Table of Contents
The information contained herein is for educational purposes only and should not be taken as legal advice, as tax laws and regulations can change within weeks and render some tax strategies void. For tax advice, consult our professionals by logging on to our website: www.FaberLLP.ca.
Unfortunately, most Canadians never do estate planning. One of the reasons is the fallacy that estate, will, and death are interrelated.
This is not the case because death and taxes are a certainty no one can avoid. It is better to prepare for something you cannot prevent than to let it happen and face the consequences of high estate taxes and probate fees.
Another problem that can arise from a lack of an estate plan is that your property will be at the discretion of the court to decide how to be distributed, and it may go to someone you would not like a lot. Therefore, make a plan today for your properties to be distributed according to your wishes.
Most high-wealth individuals in Canada pay billions of unnecessary taxes on the estate. If you do not want this to happen to you, you may have to make use of trust. To do so, follow the steps given below:
What is a Trust?
A trust is a legal arrangement and considered a separate entity for tax purposes under Canadian law that allows one person to transfer his assets to another person, whereby the latter manages and caretakes the assets for the benefit of a third party, which can include the settlor (earlier owner) himself.
In some cases, the settlor, trustee, and beneficiary can be the same person or a combination of different individuals.
A trust is not a formal entity in the eye of Canadian law and is treated more as an interpersonal contract.
Why are trusts so durable?
The tax and property laws relating to most of the matters continue to see new legislation every day.
A trust, which is not a formal entity, comes into being through the law of contract. Notably, the law of contract is traditionally unchanging as it sees an amendment only once in decades. Tax Laws, however, can have impacts on the effectiveness of trusts as an instrument.
Where a trust has income for a taxation year, the trust shall be deemed to be a taxpayer and shall be liable for tax on such income.
Trusts and Estate Tax Planning
- Establish a Trust with a Parallel Company after the Death of the Owner
This is also known as a pipeline method. In this method, you create a pipeline for the flow of wealth from one generation to the other without incurring post-mortem taxes.
The technique is that after the death of the owner, a trust comes into being, which then creates a parallel company. Thereupon, the former company sells its shares to the new company, against which the new company submits a promissory note.
After one year of simultaneous functioning, the latter company amalgamates with the first. The parent-trust enchases the promissory note, so the wealth moves from generation to generation through a pipeline.
Create an Inter Vivos Trust
Inter vivos means “between living men.” Transfer your assets to this trust during your lifetime and continue to enjoy income from it as a beneficiary along with your offspring.
At your death, the assets belonging to the trust will not be your property, and no capital gains or deemed disposition will be relevant. Being a beneficiary, you will continue to enjoy income from such a trust and inherit the assets placed in the trust.
Another benefit is that if you divide the income among your beneficiaries, you can minimize income taxes due to the personal tax credit available to every Canadian. The lowest tax bracket will be taxed to individual beneficiaries. However, you will have to consider the maximum cap.
Gift Your Assets to Your Children and Spouse Through a Trust
If you gift your assets to your children or spouse, you can see them enjoy this wealth during their lifetime.
You can also help them make investments from this money to enjoy a continuous income and flourish in front of your eyes.
Lend Money to Your Children's and Spouse's Trust
If you lend money to your offspring’s trust and charge the market interest rate, you can save tax on such transactions.
At the same time, you will be able to save on post-mortem taxes if you waive the debt before your death.
Charitable Remainder Trust
A charitable remainder trust is the one to which you transfer your assets to a named registered charity- with a remainder life interest. It’s often an inter-vivo trust but can be a testamentary trust. The asset becomes property of the trust at the time the trust is settled or on death when there is life interest in one of the beneficiaries). At your death, the assets become the property of the trust.
This trust is created to take advantage of a tax credit for a charitable donation.
However, the benefit for you is that you can enjoy income from such assets throughout your life or for a considerable period like 20 years. You and your beneficiaries can also enjoy income from such a trust.
Importantly, putting money in such a trust means that it will not only be tax-free but also that the assets will not incur any capital gains. In this way, there will be no capital gains tax at death.
Similarly, if you buy life insurance from the money you receive from such a trust, it can be highly beneficial, as your heirs can use the insurance money to pay off the taxes.
You can also sell the assets placed in such a trust without incurring any capital gains tax and then reinvest. This way, the overall benefit will be greater than what you are giving to charity.
Wealth Replacement Trust
It is a trust you create for receiving and dividing insurance money. Life Insurance is tax-free money that comes to your estate. It has many benefits. For example, it will give your beneficiaries ready cash to pay off debts, loans, and any taxes they incur.
So, if you create such a trust, the distribution of funds becomes more efficient.
Create a Cross-Border Trust for International Assets
If you own assets in more than one country, you should create a cross-border trust. The benefit of such a trust is that your assets do not see multiple probates at the time of administration.
Nonetheless, it will allow a smooth and uniform transfer of wealth from the first generation to the next.
Create A Testamentary Trust for Your Child
A testamentary trust is a trust that is created through your will and comes into effect upon your death. It allows you to control how and when your assets are distributed to your child.
Consequently, the trust document will be binding on the trustee, and they will not be able to dispose of the assets at their discretion. So, you can put conditions related to when your child should inherit assets, for example, when he grows into an adult, etc.
It allows you to create an income stream for your child. Similarly, it enables you to dispense the wealth to him at an appropriate time after you pass away.
Make Use of an Irrevocable Trust
An irrevocable trust can protect your wealth from lawsuits and creditor claims. It will also prevent your properties in that a whimsical family member cannot just sell them.
Similarly, it will ensure that the hole of your estate remains intact. Additionally, you can utilize the income from such a trust to benefit yourself and your beneficiaries.
Bottomline
Estate management is a necessary process that can save a lot of effort on the part of your beneficiaries. It can also allow them to have the comfort of inheriting money without hazards during times of grief and hardship.