Estate Planning
Estate Planning tests the mechanics of transferring wealth on death: the deemed disposition, will validity, what passes outside probate, and the trust and beneficiary designations that make or break the plan.
Core documents
A valid will, a power of attorney for property and a power of attorney for personal care. Wills require the age of majority, signature at the end, and two witnesses who are not beneficiaries. Without a will, provincial intestacy rules govern and the court appoints the estate trustee.
Tax on death
- All capital property is deemed disposed at fair market value immediately before death.
- RRSPs and RRIFs are fully taxable unless rolled to a spouse, common-law partner, or a financially dependent child or grandchild.
- Spousal rollover defers the gain; assets left to anyone else trigger tax in the final return.
- The principal residence exemption, charitable donation credits on the final return, and the ability to carry back post-death losses (the 164(6) election) all reduce the bill.
Probate and what avoids it
Estate administration tax (e.g., Ontario: $250 on the first $50,000 plus 1.5% above) applies to assets passing through the will. Assets passing outside probate include jointly held property with right of survivorship, life insurance with a named beneficiary, and registered plans with a valid beneficiary or successor holder. Secondary wills (Ontario, BC) isolate private company shares. In Ontario a separate will for a secondary estate is common practice.
Trusts
Inter vivos versus testamentary trusts; alter ego and joint partner trusts (age 65+); family trusts. Inter vivos trusts face a deemed disposition every 21 years.
Worked example
A cottage has an ACB of $200,000 and FMV of $600,000 at death. The gain is $400,000; the taxable capital gain is $200,000; at a 45% marginal rate the tax is roughly $90,000.
Left to a spouse, the rollover defers this. Left to an adult child, tax is due on the final return. If liquidity is a concern, the answer is often permanent life insurance owned by an inter vivos trust or a named beneficiary, so proceeds bypass probate and arrive tax-free to fund the bill.
Traps
- Adding an adult child to title as joint tenant - resulting trust and income attribution issues may arise, and the deemed disposition is not always avoided.
- Confusing a TFSA successor holder (spouse, tax-exempt continuation) with a beneficiary (taxable).
- Assuming an RRSP avoids probate when no beneficiary is named.
- Forgetting capital property outside the province or country.
- Failing to review beneficiary designations after divorce or a death.