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VIEWPOINTS LIFE INSURANCE SEG FUNDS TAX UPLOOK QUARTERLY RRSP TFSA |
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| May 2012 |
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How do I bequeath my cottage fairly to my children? Over 3 million Canadian couples will each pass an average of one quarter of a million dollars on to the next generation over the next 30 years. Consider that 50% of all personal assets are owned by people 50 years or older. Transferring wealth to your children. The inheriting recipients will be faced with a host of new responsibilities when they inherit. They will have to decide: should I sell the house, what assets should I keep or place in storage, which assets should I share, which should I sell? For Canadians who own a cottage (which for tax purposes is a second residence) special tax planning may be needed. Therefore, before you die, consider including the following in your estate planning directives, so your estate's executor(s) will understand what to do after you die. Utilize legal and/or accounting help. If your estate is substantial, consider hiring an estate or tax planning lawyer to work with your financial advisor if your inheritance is complex, and have them discuss your estate with the children. Include your cottage when planning your estate. If you own a cottage, there may be family quarrels over who will pay for its upkeep and/or use it once you die. Consider these alternatives: · Have the cottage held in a testamentary trust after you die. · Maintain control: set up a living trust, so the cottage won't form part of your estate at death. · If the children want the cottage, give or sell the cottage to the children while you are alive. Deemed disposition When ownership of a cottage goes directly to beneficiaries or into a trust, a deemed disposition takes place. This means that if the value has increased, capital gains tax may have to be paid. Your accountant can help you calculate what that may be, based on the current fair market value of the property in excess of what you paid for it. Approximately half of the net growth in value will be taxed when disposed of, or upon your death. Large capital gains can put you into a much higher tax bracket - higher than your normal bracket - the year the disposition occurs. Advanced estate planning can cover your cottage's estate tax liability. Perhaps your cottage has increased in value over several years of inflation, increasing the fair market value of your property. Just like a business, a cottage can have capital gains growth. Thus, that asset can also later present you with a tax liability. If you die, or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested.If you consider passing the cottage on to the children, personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance, at volume discounts that can be substantial, for other needs such as the disposition of business capital gains and buy-sell agreements; creation of future income for a spouse or dependent child, if necessary. By using life insurance, they won't inherit the cottage with a large income tax bill. For a minimal monthly premium payment, your potential capital gains tax liability on a family cottage can be immediately covered. You can purchase a life insurance policy on the owner(s) for the projected tax liability of the estate. Note: Where the property passes to the deceased's spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once. Mortgage redemption maneuver. While you're alive, let your children buy your home or cottage. Consider a family-run reverse mortgage on the parents' home or cottage. One or more children can increase their parents' cash flow by agreeing to buy their real estate while they are alive. The parents hold a mortgage on the property and receive monthly payments that buy their home or cottage. Life insurance on the parents' lives can pay off any unpaid portion of the mortgage, plus any estate taxes that will be due on the property in the parents' estate. This can entirely equalize the estate with other siblings. The person holding the mortgage would be the beneficiary for tax reasons. Estate equalization maneuver. Where there is one child, who, to the exclusion of others, will receive your cottage, an inequity may occur. Your estate will pay the applicable capital gains tax on your cottage, thus lowering the remaining assets in your estate for equal distribution among the other children. Therefore, you may want to plan for estate equalization to the other heirs using life insurance proceeds. You could also increase the insurance to pay for the taxation on the cottage. If you are married, the asset is taxable in the estate of the last spouse to die (assuming the cottage passes to the surviving spouse, or spousal trust, on the death of the first spouse). A joint last-to-die life insurance policy may be the least costly method to look after this tax. Note: Prior to February 28, 2000, the inclusion rate for tax on capital gains was 75%. From February 28, 2000 to October 17, 2000, the inclusion rate was 66 2/3%. Currently, and as of October 18, 2000, the inclusion rate was further reduced to 50%. You may need to treat your capital gains or losses separately, based on these above periods and inclusion rates, relative to the time that you realize your capital gains or losses.
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