After your passing and before your assets are distributed to your beneficiaries, outstanding debts are settled within your estate including income taxes, probate fees and possibly capital gains tax (on investments, real estate, trusts, etc.). Your legal representative will file a “Date of Death” or “Terminal” tax return resulting in possible taxes being payable from the estate as it is settled. Any assets not automatically rolling over to the surviving spouse/partner will be subject to a “deemed disposition” at fair market value possibly resulting in a potential capital gain or loss on the deemed sale. Careful tax planning, conducted ahead of time, can help you avoid a substantial tax hit to your estate and help you preserve more value to be distributed amongst your surviving heirs.
What can you do to minimize the taxes and other mitigations of your estate?
There are ways to protect your estate from current and future liabilities such as trust planning and estate freezes. These procedures work best when done in conjunction with other strategies.
- Estate Freeze: A typical estate freeze allows you to exchange your common shares of your business for preference shares and have the company issue new common shares to a family trust or to your children and possibly yourself. The value of the preferred shares issued in the exchange will be “frozen” at the value ascribed to them at the date of exchange with all future appreciation and growth in value accruing in favour of the newly issued common shares; thus, capping or limiting any future tax liability on the disposition of the preferred shares.
- Trusts are a particularly useful tool for mitigating tax because they create a unique legal relationship that maintains ownership of an asset on behalf of the beneficiary. A trust can assist a surviving spouse avoid an adverse marginal tax rate they might otherwise be exposed to while also allowing for a continued and orderly splitting of income amongst family members. Assets, like a family cottage, etc., can also be placed into trusts possibly deferring taxes for the next generation.
- Charitable Donations spread your legacy, create a lasting social impact and are a powerful tool for lowering estate tax. The capital gains taxes can be substantially reduced and possibly eliminated altogether. When assets, having appreciated in value, are donated to charitable causes.
- Transfer Property to Your Spouse: One of the easiest and most straight forward ways to defer taxes on death is to have your property rollover automatically to your surviving spouse. The surviving spouse would simply slip into the shoes of the deceased spouse in regard to the assets’ ownership and carrying costs, etc. thereby deferring any gain on disposition until the death of the surviving spouse.
- Buying Assets in Your Child’s Name: A simple and legal route to reduce estate taxes is to buy the article (artwork/property/jewelry, antiques, etc.) in your child’s name. They own the article and any appreciation in the value already belongs to them.
Significant tax losses on your estate are an important concern. Pass on the rewards of your efforts to the next generation. If you want to maximize the wealth of your estate and minimize the tax burden, contact a CPA. They can help reduce and defer the tax on your estate.
Interested in reducing and/or deferring the tax burden on your estate? Contact Cook and Company Chartered Professional Accountants. Whether you operate a sole proprietorship or a conglomerate with multiple subsidiaries, Cook and Company uses their experience and expertise to help you. Contact us for a complimentary consultation.