The definition of estate planning is the process to transfer and preserve your wealth in an orderly and efficient manner to your heirs. Taxes and probate costs are often the greatest liability to your estate and the key to minimize them is to reduce the value of the estate. In Alberta, probate costs are minimal so most of the strategies discussed are aimed at reducing or moving the tax burden to your heirs.

One of the simplest is to ensure you have designated beneficiaries on all your registered savings accounts (RSPs) and registered retirement income funds (RRIFs). These assets then do not form part of the estate, but pass directly to the beneficiaries. If the beneficiary is your spouse or common-law partner, the investment will pass to him or her with no tax implications. If the beneficiary is your children or grandchildren, the value of the plan will be taxed on your final income tax return unless they are financially dependent on you. Keep your beneficiary information up to date and if you designate your spouse, you should consider an alternate in case your spouse doesn’t survive you.

In the case of property, jointly owned property with the right of survivorship will pass to the remaining to owner(s) without going through probate. Adding your spouse or common-law partner doesn’t trigger any disposition of capital gains. Upon your death the property will pass directly to the surviving spouse without going through probate. More problematic is putting an adult child joint on title as Canada Revenue Agency views that as a disposition and could generate a capital gain if the property has appreciated in value. It also has potential risks, as it then may become part of the proceedings if the joint applicant files for bankruptcy or is involved in divorce proceedings.

Life insurance can be used a as tool to cover administrative costs (lawyers etc.) and provide sufficient liquidity to cover probate taxes, income tax liabilities and other debts payable at death. Life insurance is generally paid tax free to the estate or beneficiary(ies). Life insurance, though, is subject to your health and insurability as well as your ability to pay the annual premium. So this strategy should be looked at early in the estate planning process.

Strategies to minimize taxes at death are quite acceptable and fall into the framework the Canada Revenue Agency allows. The avoidance of taxes, even inadvertently, may have adverse tax and legal consequences so obtain financial and legal advice before proceeding.

August 21, 2009