Estate Planning Flashcards
(34 cards)
What are considered ‘Family assets” for division of matrimonial property?
- Life insurance held separately would most likely be excluded
- shares in business typically excluded unless it can be shown that the Ex contributed to the growth
- investment accounts yes
Family assets to divide:
The family’s residences (house, cottage, vacation home abroad, travel trailer, etc.)
The furniture and items inside these residences
The family’s vehicles
Retirement savings (employer plans, government pensions, RRSPs, LIRAs, RRIFs)
Joint debts used to acquire, maintain or preserve assets included in the family patrimony
Be aware that the assets, like a residence, must be valued and exchanged at fair market value.
Assets that are not considered part of the family patrimony do not need to be divided up. Here are a few examples:
Income properties
Businesses (unless one partner helped grow)
Bank accounts, shares, bonds
Jewellery and other personal belongings
Money and goods inherited or received as gifts
What factors are considered with Spousal Support?
- length of union
-if there are children and if there are any prior arrangements made - roles spouses played in union
- age of each spouse
-each financial sitch
How are Spousal Support payments taxed?
- usually paid monthly and taxed in recipients hands and is deductible for the payer
-if paid in lump sum it is neither deductible nor taxable
How is Child Support determined?
Child Support Guidelines and usually based on gross income
How is Child Support taxed?
Parent who receives is not taxed and parent who pays does not get a tax deduction
What three parties is a legal Alter Ego Trust between?
- The Settlor: person who sets up trust, makes decision on items inside trust
- The Trustee: appointed by Settlor and manages the trust instructions
- The Beneficiary: who the trust benefits
- When you set up a trust the assets are no longer personally held by you
- no real tax benefits nowadays
-often referred to as a Will substitute
ALTER EGO TRUSTS ARE FOR THE LIVING
What are 4 benefits of Alter Ego Trusts?
-Probate not required
-Privacy maintained
-Bene’s receive inheritance with less delay
- Reduced professional fees
Alter Ego Trusts tax treatments?
Rollover treatment with no deemed disposition (unlike regular trusts)
21 year rule does not apply - only taxed at death of settlor! When the death of the settlor happens the assets are deemed disposition and taxed at highest marginal tax rate.
What are cons of Alter Ego Trusts?
-tax returns need to be filed annually
- income in the trust will be taxed at highest marginal rate
What is a spousal Testamentary trust?
- It is an income splitting strategy
- a way to defer capital gains tax consequences at death for surviving spouse
-a useful strategy for a second marriage scenario - component for estate planning
What is a Henson’s Trust?
- for a disabled person
- it protects assets (typically inheritance) for a disabled person
- trustee has “absolute discretion”
- ## may provide tax relief with lower MTR
What are advantages of a Henson Trust?
- can really improve quality of life for disabled person
-ensures person is taken care of financially
-eliminates probate fees
-can have overall savings from tax benefits
What are disadvantages of a Henson Trust?
- finding a trustee can be difficult
-regulations can change
-poorly constructed trusts can disqualify disabled person for other things
At death, if someone has two properties what is a strategy the executor can employ?
Determine if the cottage or original house have a bigger deemed disposition on them. If the cottage has a larger disposition then the executor can elect to have it be the PR and get the PR exemption. So now the cottage would have no tax liability and the “oG house” would instead….
So, say the house is worth $800,000 with an ACB of $250,000:
Exempt Gain = (yrs designated as PR + 1) X capital gain / years owned
How are these assets taxed at death?
- Insurance : not taxable at death
-RRSPs : fully taxable at death unless spousal rollover - Non -reg accounts: 50% of gain is taxable at death
Advantages and Disadvantages of Transferring Property to Joint Tenancy
Advantages:
- ELIMINATES PROBATE Property will not go through Estate at one parties death (avoiding probate) and not on his list of assets at death
- With joint assets property transfers automatically to surviving partners at death with no delays or disruptions that can happen in a will
- If the property is income generating, the owners can split the investment income and if the joint owners are NOT spouse there is no income attribution
Disadvantages:
-You lose full control of the asset
- If any owner is married and there is a marriage breakdown those assets are at risk
- Creditor risk if client has bad financials or other business affairs putting them at risk
Advantages and Disadvantages of Transferring Property (assets) to a Trust
Advantages:
- Settlor (gifter) remains in control of the assets
-Privacy related to the asset, it does not go through a Will and it also will not have Probate
Disadvantages:
- Trusts are expensive - set up fees and annual reporting
- You will need to pay the full capital gains tax on property when you transfer the asset into a trust TODAY
- Trusts are subject to a 21- year rule, aka a Deemed Disposition every 21 years, client could be young and causing themselves more tax consequences
Inter-vivos trusts or a Family Trust is an option to consider in Estate planning. It allows settlor control over the assets during his lifetime but has significant set up costs and tax implications today and in their 21 year rules.
Advantages and Disadvantages of including a clause in your Will to Set up a Trust
Advantages:
-Owner remains control of the asset while alive
-Owner maintains flexibility to change their mind
-Capital gains taxes will be deferred until he dies, taxes will be less of a concern for owner
-Possible graduated rate estate trust taxation benefits (2016 this took effect)
Disadvantages:
- You will have to pay probate at death as the asset will go through the Estate first
-If heirs are young, Trusts have a 21 year rule
- The trust owns the assets over people
- Trusts have costs to set up and maintain that might outweigh benefits
Typically the most effective way to deal with the transfer of assets is to set up a trust via the will. This allows existing owner to remain in control and obtain income from the asset. At the death the assets transfer to the beneficiary via a trust. Probate applies to the asset.
How do you calculate Estate Tax?
REMINDER - first $50,000 excluded!!
Take all the assets required to go through probate - basically anything having “estate” as bene or NO bene listed…
Add up all those assets, say the total is $821,200, you need to round to the nearest 100th!!! So that means you would round this up to: $822,000
MINUS the allowance (say $50K):
$822,000 - 50,000 = $772,000
Now apply the tax of 1.4%:
= 772,000 x 0.014
= X
Beneficiaries receive value remaining after taxes and probate split amongst their shares.
What does Per Stripes mean in an Estate?
It means children of a dead beneficiary receive the inheritance rather than the division going from say 4 siblings to 3 siblings. Instead the Estate remains as 4 equals and goes to that persons children.
Don’t forget about….
CPP survivor benefits!
What are some common Will clauses?
- Revokes all prior Wills
- Signed by two witnesses and drawn up by a notary or lawyer
- All personal details
- Names an executor
- Lists assets and beneficiaries
If assets transfer to a trust at death they will be…
taxed and probated
In divorce settlements how does getting a life insurance policy on the other play out?
Some divorces arrangements are structured so supporting spouse maintains life insurance on his life with wife or children as irrevocable bene’s - there is no legal obligation to do so but it might be negotiated.
