How Ottawa shares in your estate

Estate planning? Two simple words which stand for arranging your affairs to ensure that whatever remains of your retirement savings after you die passes to your heirs according to your wishes without delay and unnecessary tax payments.

It’s a crucial issue for the 50-plus. Sadly, it’s an issue far too often ignored. That’s why the subject will be the key theme of next January’s CARPNews Financial Guide: Will your heirs be able to afford their inheritance?

While it’s technically true that we do not have an estate tax or death duty in Canada, your beneficiaries may end up facing a huge income tax bill that could catapult even those of modest means into the highest tax bracket.

That’s because few people realize the government will be there, sooner or later, to “scoop up” its share of an estate. And, without realizing it, even fewer people are prepared for this eventuality.

Here’s an example: RRSPs or RRIFs containing substantial assets will ultimately trigger a tax liability amounting to 50 per cent or more. However, if you consider such registered monies to be estate assets in addition to a source of retirement income, you may be able to use life insurce to keep your legacy intact.

When you die, your capital assets are deemed by Revenue Canada to have been sold, and any capital gains resulting are folded into your taxable income and reported on your final tax return. RRSPs and RRIFs are brought into this taxable income as well. This is not the case when your estate is left to your spouse — instead, it rolls over tax-free to him or her. But that’s merely a deferral. The tax liability is triggered when the assets are passed on to the next generation.

Buying life insurance is a sound way to block Revenue Canada from becoming such an unintended beneficiary. The inevitable taxes will still be paid, of course, but the insurance policy generates the money needed to preserve your estate.

The basic concept is to buy enough life insurance to take care of the taxes when you (or you and your spouse) die. Providing you’re in good, even reasonable health, the money you pay out in annual premiums could easily be offset by future tax savings.

Some insurance plans are specifically designed to pay out a lump sum when the surviving spouse dies — they’re called second-to-die policies — and they’re generally substantially cheaper than a policy dealing with one life alone. It’s also extremely important to understand the role of an executor and to choose yours with great care. The executor named in your will is the person entrusted with settling your estate according to your wishes and administering any trusts you may have set up.

There are two types of executor: corporate, such as a trust company, and individuals, such as family members or close friends. I urge you not to saddle a relative or friend with what can be an extremely complex and time-consuming job, certainly not without their consent. If you want to appoint someone close, make them a co-executor, along with a professional advisor or trust company.

I recommend going the co-executor route: A trusted friend or relative along with a trust company, lawyer, accountant or other qualified professional. That way, the friend or relative retains the executor’s powers and duties, but someone with the expertise and time takes care of the long list of details.