How to Avoid Tax Pitfalls in Estate Planning

Okay, so when you're planning your estate, and we all should be focusing on this because we know there's two things guaranteed in life, death and taxes. And at some point death is going to happen. And when death happens, taxes also happen. So not a great circumstance if it's not very well planned out. So a couple of things that you need to consider when you are planning your estate. One is what are your assets going to be like when you ultimately pass away? And we don't always know when that's going to be, but we always want to plan for it to be the most efficient tax outcome upon death. Because here's one thing that happens that you need to be aware of. When you die, all of your assets are deemed to be sold at fair market value. Now, if you're married, all of your assets transfer over to your spouse tax free. But when your spouse dies, all of those assets are deemed to be sold. So items like your home, any investments you have, the value of your business, RSPs, any type of investments you have, whatever it is, are deemed to be sold at fair market value. So what happens? Massive tax consequences. So one of the areas that people get hit with a lot of tax on is on their RSPs. So RSPs, if people have been accumulating them and essentially investing in RSPs for years, they pass away. Those RSPs or the value of those RRSPs all come into tax or taxable on the date of death. This is a major liability in many instances. Another circumstance that you have to be aware of is any property that's not your principal residence, such as a cottage or an investment property. So all of those are deemed to be sold the day you die. Even if you didn't get paid for them and you still own them or your estate owns them, they're deemed to be sold. So for example, if I have a million dollar cottage and I want my kids to have the cottage, but I never transfer it to them, I never really deal with it, if I die, my kids would have to pay tax on that cottage, which maybe has equity in it, maybe it doesn't. So let's say, for example, I bought it in 1975. If I bought it in 1975, it's worth $1 million. It's deemed to be sold at 1 million. My cost base was likely zero or close to zero. Maybe it's $5,000. Let's just say it's zero. $1 million of capital gain, that's included. I would pay tax at the highest rate of 25%, which would be $250,000. Now I die no proceeds on the sale of this house. It's now caught up in an estate. But my estate owes $250,000 of tax and my kids don't have the money for it. That becomes a major challenge. There's ways to avoid this and to better plan for this. So just this was a good example of something that's deemed disposed of. You didn't get cash for it, there's going to be a tax bill. Your estate has to handle it. And if it's not well planned for, you can put yourself and your family in a very dire financial need. In many of these instances where there's a cottage like the example I use, a family cottage that you really want to keep in the family forever because there's been so many great moments in history that have allowed this. Well, when you pass away, the kids have no choice but to sell the property to pay the tax bill. If this is something you don't want to have, you need to be planning your estate in advance. So there's lots of circumstances. Again, when you pass away, everything's deemed disposed of. So keep in mind that that's going to bring in a lot of negative tax implications. And if we plan for it appropriately, we can avoid these and other estate tax, like a probate, for example, if we do it properly. So if you want to avoid any sort of negative estate related or death related tax consequences, make sure that you're planning for these items upfront to avoid any tax catastrophes. You need help, feel free to reach out to our team. We're happy to support you, sa.