Estate Planning Strategies

Objectives

• Minimization of income taxes on death.
• Minimization of succession duties.
• Income splitting with other family members.
• Increase capital gains exemption for farms & private corporations.
• Provide for dependents in the event of death or disability.

Planning

• Prepare a will and power of attorney.
• Take inventory and document your assets (adjusted cost base & fair market value), and liabilities to estimate estate income, expenses and taxes at death.

There are estate taxes in the United States and Hong Kong but there is no estate tax Canada. However at death, you are deemed to have disposed of all of your capital property for proceeds equal to the fair market value. Any capital gains accrued to the date of death will be included in your final tax return unless all assets passes to your spouse or a spousal trust at your original cost base.

To the extent it has not been utilized, the enhanced $400,000 capital gains exemption on qualified small business corporate shares or qualified farm property may provide relief from capital gains tax.

The last tax return covers the period up to the date of death. Up to three additional separate returns may be filed for certain types of income earned and not received at the date of death. Each tax return may claim full personal tax credits resulting in tax savings.

It is important to consider insurance within an estate plan. Insurance can provide replacement income for the surviving spouse and children, funds to pay taxes, debts and other expenses arising on death. In business situations, insurance can provide funding in the buy-out of shareholders, partners or their heirs.

Exempt life insurance policies also provide an investment element of tax free growth. Insurance proceeds payable on the death of the insured are not taxable to the beneficiary.

Donations claimed cannot exceed 75% of the individual's net income for the year. The 75% restriction does apply to (a) gifts of cultural property and (b) the year of death, any excess donations may be carried back to the preceding tax year.

There is a further tax credit on 25% of any taxable capital gain and/or recaptured capital cost allowance arising from donations of capital property. After February 18, 1997, the income inclusion rate was reduced to one third on certain taxable capital gains (from arm’s length donation of shares of a private company or any property listed on any Canadian stock exchange.

The concept of estate freezing is to transfer the future growth in the value of your assets and the future tax liability on the appreciation to your heirs. Estate freezes are often done through corporations whereby the ownership of the shares are structured whereby the "growth" common shares are held by the heirs and the majority voting preference shares are held by you.

A trust can be set up to achieve income splitting, provide for the maintenance of survivors, preserve control of business interests or manage assets until age of majority.

A testamentary trust is created under your will and is taxed at the same tax rates as individuals, income up to $100,000 will be taxed at lower graduated rates. An inter-vivos trust is set up during your lifetime and is taxed at the top rate for individuals. Undistributed income can be structured to be taxed at lower rates upon an election to allow income to taxed in the hands of a preferred beneficiary (a beneficiary who qualifies for the disability tax credit).

Trusts are subject to capital gains tax every 21 years. This tax is effective January 1, 1999 for all trusts established since 1972.

An offshore trust can help certain individuals who are exposed to legal liability in a potential lawsuit but it may not protect you from Revenue Canada. Because of significant start up costs and annual fees, an individual should have at least $300,000 in liquid discretionary funds that they do not need to maintain their every day living expenses.

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