deemed Disposition on Death]
So, the deemed disposition on death - what does that mean? That means that, basically all your property, your investments, your stocks, your bonds, your real estate, mutual fund units, at the time of your death it's as if you sold them at their fair market value and so, you are going to have tax that is owing at the capital gains rate resulting from this deemed disposition because it's as if you sold it, and received proceeds for its fair market value and you subtract whatever you paid for those assets and that will be the capital gains subject to tax.
[Avoiding Deemed Disposition: Transfer to Spouse or Partner]
Now there are some exceptions to this and of course, everybody knows – must know about the principal residence exemption, but on top of that property that you leave to your spouse, (or) your common law partner, that, you can transfer at its adjusted cost base. So, it's going to go on what's called the rollover basis and you won't have any tax that's realized or any capital gains that are realized at the time of your death. Instead, that will be deferred until the time of your spouse or common law partner's death.
[Avoiding Deemed Disposition: Gifts to Family Members]
Another way to avoid the disposition at death is to not die owning anything. In other words to the extent that you have excess assets you make consider gifting them away prior to death. Now, there is a difference between giving cash or giving property. If you give cash away that's fine. In fact, you can make a cash gift to anyone you want, whenever you want, on a tax free basis. Cash gifts are non-taxable. If you want to give your kid a million dollars tomorrow you can do so. It doesn't show up on anyone's tax return. Property gifts may cause a tax event because when you give a gift of property there may be a disposition at fair market value giving rise to potentially capital gains tax. So, if you are giving your securities away to your kid you could be deemed to have "sold them at fair value" and therefore, you could give rise to some capital gains tax at the time of making that gift. Now depending on the circumstances and the ages of the kids, there may be some opportunities to doing that. So, for example if you have got kids over the age of 18 giving excess money away right now could be helpful because: a) they maybe in lower tax rates than you. So, if you just give them the money and then they go out and invest that, once they are over the age of 18, it's their money - they can do whatever they want with it. We don't have any attribution concerns. Another thing to think about when making a gift is that at the end of the day it is permanent. So if you are going to make a gift you've got to make sure that you actually don't need that money because once you make a gift it's very hard to get it back later on. So, we advise all clients that when making such gifts you really want to be careful to have that balance sheet that we talked about earlier, you have got your assets and liabilities and know what you are worth and know what you need for retirement, you've got a plan and therefore, you can afford to make that gift.
[Tax on Registered Plans]
Debbie, what about RRSPs and RRIFs?
Well what happens with an RRSP or a RRIF is that the entire value of it is going to come into your income and you will have to report it in your terminal tax return, unless, certain individuals receive that money.
[Tax on Registered Plans: Naming a Beneficiary]
So that can be your surviving spouse or common law partner or a financially dependent child or grandchild. Now, so if you give it to your spouse or your partner, it's a complete rollover. So now that, none of that amount comes into your income and there is the income inclusion is deferred until the death of that spouse or partner, or until they take it out of the RRSP or RRIF as their income.
So Debbie, I suppose if spouses keep dying and remarrying younger spouses you probably could have indefinite deferral.
It’s a great strategy.
You might think of that as a strategy.
What about kids? Can you ever leave it to your kids?
You can. If you leave it to a dependent child or grandchild what they can do is defer including it into their income for a number of years. What they can do is purchase an annuity, so certain amount comes out each year until age 18 and this actually can save a fair bit of tax because if they have no other income it could come out at a much lower tax rate and you could have a big tax savings if that happens. Now if the child is dependent as well as mentally or physically infirmed then a more full rollover is available. So, you can do the same thing as if you were transferring it to your spouse or your common law partner and it can go into RRSP and RRIF in their name. However, if you are going to be having the beneficiary as an adult but somebody who is not dependent or third party, then it all comes into your income at the time of your death.
And I think an important clarification and Debbie feel free to interject because I am sure you have seen this as well is that people often get confused when you have a beneficiary that necessarily the money doesn't necessarily follow the tax liability. So, for example, let's say there is a single individual who dies, there is no surviving spouse, there is no partner and they leave their entire RRSP call it $200,000 inside their Investor's Edge account and they leave it to their daughter. The daughter's name is the direct beneficiary - let's say it's a province like Ontario. The money will go directly to the daughter. There is no withholding tax on death. There is no probate because beneficiary is named. What about the tax liability?
Yeah, that's often an issue that does come up because, Jamie, so you said that this is just going to (the) daughter, so, the tax there is going to come into the estate and be a part of the liability of the estate and that's a problem if the daughter was the only beneficiary and there is other assets to pay the tax, that's fine but if the parent who passed away thought well this is way to sort of equalize my gifts between my children, so I've got two children, daughter and son and I have about an equal amount of assets inside my RRSP or RRIF and outside, so (the) daughter gets RRSP, as Jamie said, they going to name her as beneficiary so it goes directly to her. Well, the son now doesn't get the same amount as the daughter does because, first the estate has to pay the estate's tax liability not just from that RRSP, RRIF, but on what other capital gains tax can arise and the son can be left with much less than the daughter.
And I would say this is probably - if there is one thing that you can get out of this seminar - this is probably one of the biggest areas of concern. People are so excited about saving some probate taxes and again, we are talking maybe 1.5% in the high probate provinces that they go ahead and name beneficiaries and the money goes outside the estate, which is great, but what about the tax liability? There is even a recent case that went to court in the last year that looked at this issue where the liability ultimately came back to the executor to pay the taxes and it can be a big problem. So again, make sure you get good advice and that the tax liability - if I can just relate one more time the tax liability on the RRSP is the first and foremost with the estate. So, if someone dies with RRSP or RRIF and the fair market value is included in the terminal return the person that owes that money if there are assets left in the estate, is the estate. It's only if there is nothing in the estate that the beneficiary will be on the hook.
[Step 8: Keep Track of accounts, Important Info]
So again, it's something to really think about when doing the will and thinking about estate planning. Alright we have three steps left, and then we will see if we can get to some of your questions. So, step number eight: keep track of accounts and important information. So again, make a list of all your assets, and before, we had your household balance sheet, but there are other assets. You may have art work in your home, you may have certain antiques, you may have special furniture, the things like that, make a list of those assets and obviously all your account numbers and put a copy of this list in a safe place and I wouldn't say that the safest place is your safety deposit box. Although it's a lot safe, on this list you are probably going to put the location of your safety deposit box. So, there is no point putting a list of where your safe deposit box is inside your safety deposit box because no one is going to find it. So, I would say take a copy of the list, maybe store digitally, give it your executor, have it somewhere at home so people know where to look and know where to find that particular list of assets.
[Step 9: Review and Update Regularly]
Step number nine.
Don't think you are done once you have done all of this because what you need to do every year is review your plan, review your estate plan and your financial plan and think about if any changes need to be made because as your life changes so does your estate plan.
And it's not so much, Debbie, that there are legal changes, I mean, you know, pretty much made a will five, ten years ago - it's probably, it was valid then, it's probably valid, just as valid today but more so I think on the life stages. If you get remarried, divorced, if you have a new child, if you want to just inherit a child, like these are all life event. I think it's more important to think of changes that way than necessarily that the law has changed.
Absolutely. And your assets values will change as well. You need to consider what you will be doing with those assets.
Absolutely, and especially, if you find that later in life you have accumulated extra assets you may also decide to be charitable. And if on the end of the day you want to leave assets to charity one of the advantages that you could do, and if you speak to some tax advisers they will help you with this is that if you give appreciated securities to charity not just during your life time but even on death you can avoid the capital gains tax. Not only that but your estate can use the donation receipt. So, again, it's another way if you want to be charitable to minimize the taxes on death. Alright, we have one more step.
[Step 10: Share Your Plans]
Step number ten, (in) some cases the hardest step, share your plans. Tell those involved their responsibilities, as Debbie said earlier. If you are going to name your neighbour as the guardian for your three young children, probably a good idea to tell them in advance. Make sure that they are okay with that. Communicate your plan. In my advice is if you are going to do anything weird, like let's say not treat the kids exactly equally, in my view it's good idea to tell them in advance because we have seen, and I am sure Debbie you've seen as well, families destroyed over fights in the estate, where brothers don't talk to brothers, sisters don't talk to sisters because of a misunderstanding. Why did dad leave kid A 40% and kid B got 60%. Did he love kid B more? And these can lead to multi-generational rifts. So, I think it's a good idea to talk to your kids. You don't necessarily have to disclose how much money you have and all the details. Many people are not comfortable with that. However, if you do anything different, I would tell them about it. Have an open discussion. If they are going to be mad at anyone let them not be mad at each other, let them be mad at you, because at this point you are dead anyway. So, who cares.
So, those are some of the thoughts that I had and any final comments, Debbie, then we are now going to turn over to some questions.
No, I think you are right. And the other thing to think about, it's just not anger as well, it could be huge legal battles that can ensue over whether or not you have capacity when you made these decisions, whether there was influence from one of the children and that's another thing that you just don't want happening.
Maybe it's worth just a comment Debbie, while you are here, obviously we have a lot of do it yourself investors on the phone that manage their own money and that's great. You know, people enjoy managing their money. But when it comes to wills and estate planning there are these kits that you can buy for $30 or $40 - they are do it yourself. I mean, sometimes they work but what would be your general advice there in terms of that?
Well, you probably get what you pay for, I would think, when you are talking about your estate plan and you are right Jamie, they probably do work in getting what you want to be, you know, what you stated there to be done. But when you meet with someone who understands estate planning they might make you think about things that you wouldn't otherwise think about and push you to think as to what you really want to happen and the best ways to get there, not just in terms of, you know, getting your gifts to the right people, also doing so in the most tax efficient manner, I mean Jamie we talked about certain assets being eligible for rollover treatment. We talked about, well, if you are going to do a charitable donation, think about choosing securities with high accumulated gains in them. So, there is all sorts of things like that that will come out if you deal with the right estate planning professionals.
Yeah, and I agree, and that's why I really do think certainly in this area, it's a good idea to go to someone with the experience with the right background in terms of the estate and to make sure that, you know, you are doing things properly and you're taking advantage of not just the legal rules but all the tax things that we talked about. So, Ammar, I will turn it back to you.
Thank you Jamie and Debbie. That was a very informative and insightful presentation.
[Q & A]
We would like to answer questions from the audiences. So, if you have them ready please type them into the Q&A panel. It's located on the right-hand side of your screen. While we wait for questions to come in, I would like to point out that CIBC Investor's Edge clients have access to our new knowledge bank. You will find this after logging into your Investor's Edge account and then clicking on education centre. In our knowledge bank we have videos, articles, and also past webinar replays. We also have videos by Jamie on tax and financial planning and also other subjects related to economy and markets. Now, I will pass it back to you Jamie to go through some of the audience questions.
Sure. So, we are just... waiting for the questions to load. We have got a few questions coming up. And the first one is from Nancy and she asks the question about a holograph will. A holograph will is a will that's written all entirely in your own hand. And yeah, that is valid. I mean, I think in all provinces if you literally write it in your own hand and then you... and you are specific on who you leave the money to and sign it in your own handwriting it's valid, but again to Debbie's point what are you missing? And that's the only thing I would say. In other words, have you taken advantage of all the opportunities that, someone who is experienced, someone who may be able to give you just some extra tips, can help out with.
And the other thing is... it depends on what you are doing with all your assets and whether it could come up later on if this really was your will and is this really you handwriting. So, what you need to do when you do a will is to get people to witness it and to sign a statement that at that time that they witnessed it, that they witnessed you doing it so if they are called on later on they can back up that this is what you wanted to do.
Nice Debbie. We have a question here about the tax implications if the children are out of the country. Great question. So generally speaking you can leave inheritances to children outside of the country. And again, the taxation falls in Canada on the deceased. So, when you die there is those three things, income in the year of death is taxable, disposition of the fair market value, RRSPs and RRIFs are taxable, that's all on the terminal tax return. So, if you ultimately die and then you have an estate you can then make a tax-free distribution after the estate has paid all its taxes, to people in foreign countries. Typically, you are distributing capital and on capital there is no withholding tax. So, I think it can be done very easily, of course, other countries depending on where they live, maybe in Europe, and may have a form of inheritance taxes. Certainly, we don't have that in Canada. You don't have that in the US. So, it's not really a concern. Got a question here about common law relationships. The question is at what point does a couple that moves in together become common law. Doesn't invalidate prior wills. These are great questions. And again, these vary by province. Typically speaking I think in many provinces it's a three-year rule but you are going to have to check in your province of residence to make sure that you got the right time but typically speaking after three years a common law relationship is obviously a meaningful one and one that from a legal perspective has certain rights of obligation in terms of support. And there are different rules whether someone is legally married or common law and these are things to certainly consider on province-by-province basis. Sorry we can't be more specific without getting into the provincial differences. So, we have got a question about people who own property in the States, and spend three or four months there every year. Again, it really depends on your net worth, it depends on the value of the property. US has something called an estate tax but right now, the estate tax will only kick in if you have net worth beyond the exemption. Exemption is about 5.5 million US. So, unless you are a significantly high net worth person most cases you can buy the US property personally not really worry about it if you are spending three or four months down there. Again, probably not a concern in terms of filing US return but again, you may just want to just check with your US tax adviser.
And in all likelihood, you are going to maintain your Canadian residency when you are just there for three or four months, and Canada is still your home.
We have got a question about the RRSP rollover for kids. So great question. So, on death you can roll an RRSP or RRIF to any child. Child has to be dependent on you so, if it's just a grandchild that's not living with you that you are not providing financial support, that does not work. But again, the money has to be used to buy a registered annuity, deferred until up to age 18. So, if the kid is 11 you're looking at a seven year annuity, that allows you to basically pay tax on that value of the RRSP or RRIF over a seven year period which again may be beneficial.
So we have a question on what happens if you sign your house to one of your kids as a joint tenancy and what the tax implications could be there? So, Jamie alluded to this previously when he was talking about some of the different ways that people think about getting out of probate fees. The problem that you have when you put a child on as a joint tenancy is that if this is not your principal residence there is a possibility that you could be considered to have disposed of half of that at its fair market value because now your child has half of that so, for tax purposes you could realize a capital gain that wouldn't be the case if it's considered your principal residence. But again, there is all sorts of non-tax implications on what this really means, do you mean for that child, is it a joint tenancy with right of survivorship, is that child supposed to get that property on your death or are you just doing this for ease of administration so they can make decisions on your behalf or you are doing this, just to get out of a probate. So, it's a very complicated question.
Great. We have got a whole bunch of questions. I am just trying to find the ones that are sort of generic and not specifically to – so great question here dealing with the RRSP issue, that we talked about on death. So, the question from Rosita was, what happens if the tax liability relating to the RRSP exceeds the value of the estate. So again, that could – that can certainly happen because let's say you have an estate that's worth 100,000 and you have RRSP that's worth a million and it goes to beneficiary so, there is a special law in the income tax act that says that if the estate doesn't have enough money and only in that situation where the estate doesn't have enough money to cover the tax owing on the RRSP or RRIF that the CRA can then actually go after the beneficiary. But if there were sufficient fund in the estate then I am afraid that the estate is on the hook even though the beneficiary has received the money.
Okay. So, there is a question up from Stefan about what we consider to be called an alter-ego trust and it's whether after age 65 you can put all your assets in a trust for your benefit, have it taxed directly to you and avoid probate at death and the answer is yes. This is a type of a trust where you can transfer in assets at their cost base. So, there is a rollover and in order for this provision in the income tax act to allow this to occur, all of the income from those assets that it generates has to go to you until the time of your death and it can't go to anybody else. Nobody else can get any of the income or the capital from that. Then at the time of your death there will be a disposition of the assets at that time at their fair market value and the trust will be responsible for the tax on those assets and then whatever is left will pass outside of your estate and there won't be probate fees because it's coming out of a trust and not out of your estate at your death.
Thanks Debbie. I have got a couple of questions here on TFSAs. The first one is what about TFSAs on death. Well the good news is TFSAs are 100% tax-free on death and you can name a beneficiary on the TFSAs and it goes directly to them. There is no withholding tax because there is no tax. You can name a successor on the TFSAs as long as it's your spouse and they would continue to have that TFSA in their name - again, no tax. Another question on TFSAs: does a TFSA holdings have to be sold on death? And they do not. You could actually roll those TFSAs holdings in kind out to whoever the beneficiary is if they open up their own account or to another TFSA if they've got the room. So, no they do not have to be sold on death.
One thing to notice sometimes, you might have some assets in there where something from the issuer doesn't allow things to be transferred directly in kind so that may be a limitation but certainly, there is no limitation under the TFSA rules per se.
Great, and I think we have got time for one more, because we said we'd finish at 10 to the hour, this question has come up about ten times so far and I just want to reiterate one more time: Is there any advantage to putting your home in your children's name for tax purposes and I would say there is a disadvantage of doing so and the only advantage that people do this for in my understanding is probate. In other words, they want to avoid the probate. But there is a couple of issues. Some provinces have land transfer tax. So that, when you change title you might have to pay that, but even if you didn't have to do that, the concern primarily is of course the principal residence exemption. You got a home, you are living in the home, and your kids already have homes. And you got to add your kids to your home as joint legal owners of your home and all of the sudden you could potentially jeopardize your principal residence exemption. So again, you got to be very careful about some of these issues and we are not really big fans of this type of joint ownership.
And interestingly enough Jamie this question seems to indicate that you are not even putting it in joint ownership with your children, you are actually going to put in your childrens' names. What if it turns out that they sell your home out from under you?
Yeah, we have seen, unfortunately, some difficult stories where one story I remember, and maybe we will conclude with this story is a horror story of an estate planning because we've got a few of these from the years, where someone in Vancouver, very wealthy part of Vancouver had a $3 million home and they were advised to save in probate to put the home jointly with their adult child and the woman in this case was widower in her 90s, she wanted to sell the home. It was in joint name and when I tried to get the listing the son didn't want to sell. He didn't think market conditions were correct. So, he wouldn't sign the real estate agent contract to sell the home and the woman was forced to stay in the home even though she wanted to sell it and move into a nursing facility. So, it's a very difficult situation unfortunately and so hopefully most cases that doesn't happen but these are some of the reasons why you really want to get some good advice before doing a will, doing an estate plan, powers of attorney and even putting something as simple as an asset or home into joint names.
Thanks again. It looks like that's all time we have.
Jamie and Debbie, that was a very informative presentation and I am sure audiences are well equipped for estate planning. Our reminder to the audience that if you wish to listen this webinar again, a link will be emailed to anyone that registered. I would like to thank the audience. We really appreciate you being here. Should you have any questions or comments, please visit Investor's Edge website or get in touch with us by phone, chat or email. Thank you for joining us today. We will see you next time.