ESTATE PLANNING ALERT

General Taxation

The provisions of the Income Tax Act require a deceased's assets to be deemed "sold" at their fair market value at the time of death. Where a deceased owns property that has increased in value a capital gain will result. RRSP's are also deemed to be "cashed in" in the year of passing. As a result of these provisions, a significant liability can result on the deceased's final return.
It should be noted that when the deceased's assets are left to a surviving spouse (either directly or through a Spousal Trust) the capital gain and RRSP income is not subject to tax until the death of the surviving spouse.
The Ontario Estate Administration Tax (probate fees) may also result in a significant cost to the Estate for Estates over $50,000. The tax is levied at a rate of 1 ½% on the gross value of the Estate. There is an exemption where assets are held jointly with the right of survivorship or where there is a specific named beneficiary under an insurance contract.
The above noted costs can significantly affect the distribution of one's Estate.

Developing A Proper Estate Plan
In some cases, you may consider utilizing "trusts".
A "trust" is an arrangement whereby a person known as the settlor makes a gift to a trustee(s) to hold and oversee property on behalf of the beneficiary. A trust established upon the death of an individual is known as a "testamentary" trust.
A testamentary trust can be a very powerful Estate planning tool. Please consider how the following examples may assist in your Estate plan.

Testamentary Spousal Trust
Mr. and Mrs. A have accumulated a comfortable asset base over the years. Mrs. A has always looked after the financial affairs of the family. Mr. A is a very generous and giving person. Mrs. A is concerned that if she passes away first, Mr. A will be unable to manage his financial affairs properly.
Mrs. A decides to set up a spousal trust within her Will. The Will empowers the trustees as follows:

• Invest the capital and pay the net income to Mr. A on a monthly basis.
• Encroach on capital for Mr. A in case of medical or financial emergencies.
• Distribute the residual capital to their children upon Mr. A's death.

By setting up a spousal trust, Mrs. A has a degree of certainty that Mr. A will be financially secure for his lifetime. She is also assured that the capital is protected and will be allocated to her children. The trust also provides certain tax benefits. The income may be taxed within the trust even though it is "paid" to Mr. A. This provides an opportunity to use the low tax rates as a testamentary trust is taxed as a separate taxpayer. It may also allow Mr. A to avoid loss of the age credit, Old Age Security clawback and maintain eligibility for the Ontario and GST tax credits.
It should be noted that in order for the assets to be set up in a trust, they must be owned individually and not held jointly. For example, if Mr. and Mrs. A have a joint bank account, the balance automatically becomes Mr. A's property if Mrs. A. predeceases him.

Testamentary Grandchildren Trust
Mr. and Mrs. B feel they have adequately contributed to the financial well being of their children. However, Mr. and Mrs. B are very concerned about ensuring that their grandchildren have a proper education. In this regard, they have established a trust for their grandchildren within their Will. Details are as follows:

• A trust fund is set-up for their grandchildren upon the last to die of Mr. and Mrs. B.
• Income accumulated is added to the capital.
• The capital of the trust is to be distributed to the beneficiaries for educational purpose.
• If a particular grandchild does not attend school a capital allocation is made upon attaining the age of 28.

Mr. and Mrs. B have now ensured that there will be a capital base for the grandchildren, even if their children encounter financial hardship, marital problems or any other unforeseen circumstances.
A trust fund also allows the opportunity to accumulate income at the low marginal tax rates.

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As you can see from the above, there are many uses for testamentary trusts. Please consider them when finalizing your Estate plan. It is advisable to seek professional assistance when developing your Estate plan.

"Information contained herein is of a general nature. No action should be taken without seeking professional advice that takes into account current developments and the specific facts of a particular situation."

[Updated - February 20, 2010]