Estate Planning
Most people want to pass on as much as they can to their beneficiaries. But, for many, estate planning sounds lofty and complicated. Although, it can be complex, it doesn’t have to be. You should give careful consideration to the financial, legal and tax issues that will affect the transfer of your assets to your beneficiaries.
At any Age, an Estate Plan Can Help You:
- Set a value on your estate through an analysis of your assets and project estate values over time;
- Assess and address current and future liabilities, such as mortgages or bank loans, probate fees, taxes, legal fees, executor's compensation, and any personal guarantees that will be payable by your estate;
- Determine how best to meet the needs of your beneficiaries.
An effective estate plan considers two areas - the financial component and the administrative component. The financial component deals with the assets that you have and whether they will be sufficient to provide for your beneficiaries once they are distributed. The administrative component addresses how your assets are distributed. It is the part of the estate planning process that deals with wills, powers of attorney, trusts and other means to distribute and manage assets.
There are very few professionals who can provide you with all the products and services that you need to complete an estate plan. Accountants, lawyers and your ScotiaMcLeod Investment Advisor all play a role. To give you general information on estate planning and some of the issues you need to consider, ScotiaMcLeod offers our Practical Perspectives on Estate Planning Handbook. The handbook covers topics such as the estate planning process, powers of attorney, taxes at death, probate fees and a getting started worksheet.
Preserving Estate Value
Most people want to preserve the value of their estate. They spend a lifetime building it and don't want to see it dissipate at death. The key to preserving the value of your estate is to plan during your lifetime for effectively directing estate assets and minimizing shrinkage or erosion.
Taxation
Taxation is the number one cause of estate value erosion. While Canada doesn't impose estate taxes at death, the Canada Revenue Agency imposes capital gains taxes. Please read the page entitled Estate Taxation at Death.
Fees
The next major cause of shrinkage is fees. Fees fall into three main categories: executor fees, probate fees, and legal and accounting fees. Executor and probate fees vary directly with the size of the estate, while legal and accounting fees depend on the complexity of the estate. In other words, the smaller and simpler the estate, the lower the fee.
Only those assets that form part of the estate are affected by fees. If the asset "leaves" the estate at death, it doesn't form part of the estate.
Executor Fees
Executor costs can be the largest fees charged to an estate. Provincial statutes frequently allow fees of up to 5% of the probate value of an estate.
Probate Fees
Probate fees vary widely by province, with Ontario charging the highest
fees in Canada. For more information on probate fees, please see the page on Probate Planning Tips.
Legal and Accounting Fees
Legal and accounting fees are incurred when a lawyer or accountant is hired to perform work for the estate. Often, in larger estates, income tax can become complex, with the executor seeking to minimize taxation for both the estate and survivors. Fees incurred in this regard may not, in the final analysis, cost anything because the tax savings may eclipse the professional charges.
How to Avoid Fees
- One popular technique to avoid fees is to register assets as joint with rights of survivorship with your spouse. This way, a surviving spouse becomes the 100% owner and the asset doesn't form part of the estate.
- If joint tenancy isn't advisable, investment products from insurance companies are considered to be "estate-friendly investments" that allow you to specify a beneficiary. When you die, the proceeds pass directly to your beneficiary. They do not form part of the estate and are not subject to probate fees.
- For straightforward estates, executor fees can be eliminated by naming a spouse or a competent adult child as an executor. This person, working with the assistance of a knowledgeable estate lawyer, is likely familiar with the estate and is frequently a large beneficiary. Family member executors rarely charge full fees to the estate because they're considered taxable income whereas proceeds as a beneficiary of an estate are non-taxable.
- Where complex trustee work is involved, on the other hand, professional or corporate trustees and executors should be considered.
Lack of Liquidity
The final and most often overlooked cause of estate shrinkage is lack of liquidity. An estate needs cash to pay fees, settlement costs and income taxes. If the estate doesn't have enough liquid assets to cover these disbursements, non-liquid assets must be sold.
Commissions, transfer taxes, appraisal and valuation fees, legal fees, recapture of capital cost allowances, realized capital gains and a low market price can combine to create a "fire sale" leading to dramatic shrinkage of the estate.
For more information on preserving the value of your estate, please contact a ScotiaMcLeod advisor
Probate Planning Tips
Probate is the process of authenticating or proving a will. It establishes that a will presented to the government or court is not only valid but is in fact the final will of the deceased. Third parties such as banks, trust companies, investment dealers, government registries and others are more comfortable dealing with an executor of a probated will because they know they are dealing with the true representative of the deceased.
Why Avoid Probate Fees?
As easy as it seems, people often try to avoid probate because it can be time-consuming and costly. As well, all documents become public record.
The process of identifying all the assets of the deceased, listing them in a prescribed fashion and filing documents with the appropriate government departments can take months and sometimes years to complete. During this time, the executor cannot settle the estate and cannot usually make disbursements from it. With a long delay, beneficiaries may face financial hardship.
Probate fees vary greatly by province. In most provinces, while not small, they are manageable in terms of overall cost to the estate. When viewed as a filing fee, however, they can be seen as unreasonably high. In most cases, the fees are a small percentage of the probate value of the estate. Probate value is the value of the deceased's assets that will pass through the estate less, in some cases, a reduction for debt associated with an asset such as a mortgage on a home. A few years ago, the Ontario government suddenly tripled probate fees on estates in excess of $50,000.
To obtain a Grant of Letters Probate and Administration where a person dies leaving an estate exceeding $25,000 in value, there is a fee of $140.00.
These fees are paid whenever an asset transfers as a consequence of death. If an individual died and left all assets to a spouse, the assets would face these fees. When the spouse died, the fees would be paid once again. In Ontario, probate fees could amount to $29,000 on a $1,000,000 estate.
The final reason for striving to avoid probate is that once filed, the statement of affairs of the deceased, including all assets and liabilities and a copy of the will, become available to the public. For high-profile and high net worth individuals, a public record could expose the estate to unwanted publicity.
Tips to Avoiding or Minimizing Probate Costs
There are a number of proven techniques to avoid or minimize probate costs. Before acting on any of these tips, you should seek the advice of a lawyer or accountant.
Tip #1 - Give it away while you are alive
As strange as it sounds, if you die without an estate, there is nothing left to probate. If a gift to a spouse, child, grandchild or other beneficiary makes sense and wouldn't jeopardize your well-being, you might consider it as a means of avoiding probate. However, take care when giving appreciated capital property because in most cases it will trigger capital gains. If the property gifted produces income and the beneficiary is your spouse, a minor child or a grandchild, you'll continue to include this income in your taxable income (attribution rules, Income Tax Act).
Tip #2 - Register or re-register assets in joint tenancy with rights of survivorship
Assets that are registered in joint tenancy with rights of survivorship become the property of the joint owner on the death of an owner. Many spouses register their family home this way, but any non-registered (RSP/RIF) asset can be registered in joint title. Upon death, the asset does not form part of the estate. When purchasing assets or re-registering assets, care should be taken with regard to attribution rules. In addition, if you're re-registering assets, capital gains could be triggered. Consult your professional advisor before proceeding.
Tip #3 - Establish an inter-vivos trust
An inter-vivos trust is a trust that you establish during your lifetime. A trust is created by a donor settling (giving) assets to a trust for the benefit of a beneficiary. The assets of the trust are managed for the beneficiary by the trustees of the trust. By settling a trust during your lifetime, you no longer own the assets. You may, however, be a trustee and exercise a degree of control over the assets. Once settled, however, the assets are trust assets held for the benefit of the beneficiaries. Here you have, in fact, given away the assets, but in a different way than in Tip #1.
Tip #4 - Establish a trust (especially a spousal trust) in your will
While a spousal trust will not help reduce your estate for probate, it may allow a beneficiary to avoid probate on his or her death.
For example, if John leaves property to a spousal trust for the benefit of his wife Marie during her lifetime, Marie can enjoy the trust property and spend the income from the trust. The property is not, however, in her name, it is simply held in trust for her. When Marie dies, the property passes directly to residual beneficiaries without being included in Marie's estate. An added advantage to this approach is that during Marie's lifetime, she and the spousal trust are separate taxpayers and this usually results in lower overall income taxes compared to all the property and income being held by one taxpayer.
Tip #5 - Invest in estate-friendly investments
Investment products offered by life insurance companies provide unique estate advantages. As "life insurance" products (even though they look, act and perform just like regular investments), the owner of the investment can name a beneficiary. The investment is registered with the insurance company and upon the individual's death, assets pass directly to the beneficiary and do not form part of the estate. Under certain circumstances, these products also offer some creditor protection.
Insurance companies offer a range of highly competitive fixed-rate investments that act just like Guaranteed Investment Certificates (GICs). They are often referred to as Guaranteed Interest Annuities (GIAs). They also offer segregated funds that are similar in many ways to mutual funds. Estate-friendly investments are frequently underutilized in estate planning. Through ScotiaMcLeod Financial Services, our independent insurance agency subsidiary, we can assist clients with a wide range of products from the leading Canadian insurance companies.
Tip #6 - Establish multiple wills
With care and professional drafting by your lawyer, it is possible to separate your assets into groups: assets that must be probated, assets that don't require probate, and assets that can or must be probated in another (hopefully lower cost) jurisdiction. While this approach requires more work, it can substantially reduce the cost of settling your estate. Some assets, such as the shares of a private company, normally do not require probate to be dealt with by an executor. If you own a private company with a significant value, it may be possible for this asset to be dealt with in a separate will and the executor can avoid probate on this asset. Again, legal advice is critical in this strategy.
Estate Taxation at Death
While no provincial or federal government currently imposes succession duties or estate taxes, most estates feel the impact of taxation. Income taxes are levied because the Income Tax Act provides that an individual is "deemed to have disposed of all capital property immediately prior to death at its fair market value." This is referred to as a deemed disposition and results in all unrealized capital gains being triggered, capital cost allowance being recaptured, and registered programs (RSPs and RIFs) being de-registered and added to income in the year of death.
For capital property such as stocks, bonds, mutual funds, rental property, a cottage or vacation property, capital gains taxes are triggered. Fifty per cent (50%) of any gain in value is taxed as income. For example, a cottage or vacation home purchased 15 years ago for $80,000 and today worth $180,000 would have a capital gain of $100,000. Of this, 50% or $50,000 would be a taxable capital gain subject to tax at your marginal tax rate. The top marginal tax rates for most provinces are approximately 45%, so this would result in taxes of roughly $22,500 ($50,000 x 45%).
Depreciable capital property such as rental buildings, are subject to recapture of Capital Cost Allowance (CCA), also known as depreciation. When a depreciable capital property is disposed of (or deemed to be disposed), the CCA previously claimed is added back to income and taxed.
Registered assets such as Registered Savings Plans (RSPs), Retirement Income Funds (RIFs), Life Retirement Income Funds (LRIFs), Locked-In Retirement Accounts (LIRAs) and Life Income Funds (LIFs) are de-registered at death and the full amount is added to income.
Married persons can avoid these taxes by leaving property to their spouse or to a spousal trust. In this case, the assets can be transferred to the spouse at the original cost base and all taxes are deferred until the assets are actually disposed of or the spouse dies. Careful drafting of wills by legal advisors is crucial to ensure that this tax-deferral opportunity is captured.
Business Succession Planning
Succession planning is a process to effect the orderly transition of management and/or ownership of a business, done in fashion that best achieves the objectives of the transitioning owner.
At Scotia, we can help you effect a smooth and successful transition from your business, whether you are transferring ownership within a family or otherwise. Our unique approach encompasses your personal and business situation, and is part of a complete financial strategy. Your plan will reflect what matters most to you, your family and your business.
Why Plan Now?
A business often represents a lifetime of work and vision. However, despite almost three-quarters of business owners wanting to transfer control or exit ownership within the next decade, barely a third have a formal succession plan in place. Lack of a plan is also the most common reason family businesses fail to survive first-to-second generation ownership.
Leaving business succession to chance could allow someone else to decide what happens to your business, and potentially at significant cost.
Planning early also helps reduce the tax impact of ownership changes, as well as ensure a smooth and successful transition of the business to the new owner or owners. A successful plan will also help enhance the overall value of your business today.
Succession Planning Process
Each of the steps in the process of planning and enacting a successful transition is equally important.
Elements of a Succession Plan
An effective succession plan will examine all aspects of your financial situation.
Support and Resources
There are many sources of advice you can turn to for help in creating and implementing an effective succession plan.
Succession Planning Process
The process of planning and enacting a successful transition consists of several steps, including:
Identify and Review Priorities
The first step in the process starts with identifying your priorities. Business owners should ask themselves, "What do I want for my future, my family, and my business?"
Identify a Buyer or Successor
Who will run the business when you are no longer doing so?
Develop a Succession Plan
Since a variety of expertise is needed, it is important that you work with an appropriate team of experts to help you develop your business succession plan.
Integrate with Personal Financial Planning
Ensure that your personal retirement and estate goals are integrated with your overall financial plan.
Monitor Plan Implementation
It is important to monitor and review your plan during the implementation period to ensure that you are on track in terms of timing and deliverables.
Elements of a Succession Plan
Succession planning does not take place in isolation from the larger issue of your overall financial security. An effective succession plan will examine all aspects of your financial situation.
Distribution of Ownership
If you are transferring ownership of your business, a shareholder agreement is a key tool that should be considered.
Selecting and Grooming Your Successor
Identifying the right person to take over the reins when you leave is a process that requires careful thought and planning.
Business Maximization Strategies
There are many strategies you should consider to increase the value of your business prior to sale or transfer of ownership.
The Role of Key Employees
Key employees are vital to the success of ownership transition, and can offer real help in the planning process.
Business Valuation
While you may have a good idea of what your business is worth, you should still consult with a professional business valuator to confirm or determine this crucial figure.
Financing and the Mechanics of Sale
Financing the change of ownership should be a key part of your succession plan.
Taxation and Legal Considerations
It is important that you consult with your tax and legal advisors early in the process to make sure that that your plan achieves your objectives.
Retirement and Estate Considerations
Since your investment in your business is probably your most significant asset, there are a number of important retirement and estate planning issues that should be addressed.
Timetable
When you develop your plan, you should ensure that there is a clear timetable, so those involved know exactly what will be expected of them and when.
Monitoring Process
Be sure to update and adjust your plan as necessary if and when there are changes to your business and/or personal situation.
Contingency Considerations and Risk Management
If illness or death meant that you were suddenly unavailable to manage the business, who would take over your responsibilities?
Support and Resources
At Scotiabank, we can help you effect a smooth and successful transition from your business, and manage the proceeds of sale, whether you are transferring ownership within a family or otherwise.
How to get started
Finding the right approach to exiting from your business will depend on your own expertise, the complexity of personal financial situation and the time and desire you have to manage your transition. Whatever you do, don't go it alone. There are many sources of objective advice you can turn to for help in creating and implementing an effective succession plan.
Considered all at once, business succession planning can seem a little overwhelming. However, at Scotia, we have the knowledge, resources and team of experts to help you take it one step at a time. The best time to take that first step is now.
Contact us for More Information
Arrange to speak to a representative who can help you get started or provide further information.
Keys to Successful Succession Planning
- Start the process early.
- Understand family issues/concerns.
- Open dialogue and communication with key stakeholders.
- Designate a team of professionals.
- Develop a written plan, including a clear timeline for the process.
- Link business succession plan to your personal financial plan.
- Consider estate planning within the framework of succession planning.
- Consider contingencies for unplanned exits as well.
- Communicate your plan and inform people of responsibilities/roles.
- Review and update regularly.
Related links
For additional information on business succession planning, you may want to visit some of these sites.
Canadian Association of Family Enterprise
The voice of family business in Canada, CAFÉ is dedicated to helping families build their business and provides some excellent succession planning resources.
Canadian Federation of Independent Businesses
With over 100,000 members, the CFIB has been representing small and medium sized businesses at the federal, provincial and local levels of government for over 35 years.
Canadian Institute of Chartered Business Valuators
The pre-eminent business valuation organization in Canada can help you find a Chartered Business Valuator.
Grant Thornton LLP Chartered Accountants
A site devoted to issues of interest and concern to family businesses, including succession planning.
BDO Dunwoody LLP Chartered Accountants and Advisors
Information on some of the tax issues surrounding business succession.
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