Taxpayers traditionally use their Will as a way to control the distribution of the assets that they own at their death. Your Will can effectively do two things. It appoints someone (the executor or estate administrator) to take care of your assets after your death and tells the executors what to do with those assets.

Probate is a process by which the executors are able to provide a third party with evidence that they have the authority to deal with assets of the deceased. In recent years, the provinces have realized the value of these testamentary successions and have increased probate fees. These range as high as 1.5% of the gross value of an estate in Ontario and 1.4% in British Columbia.

In addition to these fees, another drawback is that assets subject to probate become a matter of public record, which can be accessed by anyone for a small fee.

To avoid these fees and the disclosure of otherwise private information, taxpayers often use other methods to pass assets after their death. Of course, with any tax planning strategy, you should contact Logan Katz LLP to ensure no unexpected tax consequences arise.

Joint ownership

Joint ownership is one method that is often used to reduce or avoid probate fees. Assets that are held in joint ownership pass directly to the joint owner on the death of an individual and are usually not dealt with in the Will. However, there is a disposition of the deceased's interest in these assets for income tax purposes at the time of transfer.

Family trust

Another means of reducing the impact of probate fees is to create an intervivos trust. This type of trust is created during one's lifetime and the terms are specified in a trust deed. The assets held in the trust do not form part of your estate, even though you may be a beneficiary. At death, the other beneficiaries of the trust become entitled to the assets. However, it is important to note that when you set up the trust and convey assets to it, there is generally a deemed disposition of those assets at fair market value. As a result, you will have to pay tax on any accrued gains. When the assets are distributed by the trust to Canadian beneficiaries, the distribution is at the trust's tax cost with any taxes on that distribution being deferred.

Spousal trusts are treated differently. During your lifetime or on death, you can transfer assets on a tax-deferred basis to a spousal trust of which your spouse or common-law partner is entitled to all of the income and is the only person entitled to any of the capital during your spouse's or common-law partner's lifetime. No gain would be realized on the transfer of the assets to a spousal trust. All of the assets of the spousal trust are deemed disposed of on the death of the spouse or common-law partner resulting in the realization of any accrued gain at that time.

Proposed legislation

Recently proposed legislation extends the rollover treatment of a spousal trust to two new forms of trusts: the alter ego trust and the joint partner trust.

Alter ego trust

An alter ego trust is one that you establish for yourself. To create an alter ego trust:

• the individual transferring assets to the trust must be 65 years of age or older
• income earned within the trust must be payable only to the individual transferring assets to the trust
• the individual transferring assets to the trust is the only one who can receive
• the capital during the individual's lifetime, and
• the trust does not elect out of these rules.

The assets within the alter ego trust are transferred to the named beneficiaries after the death of the settlor (the creator of the trust). However, this is where the similarity with an inter vivos trust ends. With an inter vivos trust, assets transferred to a trust, other than one established for a spouse, are deemed to have been transferred at fair market value at the date of transfer, and therefore attract tax at the time of transfer. An alter ego trust permits the transfer of the assets at cost base, and thus, taxes do not apply at the time of transfer. When the settlor of the trust dies, the alter ego trust will then be taxed on the gains that have accrued. The alter-ego trust thus allows you to defer the tax liability until the time of death.

Joint partner trust for those 65 and older

The proposed joint partner trust is similar to both the spousal trust and the alter-ego trust. With a joint partner trust:

• again you must be at least 65 years old in order to establish a joint partner trust and receive the rollover treatment
• both you and your spouse or common-law partner must be the beneficiaries of the trust who are entitled to receive all the income and the only ones who can receive capital during your lifetimes, and
• the trust can specify the beneficiaries to whom the assets are to be transferred at the time of your deaths.

 
Similar to an alter ego trust, the tax on the accrued gains on assets owned by a joint partner trust is deferred until the death of the last surviving spouse or common-law partner.

Get professional advice from Logan Katz LLP

As you need to consider many issues in your estate planning, you do need professional advice. Other issues could include a power of attorney, a pre-nuptial agreement, the impact of your estate planning on your business, family law considerations and other matters unique to your particular situation.

Having a clear understanding of your current financial situation, your long-term financial goals and the tax implications of your estate planning will help you make the best decisions for your future and that of your heirs.

Please contact Logan Katz LLP for more information.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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