There’s an old saying that goes, “The only things that are certain are death and taxes.”  But, even after you die, you still don’t get out of paying income tax.  Your executor must file your final income tax return within six months after your death or by April 30th of the following year, whichever is later.

There are several ways to minimize your estate costs.

Designate beneficiaries on RRSP’s, RRIF’s and life insurance policies so that the assets are passed on outside the estate, reducing the value.

Hold property and other assets as joint tenants with right of survivorship.  There may be legal and tax issues that arise when you transfer assets into joint registration so get professional advice before making any changes.

Share your assets.  Make charitable donations and cash gifts to adult family members while you are living, provided that you have ample funds for your own needs.

Establishing a trust is a good way to beat the taxman and leave more of your assets to your beneficiaries.  A trust is a legal agreement in which you place specific assets in trust for the benefit of one or more people whom you name in the trust.  A trust is treated as a separate entity.  With a properly drawn trust your estate can avoid probate.  Trusts also allow flexibility, control and tax efficiency.

Irrevocable Trust

An irrevocable trust is permanent and can never be revoked or changed.  You relinquish ownership of whatever assets you place in the trust – they are no longer part of your estate.  You must be absolutely certain you won’t want to change your decision.

It might be used to establish support for an incapacitated family member, set up an education fund for children or grandchildren or fund a charity to establish an income stream.

Revocable Trust

A revocable trust can be revoked or changed as long as you are alive.  It becomes irrevocable when you die.  The assets remain in your control and ownership until your death, which makes this type of trust far more widely used.  You can specify the age at which a child is to receive their inheritance, for example, or when it can be used for special needs such as education or buying a home.

The most common types are:

  1. Living trust.  Assets can be placed in the trust (by retitling them) as soon as the trust agreement is signed and notarized.  A living trust can be revocable or irrevocable.
  2. Testamentary trust.  This may be included as part of your will.  It will become effective on the probate of your will, which is when the assets will be transferred and the trustee takes over.
  3. Spousal trust.  This is a specific type of trust that is used to provide income to a surviving spouse for the rest of his or her life, and at the same time ensures the eventual delivery of the trust assets to other designated beneficiaries at the originator’s death.

For many, a revocable living trust is a good choice for estate planning.  It gives you the flexibility to change or even cancel it at any time.  It gives you control of your assets.  You can act as trustee yourself and continue to manage the assets, or you can appoint someone else.

You can specify the timing, amount and circumstances under which distributions are made.  The biggest advantages are that you can minimize estate taxes and avoid probate.

Planning to minimize your estate costs can be complex.  By hiring a professional, such as a lawyer, accountant, or trust company representative you will ensure you have considered all the strategies for your estate plan.

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5 Comments

  1. Hunter Dickson on September 20, 2011 at 8:46 am

    After having to probate two estates – my father’s and my sister’s, it is certainly worthwhile to have the foresight and hire an expert estate planner.

    A great overview on options. Thanks.

  2. Dr Dale Rathgeber on September 20, 2011 at 9:49 am

    In my experience most estates of a value less than $3 million do not warrant the establishment of trusts.

  3. Krantcents on September 20, 2011 at 12:02 pm

    I went through this with my mother about 6 years ago. Thankfully, it was very simple and I did not require professional help. The key to it was setting things up in advance.

  4. Theresa on November 17, 2011 at 7:45 am

    I’m reading the article on inheritance tax. My question is if we don’t have an inheritance tax in Canada and any cash in the bank will be yours, why should someone give cash gifts to family members while that person is still living?

    • Boomer on November 17, 2011 at 5:45 pm

      @Theresa: While there is no inheritance tax as such, there are probate fees which usually are a percentage of assets and can be substantial in some provinces. Gifts can reduce the assets subject to probate fees and also, a lot of people like to help out younger family members (education, house purchase, etc) without them having to wait.

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