This blog will consider some common estate planning scenarios as food for thought. Every person’s wishes and situation are different, and there are many estate planning alternatives to be considered to achieve an individuals goals. Here are a few to consider:
- The RRIF trap – Some might consider that it is always best to withdraw only the mandated minimum from your RRIF each year. This may not be true for some or perhaps most people on retirement incomes. Remember that the trick with RRIF withdrawals is to get the income out at a lower rate than when you contributed the money, or at least, a neutral level. This means that your marginal tax rate is the most significant figure to consider. It might be a good objective to take as much from your RRIF as you can each year to reach the top of the marginal bracket that the rest of your income typically puts you in. This ensures you will pay tax at a constant rate on these withdrawals and have more tax-paid cash available outside your registered vehicle, which may, in turn be reinvested in a Tax Free Savings Account. You will benefit by having more tax-paid cash available outside your registered account for personal expenses or investment and help to minimize the likelihood that your estate will face a large tax bill on your final return from RRIF balances that have not been withdrawn. There may be specific reasons for you not to adopt this strategy such as OAS clawback or other social benefit payments tied to your income level, but in the absence of these factors it should be a strategy to consider.
- Avoiding probate tax – In British Columbia probate tax is 1.4% of all estate asset values greater than $50,000 and 0.6% for values between $25,000 and $50,000. Estates below $25,000 in value are not subject to this tax. Some techniques will avoid probate, such as the use of segregated mutual funds (those run by insurance companies, as they are technically insurance policies and may be designated for a specific beneficiary outside the Will and thus outside the Estate. These funds however typically pay a high service charge (management expense ratio) compared to alternative investments, meaning that what you save in probate tax may be lost in management fees and lower investment return during the life of the investment. Another potential alternative is to use a trust vehicle which may be used to pass assets outside the estate to designated beneficiaries. Assets held in an inter vivos (created while you are alive) trust are taxed at the highest marginal rate in Canada so income generated must typically pass to the beneficiaries each year to avoid punitive taxation. These assets, however, will avoid probate tax and be designated specifically in the way you wish regardless of your Will. This will also protect your privacy as the trust will not form part of your estate and thus will not become part of the public record during the probate process. This may also offer protection from a Will variance challenge from a disgruntled beneficiary or family member who was excluded from the Will. These are, however, legal considerations to discuss with your lawyer if they are important for your situation.
- Bequests to charity – It is possible to optimize the final tax position of your estate by making charitable donations in your Will that will generate credits for your final return. This was discussed in another of my blogs so I will not elaborate further here.
- Alter ego/Joint spouse trusts – These are relatively new vehicles recognized under the Tax act designed for people aged 65 or older. This type of trust must payout its income to the trustee during their lifetime before passing to the ultimate beneficiary at their death. You gain the lifetime income from the assets, bypass the Will and thus probate tax and get to direct the final disposition of assets to the ultimate beneficiary. These can be great advantages but must be weighed against the cost of maintaining a trust, which must file its own tax return each year, and be established by a lawyer to ensure it complies with all relevant laws.
These are just a few ideas to consider, what do you think? Have you used a different technique that works well for you?