Last week I wrote about organizing your affairs should you unfortunately be diagnosed as terminally ill. Today I will discuss some financial and tax planning considerations if you have been given a finite period to live.
Probate Fees & Income Taxes
Upon death, your estate will be subject to probate fees (more properly called estate administration fees in Ontario) and income taxes.
In order to minimize your probate fees and/or income taxes, I recommend you obtain tax and/or legal advice.
Probate Planning
This type of planning is complex and if not properly executed, can lead to income tax and legal issues. I have set out below some of the considerations in respect of probate planning. Again, get advice before considering any of the following planning strategies:
Joint Tenancy
In order to avoid probate fees, many people transfer their assets into joint tenancy, with the right of survivorship. This means that upon the death of one of the joint tenants, the property passes to the other tenant automatically. The risk with this type of transfer is if the property is capital property (such as stocks or certain real estate) that has appreciated in value, the transfer (if to anyone other than your spouse) will create a deemed capital gain and income tax liability.
So for example: if you transfer 100 shares of Bell Canada that cost you $2,000, either directly or into joint tenancy with your son and those shares are worth $5,000 today, you will have to report a capital of $3,000 if transferred directly, or $1,500 if transferred into joint tenancy; even though you just transferred the shares and did not sell them on the open market.
Where you are terminally ill, the deemed disposition may not be as large an issue as for a healthy person since you may only be accelerating the income tax liability a few months or years. This deemed gain upon death is discussed in greater detail below.
If you transfer a bank account or stock into joint ownership with one of your children to help you manage your money while you are alive, that child becomes the sole owner of that account when you pass away. That child may consider the account is theirs even if that was not your intention and decide not to share it with the other siblings. This can lead to estate litigation, especially where your intention is not documented.
Gifting
Similar to the issue above with joint tenancy, when you gift property to someone other than a spouse there may be a deemed capital gain where the property has appreciated in value. Thus, if you wish to make a gift, you should consider gifting cash instead of property to avoid any income tax issues (be careful to ensure any gifts are consistent with your wishes in your will- i.e. if you split your estate equally with your three children in your will, the gift should be 1/3, 1/3,1/3, or you may need to amend your will). However, care must be taken to ensure you will not need that money to live on or pay medical bills during your illness. I suggest you only gift money you are absolutely sure you will not need to live on.
Consolidation of Accounts
Many of us have multiple bank accounts, investment accounts, RRSPs etc. If you are terminally ill it may make sense to consolidate these accounts into one or two accounts to simplify your executor’s life. You may also want to consider liquidating certain investments so your executor does not have to deal with these decisions. However, you need to consider the investment merits of liquidation versus the “ease of administration” issue.
Estate/Income Tax Planning
As a courtesy to your executor, gather up you prior tax returns and put them in a box or file cabinet and ensure you advise your executor where they are located. If you made a 1994 capital gains election (a special election for that year only, that allowed you to “bump” up the cost of certain capital property), provide a copy of that return.
Income Tax Smoothing
If you are terminally ill and have a finite period of time to live, from an income tax perspective, you will want to minimize your tax bill over the remainder or your life by smoothing your income as best as possible. Smoothing your income involves utilizing the lower marginal rates, rather than just the high rate on death. Typically this would be done by drawing on your RRSP or RRIF. This may have the secondary advantage of providing funds to live on.
Capital Gains
Upon death, if you do not leave your assets to your spouse or you are the last spouse to pass away, you have a deemed disposition of your assets at fair market value. See my blog on death and taxes for more details. You can utilize any capital losses against capital gains in the year of death and can carryback any excess capital losses for three years. In addition, where you cannot use all your capital losses on your terminal return, the losses are deductible against all income on your terminal return or the year proceeding death.
Purify capital gains exemption
The same deemed disposition rule holds true for shares in any private corporations you may own. As discussed in my blog “Corporate Small Business Owners: Beware; the Capital Gains Exemption is not a Gimme” shares you hold in a small business corporation may be offside the rules to claim the $800,000 Capital Gains Exemption (indexed to $813,600 in 2015) where you have significant cash and/or investments in your corporation. In order to meet the criteria to qualify for the capital gains exemption, it is often advisable to pay a dividend from the corporation to reduce the corporation’s cash and near cash assets. Where you have a terminal illness, it is imperative you review the status of your corporation with your accountant to ensure your company is onside the rules or is “purified” to qualify for the exemption.
Charitable Giving
Consideration should be given to any charitable contributions you wish to make upon death or while alive. Any donations made in the year of death are not subject to any limitations and are 100% deductible. The tax savings are worth approximately one-half of the actual contribution. The rules for donations made in your will were made more flexible in the 2014 budget.
Medical Expenses
Medical expenses qualify as a non-refundable tax credit. In the year of death, medical expenses may be claimed for any 24 month period including the date of the person's death, which were not claimed in a prior year. Sometimes you may wish to amend a prior year’s medical expense claim to utilize the 24 month period option. However, as you would typically have significant medical expenses if you are terminally ill, there is often not much to be gained by using the 24 month option as you would receive a full tax credit.
This topic is unpleasant and dealing with financial and tax planning may be the last thing on your mind if you are terminally ill. However, engaging in financial planning for your own demise is prudent and your final act of kindness for your family and/or executors.
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.
