Before any money or property you leave behind is passed on to your loved ones, your debts must be paid first. Other estate costs, such as funeral costs, legal fees, and other administrative expenses in settling your estate, will also arise. There may be other common estate costs, such as estate administration tax and taxes on investments that you may not have considered in your planning. Remember — failing to plan is planning to fail.
Three Common Estate Costs
- Estate Administration Tax (Probate Fees)
After you die, your estate trustee may need proof (requested by financial institutions and government agencies) that they are the person authorized to represent your estate. An application for Certificate of Appointment of Estate Trustee with (or without) a Will (Probate) is the process that provides court certification of this fact. In Ontario, the fees (officially called an estate administration tax) equal almost 1.5% of your estate’s value at the date of your death. It should be noted that your debts (other than any mortgage registered against your real estate property) and other costs, such as funeral and related expenses, are not deducted from this value for the purposes of calculating the estate administration tax. Generally speaking, assets that have a designated beneficiary or are held jointly with right of survivorship are not part of your estate for the purposes of calculating the tax.
- Income Tax on Capital Gains
At death, you are deemed to have sold off all your capital property. Your estate must pay the income tax liability on any capital gains that occur due to this deemed disposition.
- Income Tax on Tax-Sheltered Savings Plans
Registered plans such as RRSPs and RRIFs may be transferred tax-free to your spouse’s or common-law spouse’s (qualifying spouse’s) plan. If you do not have a qualifying spouse, or if your qualifying spouse does not transfer the savings to his/her own plan, the full value of these savings at the date of your death is deemed to be disposed by you and your estate must pay the income tax liability. In some cases, your estate may also be able to transfer your RRSP/RRIF to a Beneficiary’s RDSP.
Planning Tips to Manage Estate Costs
- Leave a Valid Will
Without a valid will, your estate gets settled according to the laws of your province, rather than according to your personal wishes. This will be a more complicated process, with higher legal fees and the potential for costly disputes.
- Consider Designating Beneficiaries for Insurance and Registered Plans
Many life insurance policies, RRSPs, TFSAs, or other registered plan accounts allow you to name a beneficiary or beneficiaries to receive the money from the policy/account when you die. This means the money sidesteps the estate administration process and is paid directly to the named beneficiary (or beneficiaries). As the money does not form part of your estate, the money is not subject to estate administration tax, and there is little to no delay in your beneficiary (or beneficiaries) receiving the money. Caution – do not designate a minor.
- Owning Assets Jointly with Right of Survivorship
Holding assets (such as a home or cottage) as joint tenants with another person is another strategy to be considered for reducing estate administration tax. Jointly owned assets pass by right of survivorship to the surviving joint owner, and are generally not considered part of your estate (and are therefore not subject to estate administration tax).
Joint ownership arrangements can be complicated. You should obtain legal and income tax advice before entering into one of these arrangements.
- Permanent Life Insurance Policy
For estate planning purposes, you may wish to consider a permanent life insurance policy. Permanent life insurance covers you for life, no matter how long you might live. Term insurance is only to be paid out if you die during the Term.
A benefit to having life insurance is that insurance monies can be used to pay estate costs. To do this, name your estate as the beneficiary on the insurance policy. Although your estate will pay estate administration tax on the insurance proceeds, it gives your estate the cash to pay debts, taxes, or other obligations arising on your death. This may avoid the need to sell estate assets, such as a home or cottage (which beneficiaries may want to keep in the family), in order to pay the capital gains or other estate expenses.
- Preplan and Prepay Your Funeral
Preplanning and prepaying your funeral removes a key expense that your estate must pay following your death. When you prepay, the money is deposited into an interest-bearing trust account or insurance fund until your funeral. You also gain certainty over costs because you choose the type of funeral you want in advance and your family is saved the difficult task of making these decisions.
This blog post was written by Diana Tebby, a member of the Real Estate and Wills and Estates teams. She can be reached at 613-369-0384 or at diana.tebby@mannlawyers.com.
