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Probate Tax [351]

 No discussion of tax – planning the will would be complete without a brief mention of probate tax (or, as it is referred to in Ontario, “estate administration tax”). In essence, probate planning is aimed at reducing the value of the estate that passes to the personal representative – probate tax is proportional to the value of the estate, so the lower the value of the estate, the lower the probate tax that will be payable. Reducing the value of the estate can be achieved through the use of multiple wills and a Varity of will substitutes. However, it is worth noting that many of the more popular probate planning techniques (such as transferring assets to an alter ego trust or into joint tenancy with the intended beneficiary) present significant potential pitfalls, not least of which is that they can hinder effective tax planning. For example,

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If the bulk of a testator’s assets pass outside his/her estate to the intended beneficiaries, this will mean foregoing the use of one or more testamentary trusts to engage in post – mortem income splitting;

Transferring assets into joint tenancy will result in a deemed disposition, possibly accelerating the recognition of capital gains; and

Transferring assets to an alter ego or joint partner trust raises a host of tax issues, such as the fact that such trusts rather than the marginal rates applicable to individuals and testamentary trusts, and that any capital gains or losses realized on the deemed disposition of assets held in these trusts will be segregated from gains or losses taxable to the deceased in the year of death.

SOME USES OF TRUSTS IN ESTATE PLANNING

While everyone should make a will and a continuing power of attorney, not everyone will want or need to set up a continuing trust. This being said, it remains true that trusts are useful for a wide variety of estate planning purposes. Non – tax purposes achieved through the use of trust include:

Holding assets for minor children until they reach the age of majority – or perhaps later.

Managing assets for beneficiaries who lack the interest or ability to do so.

Protecting assets from spendthrift beneficiaries (and their creditors).

Protecting assets from the claims of disgruntled family members.

Maintaining privacy.

Centralizing management of assets and ensuring the continuity there of upon the death or incapacity of the settler.

Ensuring that children from a previous marriage are provided for.

Historically, testamentary trusts were above all used as vehicles for preserving family wealth for future generations, when there was concern that an outright distribution might lead to its erosion (e.g., due to the actions of an incompetent or spendthrift heir). More recently, trusts have become popular where protection of the estate is not a concern at all,. Trusts have come to be prized for the tax – planning advantage they can bring to an estate plan. These include the following:

Income splitting through one or more testamentary trusts.

Reducing exposure to probate tax.

Inter – provincial tax planning.

Sheltering investment income of immigrants to Canada during their first five years in Canada.

Establishing an estate freeze.

deferral of capital gains (that would otherwise be incurred on the death of the settler).

Multiplying (family) access to the qualified small business deduction.

SOME BASIC TYPES OF TRUSTS

It is worth noting that, at the time of writing, draft legislation proposes new tax treatment for almost all estate and trust types. With certain exceptions, the draft legislation would tax and estate income at the highest marginal rates, and would also require calendar year ends and the payment of tax installments; this would apply to 2016 and subsequent year.

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