Inheritance issues: your questions answered

As a journalist specializing in personal finances with access to a network of experts who can answer your questions, I welcome any concerns you may have so I can address them in upcoming issues. Contact me at [email protected].

Wills and estate planning is an area that’s complex but crucial to you and your families. Here are the answers to some of the questions I’ve received.

Q: When an estate is botched up by a lawyer and executor, who pays the $100,000 in taxes owing? Believe it or not, we were taken to court two years after receiving money from an estate and ordered to pay the tax bill. We are retired on a modest income and lost the money we inherited on a bad investment. We’ve been fighting this and have paid $30,000 in legal fees we can ill afford. Even worse, our house is now under a writ of seizure and sale.         —M.G.

A: My sympathies. It’s painful to be forced to give back part of an inheritance you thought was yours. But someone has to pay the estate taxes. It’s the responsibility of the exutor, a person appointed to administer the terms of a will, to make sure the taxes are paid before the money is distributed.

What if the money is distributed in error and there’s nothing left in the estate? The executor can come after the residual beneficiaries (that’s you) to pay the taxes. And unfortuantely, there’s not much you can do, other than trying to arrange convenient payment terms.

How can you protect yourself in future? Before spending an inheritance, be sure to ask the executor to provide an estate tax clearance certificate from the Canada Revenue Agency. This document states the government has no claims on the estate for back taxes. The lawyer can give advice but, ultimately, it’s the executor’s responsibility.

Q: I had a past experience with an estate in which the lawyer took a percentage of the estate as his fee. He didn’t get away with it. I wrote to my province’s law society and was told this was an outdated practice. Lawyers who settle estates are supposed to tell you the amount of time spent on the estate and the hourly fee they charge.       —S.C.

A: Estate lawyers once charged a fee based on the size of the estate. Some still do. If they act as executors, they’re entitled to charge up to five per cent of the estate as a fee.

Paying an hourly rate for a lawyer’s time may be better. But this is open-ended and you don’t know how long it will take to wind up the estate. You may prefer to pay a flat fee upfront. Then, if there are difficulties later, the lawyer will be the one to bear the extra cost.

Talk to lawyers about their fees and find out whether they’re based on time, size of estate or work to be done. The more itemized a bill is, the better. As a client, you have the right to ask the provincial law society to review the fees and reduce them if they’re too high.

Q: In 2001, I inherited an apartment in Jamaica from my uncle. I sold it this year for $25,000. It’s not my principal residence since I live in Canada. Do I need to report the sale of this property to the Canadian government? —S.L.

A: Yes. You must pay capital gains tax on the sale of property you inherit, even if it’s not in Canada. Half the gain is taxable and must be reported on your 2004 income tax return. You take the fair market value of the property on the day your uncle died and subtract the adjusted cost base (which may include legal costs, real estate commissions and repairs).

Speak to an accountant in Canada on how to calculate your capital gain. You can also consult a tax adviser in Jamaica to see if there are any taxes imposed on the property sale. If there’s a tax treaty between Canada and Jamaica, that may lower your tax burden.

Ellen Roseman is a business columnist for the Toronto Star and well-known author of several finance books, including Money 101: Every Canadian’s Guide to Personal Finance and Money 201: More Personal Finance Advice for Every Canadian (both John Wiley & Sons Canada Ltd., 2003).