Good financial planning advice can steer estates away from the kind of tax traps that could significantly erode their value, says Wilmot George, managing director of tax and estate planning with Canada Life.

“There are a number of tax traps or blind spots that Canadians can run into from an estate-planning perspective,” he said, “which is why good financial planning advice can deliver so much value.”

Speaking on the Soundbites podcast this week, George said some pitfalls include:

the taxation of RRSPs and RIFs where named beneficiaries and estate beneficiaries are different;

missing the opportunity to tax income in the hands of the deceased, as opposed to a spousal rollover;

jointly held property involving adult children; and

the deemed sale or withdrawal of assets just prior to death that hikes the tax implication.

“Planning in advance allows time to consider and implement appropriate strategies to reduce taxes and other fees of death, thereby maximizing assets for beneficiaries,” he said.

Different beneficiaries

George pointed out that in the absence of a spousal rollover, RRSPs and RIFs are deemed withdrawn at time of death, with taxes payable by the estate. This is the case even if the plan contract has a named beneficiary, such as an adult child or grandchild.

“Now, where the estate beneficiary is different from the named beneficiary on the RRSP or RIF contract, taxes payable by the estate for the RRSP or RIF can frustrate estate beneficiaries when the RRSP or RIF is paid to named beneficiaries free of withholding taxes,” he said.

“Understanding the taxation of RRSPs and RIFs at death and the relationship between one’s estate and their RRSP or RIF named beneficiaries can go a long way in avoiding potential conflicts through appropriate planning.”

Spousal rollovers

George said that while spousal rollovers of RRSPs and RIFs are common at death, it might not always be the best option for families from a tax perspective.

“Where an individual dies earlier in the year, he or she might not have accumulated significant income for the year of death, allowing for taxation of additional income at lower tax brackets and rates if a spousal rollover is not requested,” he said. “Financial advisors can work with executor clients, their tax advisors and financial institutions to flush out and determine where spousal rollovers may and may not make sense.”

Jointly held property

Another potential trap or blind spot for Canadians is the use of jointly held property involving adult children.

“I’m not going to suggest that that strategy doesn’t work to bypass one’s estate and avoid probate,” he said. “But we need to understand that there are risks associated with jointly held property with adult children.”

Among the many questions it raises are: who will have signing authority with respect to transactions, do the children have creditors to be mindful of, are the children in unstable relationships that could complicate ownership, and what happens if the deceased had multiple children, but only one child is listed as a joint owner on that account.

“[These considerations] can create conflict at the time of death,” he said. “These are things that should be talked about with the family.”

Reducing the tax bill

George said Canadians are often subject to lower tax brackets and lower tax rates during their lifetimes, only to become subject to taxation at top rates for the year of death due to the deemed sale or withdraw of assets just prior to death.

“This can lead to a high taxable income for the year of death and taxation as high as 55% depending on province or territory,” he said. “Assets flowing through the estate at death might also result in probate fees of up to 1.7% of the value of the estate, depending on the jurisdiction.”

He said proper estate planning can reduce these costs, maximizing assets for beneficiaries.

“Whether it is advice related to tax minimization and death, the benefits of probate planning, the value and suitability of life insurance or tips on avoiding family conflict after death, the estate planning conversation is one that potentially impacts all Canadians,” he said.

“Why is estate planning important? Simply put, peace of mind. This can go a long way in bringing clarity and calm to situations that quite often are emotionally charged.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.