Invest well. Living well: how can I reduce my inheritance tax? (part 2)

Prior to COVID-19, we often hosted client appreciation events, including educational seminars on specific financial planning topics. Our most attended session to date was Estate Planning and Tax Reduction Strategies.

Prior to COVID-19, we often hosted client appreciation events, including educational seminars on specific financial planning topics.

Our most attended session to date was Estate Planning and Tax Reduction Strategies. We never thought talking about death and taxes could fill a room.

Our previous article discussed potential tax implications upon death, including income tax and probate fees. As promised, we continue with strategies that can help reduce the tax burden:

• Have an up-to-date will: First and foremost, make sure you have a will in place. Please review it every five years or after any major life event (marriage, divorce, birth of children, etc.).

• Proper use joint accounts: Placing assets/accounts in joint name with spouses or adult children can avoid probate, ease the transition and help ensure that no bills go unpaid. Some examples include bank accounts, investments, vehicles, safes, and household bills.

There are cases where co-ownership may not make sense. For example, adding your adult child to the title of your primary residence could jeopardize the assets if they suffer a marital breakdown, business bankruptcy, or personal lawsuit. Also, adding an adult child joint, but not all of your children, could cause misunderstandings and/or potential conflicts. In addition, adding a person to the principal residence title could result in the loss of part of the non-taxable capital gain allowance.

• Name beneficiaries: review your retirement savings plans, retirement income funds, tax-free savings accounts (TFSAs), insurance and pensions. Don’t forget to also check work policies and investments, if any. Spouses should be named successor annuitants for TFSAs so that they can retain full tax-exempt status in their TFSA.

Sometimes it’s wise to name your estate as the beneficiary of your RSP or RIF so that the executor can facilitate the distribution and pay the taxes. This usually makes sense if you are single, divorced, or widowed.

• Take more income now: One of the consequences of losing a spouse is the loss of the ability to split income, which can result in a higher tax bracket and loss of Old Age Security (SV). Three common areas to consider are:

I. Recover RSPs or RIFs sooner and/or before age 71, especially if you have larger balances.

II. Reap capital gains each year on your non-registered investment.

III. Draw additional wages or dividends from your business.

Pro Tip: If you have a large amount of credits or deductions in a year (business or investment loss, charitable donation, medical expenses, etc.), be sure to consider the merits to take extra income to compensate.

• Pre-inheritance and gift: Since there is no tax on gifts, consider gifts to your loved ones as a pre-inheritance during your lifetime, in order to see them benefit from it. Please note that there are special rules for consideration and attribution when donating to minors.

• Charitable: There are significant tax breaks for philanthropists. This can include strategies such as naming a charity as the beneficiary of your RSP or RIF to eliminate the tax burden, donating securities with large capital gains to charities, or making direct bequests in your will.

• Insurance: Insurance can help replace income, pay taxes (including large capital gains on a recreational property or business) and can be particularly useful for blended or complex family situations. It’s usually paid out quickly, tax-free, and kept private because it flows outside of the will. There are other opportunities for incorporated businesses.

• Consider trusts: Those with significant assets can explore trusts to help reduce taxes, avoid probate, ensure proper asset allocation, provide income and maintain privacy.

The above is not an exhaustive list of estate planning. Because each family has different dynamics and values ​​and estate planning is complex, we strongly recommend that you seek professional assistance in building your estate plan.

Until next time, invest well. Live well.

Owritten by Eric Davis.
Opinions expressed are those of Eric Davis, Senior Portfolio Manager and Principal Investment Advisor, and Keith Davis, Associate Investment Advisor, Private Investment Advice, TD Wealth Management, as of April 14, 2022, and are likely to change based on market and other conditions. The Davis Wealth Management team is part of TD Wealth Management Private Investment Advice, a division of TD Waterhouse Canada Inc., which is a subsidiary of The Toronto-Dominion Bank.

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