This is the second post in a series regarding what happens to your assets at the end of your life. Having to deal with tax implications on top of everything else adds more stress to what is already a difficult time. So it's important to understand about death and taxes.
There is an extremely common misconception that upon your demise, all of your assets will automatically go to your heirs. That is not the whole story—your assets will first go to your spouse, but if you are the last surviving spouse, when you pass away, you are deemed to have disposed of all your assets for tax purposes. This means your heirs will be looking at a large tax bill on those assets, rather than inheriting their full value. This video is a nice overview of the three different types of assets in an estate: tax-free, capital gains, and taxable.
You Can’t Take It With You
There are ways to avoid this scenario if you plan ahead. I like to tell my clients the only way to avoid a large tax bill for your estate is to enjoy life while you are alive and spend everything!
If you plan to pass on assets to your children when you die, why not start now?
If you want to help your children now, give them cash. You might have to cash in some investments and be liable for the tax on that, but you will likely be able to maintain a lower tax bracket for this tax bill than the tax bill that your estate will have to pay when you die with assets.
Disposing of assets can be of interest to the Canada Revenue Agency (CRA), however—you would be well-advised to talk to a financial professional before making large gifts to family members.
This article looks at some potential tax problems with a large cash gift if the CRA thinks you are trying to shelter money from them.
The other option is to give your children a loan. The loan can be set up so it’s forgiven no later than at the time of your death. The loan can be interest-free if your adult children use the loan to fund their mortgage, put their children through school, buy a new car, and so on.
Higher-Level Estate Planning – Estate Freeze
A strategy that is used when you have high-value assets that grow in value is an estate freeze. What this does is “freeze” the value of the asset at that time in your hands and the tax liability that goes with it. Since you are able to estimate the value of the tax liability upon death, you are better able to plan for it by using a life insurance payout to cover the tax bill, as an example. This is a common strategy used in businesses that are being passed down from generation to generation.
This article goes into the tax planning idea of an estate freeze in more detail.
Life Insurance For The Win
If you want to secure some funds for your children after your passing rather than have a significant chunk of it go to The Tax Man, life insurance is a smart purchase. Purchasing life insurance to benefit your inheritors will not save any taxes, but the money from the life insurance policy will be available to them to pay those taxes that come due after your death. Also, the proceeds from life insurance are not taxable.
Let Us Help You Plan To Reduce Taxes
Another way to save on taxes when you die is to consider making a donation after your death with a bequest in your will. Come see us at Shaw & Associates Chartered Accountants to help you plan your estate, so more of your money can go where you want it to go.
Contact Shaw & Associates Chartered Accountants for accounting help you can count on. One complimentary meeting with us will put you and your business on a more profitable and positive path.