Optimize your estate planning in 6 steps

The largest intergenerational wealth transfer in history recently began. It was estimated in 2019 that $1 trillion will have been bequeathed to baby boomers in Canada by 2026¹. This transfer will continue for a long time as this generation, whose average wealth is estimated at $1.2 million per household, in turn carries out a second major intergenerational transfer.

This windfall means that the boomer generation’s heirs will come into considerable wealth that they will have to manage. It may give rise to financial headaches and family discord. To make life easier for your loved ones, and especially your estate liquidator, you can take a number of measures.

Not only can you facilitate estate settlement and ease the emotional burden on your heirs but you can also save them a significant tax bill and leave them a larger inheritance.

Start at the beginning. To effectively plan the transfer of your assets after your death, it’s important to identify all movable and immovable property in your possession. This is an essential step to facilitate and optimize the transfer of your assets and to ensure nothing is left out. The property to be inventoried includes the following:

Investment accounts

• Registered Retirement Savings Plan (RRSP) / Registered Retirement Income Fund (RRIF)
• Pension plan Tax Free Savings Account (TFSA)
• Registered Education Savings Plan (RESP)
• Non-registered investment accounts
  
  

Real estate

• Principal and secondary residences
• Income properties
  
  

Personal property

• Jewellery
• Furniture
• Art
• Tools
• Books and collections
  
  

Be sure to keep the inventory up to date and inform your potential liquidators of the location of the assets and any legal documents associated with them.

By drawing up a meticulous inventory, you can determine the value of your wealth and better decide what you want do with it. Do you want to leave everything to your spouse? Do you want to leave specific assets to your children, grandchildren or nieces and nephews? Perhaps you’d like to make a donation to your children during your lifetime in the form of a down payment or to contribute to your granddaughter’s RESP?

The options are many and they have significant financial and tax implications for you and your heirs.

With a complete inventory and defined goals, you can optimize your financial and estate-related decisions. A well-crafted plan will also give you invaluable peace of mind.

The tax rules vary depending on the type of assets bequeathed as well as your relationship with the beneficiary. To facilitate the liquidator’s work and to avoid an unfair division of your property, it’s important to know the effects that your bequests can have on your estate.

As a general rule, you can roll your assets over to your spouse in order to avoid inheritance tax. Such a rollover is impossible for any property bequeathed to other people, with rare exceptions.

RRSPs and RRIFs

When bequeathed to the spouse, the RRSP retains its characteristics. No tax is levied and the spouse can continue to obtain tax-sheltered returns. In addition, the amount transferred will not be deducted from the beneficiary’s contribution room. In the case of a RRIF, disbursements must continue for the benefit of the spouse and are taxed accordingly.

Leaving an RRSP to any other adult means that the estate will be taxed in full. If left to a minor, the RRSP can be paid out in the form of annual annuities until the age of 18 to reduce or to eliminate the tax burden.

TFSA

Like the RRSP, the TFSA retains its characteristics for the spouse and no contribution room is lost. Note that only the value of the TFSA at the time of death is tax-free. The estate must pay tax on any gain in the TFSA that occurs between the time of death and the transfer.

In other cases, the TFSA becomes part of the estate. Its value is not taxed, but the account nevertheless loses its tax characteristics. Thus, the returns earned after death will be taxed.

If you make a specific bequest of your TFSA, the TFSA will still be paid to the estate, but the estate will be required to pay the value of the investment to the designated person.

Pension plans and Quebec Pension Plan (QPP)

For the QPP, a predetermined percentage of the pension is paid to the spouse by default, if there is a spouse, depending on the contributions made by the deceased.

As for defined-benefit pension plans, the law requires a transfer to the spouse, if there is an eligible spouse. A bequest to any other person is impossible even if you express such a wish in your will. The eligible spouse will receive the scheduled payments.

RESP

It is possible to appoint a successor subscriber so that grandchildren can benefit from the capital and grants deposited in an RESP. In the absence of a successor subscriber named in a will, the amounts in the RESP are integrated into the estate and can be divided among all heirs.

The RESP may survive the estate, but the estate may have to liquidate it. If the RESP closes before the beneficiary can be paid, the grants will have to be reimbursed to the governments. Appointing a successor subscriber protects the RESP from this risk.

Real estate

Real estate, whether a house, an income property or a parcel of land, can be bequeathed to your heirs. As a general rule, a tax will be levied on the capital gain obtained from the properties. You can get a tax exemption on the principal residence of your choice, however. To qualify as a “principal residence”, the property must have been lived in by the family for at least one week during the year. Thus, a cottage in the countryside or a condo in Florida can qualify as a principal residence.

If several properties qualify as a principal residence, it may be advantageous to protect the one that has increased in value the most since it was purchased. It is also possible to apply a partial exemption. For example, if you have owned a house for 40 years and a cottage for 20 years, you could exempt only 20 years of capital gain on your home and use the other 20 years of exemption available, as well as future years, for the cottage.

Personal and other property

The value of personal property, such as cars, furniture, equipment, books and tools, is determined by the purchase price. As a general rule, such assets do not increase in value and were acquired with after-tax amounts. Thus, there are no possible tax losses.

That being said, works of art may lose or increase in value and may, therefore, be subject to capital gains or losses.

When it comes to your estate, your legal situation is a crucial factor, especially in the absence of a will. If you are in a common-law relationship or a divorce from a previous union has not been finalized, your loved ones may find themselves in an uncomfortable situation.

Without a will, your property will be distributed according to the legal devolution under the Civil Code of Quebec. This does not recognize the existence of a common-law spouse. Children and the spouse with whom a divorce has not been finalized will be the first beneficiaries. In no case does the legal devolution allow the common-law spouse to receive the inheritance.

The wishes set out in your will take precedence over the Civil Code. A will allows you to designate the heirs of your choice, including your common-law partner, without restriction. Your separated but not divorced spouse loses any rights to your assets. The only exception is a defined-benefit pension plan.

Even if the scenario proposed by legal devolution suits you, it’s wise to draw up a will. You can specify funeral arrangements and appoint a liquidator, both of which will make life easier for your bereaved loved ones.

A will also allows you to direct the management of your estate by making special bequests in order to optimize the transfer to your heirs. You can facilitate the liquidator’s work by sparing him or her financial headaches as well as difficult decisions that may damage the relationships between your loved ones.

Even so, you must be vigilant with individual bequests. By specifying that a portion of your assets go to a specific person, you reduce the assets available in the estate, which still has to bear the potential tax burden associated with the bequest.

To avoid unfair situations or the insolvency of your estate, you should seek advice from a financial planner and a notary.

Depending on your bequests, your currently tax-sheltered assets may be subject to tax after your death. Because capital gains, dividends and interest income are taxed differently, it may be beneficial to plan your investments accordingly.

Donating during your lifetime is also an option, as long as you can be sure you have more assets than you’ll need. Rather than transferring a large, heavily taxed inheritance, you could make several small donations. In addition to crystallizing your gains, you incur the tax burden yourself at lower rates.

But it’s best to consult a financial planner about such matters. It’s vital that you respect your investor profile and preserve your financial security. Besides, such optimizations can affect your social benefits.