Listen to The Investment Accounts.
This week on
Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
Listen to Capital Disbursement
This week on Hull on Estate and Succession Planning, Ian and Suzana follow up with their discussion on passing accounts. They focus on obstacles that often get in the way of smooth transactions particularly capital disbursement and encroaching on captial.
In response to the inquiries they received by email for more information on a precedent that people can look at, they suggest listeners go to the Hull and Hull News and Events section to look at their version of a white paper on this topic. You can link to it here.
Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
Capital Disbursement - Hull on Estate and Succession Planning Podcast #115
Posted on June 3, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #115 of our podcast on Tuesday, June 3rd, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Ian Hull: Hi, Suzana.
Suzana Popovic-Montag: Hi there, Ian. How are you today?
Ian Hull: Just terrific, thanks. And I understand that we’ve been having a fair amount of activity on our e-mail and our phone-in and so we again remind people on the phone-in, please feel free to call in. Our number is 206-457-1985.
Suzana Popovic-Montag: And that number you’ll find if you need in the show notes, along with our e-mail address which is hullandhull@gmail.com, and, of course, you can feel free to visit our blog at estatelaw.hullandhull.com as well.
Ian Hull: Alright, before we get into the meat and potatoes of today’s podcast, I think Suzana, you had an interesting article that you saw and you thought you might have some comments on.
Suzana Popovic-Montag: Well there was a great article actually, Ian, in The Globe & Mail on Tuesday, May 27th, so that’s about two weeks ago now. And it was actually entitled, “Mean Girls, but with walkers”. And I just thought that it was a remarkable and refreshing kind of reminder of the fact that there is this circle of life. And what the article actually talks about is the fact that no matter how old you get, you know, you can still be dealing with the issues of what they call “social Siberia” where whether you’re young or you’re old, women can and have been known to treat one another badly. And here they just did an exposé of, you know, how people who are living in either retirement homes or nursing homes are experiencing these issues still to the very end.
Ian Hull: Well, it’s a really interesting dynamic and as the population ages in Canada, it’s another twist and turn that we want to keep our eyes open to. I’m going to be watching this series as it goes along. I don’t know how many part series The Globe & Mail is publishing, but this was Day Two of the series and I think it’s coming out every Tuesday. So we’ll look for it and see what else is going on with this tremendously important issue in Canada.
Okay, so thanks very much Suzana for bringing that to our attention. And why don’t we turn now to our continued search for the perfect set of accounts. And we have, working on our last podcast, a checklist of sorts that identifies the kind of buttons that will get pushed in some considerable detail if the accounts aren’t properly prepared. And we finished off the last podcast dealing with the question of original assets and capital receipts.
Suzana Popovic-Montag: And just to sort of carry on from that, Ian, when we’re looking at a set of accounts or preparing a set of accounts, one of the things that I like to remind people of is the fact that we want to make sure that if it’s a subsequent passing of accounts, that you’re picking up and sort of those last balances on those first set of accounts, so that there is this natural transition from this last to the next set of accounts, picking up all the unrealized assets, picking up the ending balances which become starting balances on the new set of accounts as well.
Ian Hull: And that really makes sense if you’re going to balance your chequebook, you want to make sure you know what you left off at before you want to start recalculating on a go forward basis. So it’s really no different than taking your personal finances for the period of say, a three month period, and then balancing your chequebook so to speak, checking off the cheques that come in and went out, and then you have a final amount that’s still left in your account. While you may wait another three months to update your chequing account and when you do that, you’ll want to go back to your starting balance, your beginning moment in time when you finished your last balancing, so to speak.
So it’s not, you know, really all that complicated, it’s just a task that some people overlook when they’re preparing the accounts and then they have difficulty reconciling the set of accounts from a historically, the previous set of accounts because they haven’t really thought about what was there to start with.
Suzana Popovic-Montag: That’s a great point, Ian. And the fact is, we want to make sure that we’re picking up all of the assets. Every original asset is either going to be somehow realized, it’s going to be written off or shown at the end of the accounting period as an unrealized asset to be dealt with during the subsequent period.
Ian Hull: And I remind people again that we have on our webpage, I think it’s the June 2005 Breakfast series, we have a precedent in the system that people can look at. I know that we had a couple of e-mails last week asking us specifically just to point them to it, and it’s easy to find, it’s in our media centre. So you can sort of, as you hear about these issues, you can see how they are set up in hard form, so to speak. It’s our version of a white paper.
Alright, so now, let’s talk about what is a general concept in passing of accounts that can be a little bit daunting as an issue of law, but more importantly, what does it mean in sort of simple terms. And that is the whole question of capital disbursements. And when I think of a capital disbursement, I think of it no different than when you have an investment, so to speak. Say you invested in a company and the tax laws in Canada are very straightforward. If you put capital in to the company, say you put after-tax dollars and invested into it, you are allowed to pull that capital out tax-free essentially. And with passing of accounts, it’s the same thing. They want to delineate or separate the income that’s coming in and out and they want to delineate and separate the capital that’s coming in and out. So you have the capital coming in. For example, you might have…an easy example might be the family home. And it comes in, in the form of cash or it comes in as the form of the house if you haven’t sold it. Now we have to start talking about how things get disbursed or sent out of the accounts into the hands of the beneficiaries or into the hands of creditors, depending on the situation, to pay bills and so on, and these are capital disbursements.
Suzana Popovic-Montag: And that’s all part of your chequebook analogy in that everything that’s paid out of the estate has to be recorded, including just starting at the very beginning with funeral expenses. And then any time that any other expenses are paid on behalf of the estate, that’s reflected in the accounts, as well as the purchase of any investments.
Ian Hull: So another identifiable capital disbursement is where legacies are paid out, typically within the year of the date of death or not. You have to consider whether or not it was paid and if there’s interest attracted to that legacy. And the rule there is not hard and fast, but it’s typically considered to be an executor’s year. So if you have a gift of $10,000 to my niece, Betty, you have typically, the Courts have said, you have a year to pay niece Betty. Now if it takes more than a year to pay niece Betty, sometimes niece Betty is entitled to ask for interest on that payment. So again, it’s a question of how you want to reflect that in the accounts as well. But if it’s a normal situation, where it’s paid within the year, then niece Betty typically does not get any interest on her $10,000 gift.
Suzana Popovic-Montag: And as part of reviewing a set of accounts, when you’re looking at the capital disbursements that are actually recorded by the executor, you’re checking for these kinds of things, whether or not in hindsight they’re reasonable and in proportion to the value of the estate. And when you’re dealing with distributions to the beneficiaries, again, you want to make sure that they’re in the correct amounts and that they’re paid out to the correct recipients pursuant to the terms of the Will or any subsequent Court Order that may have been made interpreting that Will.
Ian Hull: And this is a really good point because the distributions to the beneficiaries have to be done so carefully. I had a case within the last year where there was a lot of money distributed and the executor may be carelessly, but not carelessly but inadvertently, didn’t do the math and sent out î º it was split between six different beneficiaries î º but didn’t send out the distributions in one-sixth portions for a bunch of reasons. But the point was is that the beneficiary who didn’t get her sixth percentage of an interim distribution was frustrated by that. And I think it’s just a question of “do the math”. Carefully look at how many residual beneficiaries there are and make sure you do the apportionment without mistake.
Suzana, what is the other sort of area where, in terms of attracting attention on the distributions, that we find difficulties with beneficiaries?
Suzana Popovic-Montag: Well certainly Ian, in my experience, I find that when you’re dealing with encroachments on capital, that’s a big issue for a lot of different estates. And the main question there is, is such an encroachment on capital actually permitted by the terms of the Will? And then the second follow-up question to that, of course is, well was the encroachment a reasonable one, given the size of the estate, given the nature of the administration?
Ian Hull: So when you say encroachment on capital, let’s go back to our example where we have sent in a big chunk of money maybe from the sale proceeds of the house or we have the house itself in there and then it gets sold within the administration of the estate. When you say encroachment on capital, what does the executor have to think through in this issue and what does it mean by encroachment on capital?
Suzana Popovic-Montag: Well typically, Ian, we’re dealing with a situation where there’s a life interest in an estate and we’ve talked about these on previous podcasts where, for instance, a spouse passes away and leaves the surviving spouse with a life interest in the income of the estate, and then the right to encroach on capital, perhaps on certain conditions and perhaps, you know, an unbounded right to encroach on capital.
Ian Hull: So basically, it gives the right of the executor to look at the circumstances and notwithstanding the trust provisions that look like on the face of it everything goes to the surviving spouse in terms of income, the executor is given language in the Will that says “don’t forget you can top up a monthly payment to the income beneficiary by taking capital or encroaching on capital”. And the step of taking out of capital is a really important one and I think maybe in our next podcast, we’ll start off by talking a little bit about problems that arise when you get into situations where you need to encroach on capital and those kinds of considerations.
Suzana Popovic-Montag: Well, that’s great Ian. I think that will end up this podcast and I do look forward to our next one, where we can flush that issue out a little bit more.
Ian Hull: Well remember again, please feel free to call in. Our call in number, 206-457-1985.
Suzana Popovic-Montag: Or e-mail us at hullandhull@gmail.com or visit our blog at estatelaw.hullandhull.com.
Ian Hull: Thanks very much, Suzana.
Suzana Popovic-Montag: Thanks, Ian.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.
Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.
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Listen to Talking About Wealth and Personal Finance.
This week on Hull on Estates Suzanna and Ian review the pullout in March 18th's New York Times and talk about the importance of dialog before and after death.
Comments? Send us an email at hull.lawyers@gmail.com, call us on the comment line at 206-350-6636, or leave us a comment on the Hull on Estates blog.
Talking about Wealth and Personal Finance - Hull on Estates Podcast #110
Posted on May 13th, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi and welcome to Hull on Estates. You’re listening to Episode #110 of our podcast on Tuesday, May 13th, 2008.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and Wills. Now, here are today’s hosts.
Suzana Popovic-Montag: Hello and welcome to Hull on Estates. It’s Suzana Popovic-Montag here with Ian Hull. Hi, Ian.
Ian Hull: Hi, Suzana, how are you doing?
Suzana Popovic-Montag: I’m good, thank you, how are you?
Ian Hull: Great, happy to be on Hull on Estates this week and want to just remind everyone that we have a, encourage of course, a call-in number, at 206-350-6636.
Suzana Popovic-Montag: And that number you’ll find also in our show notes as well as our e-mail address which is hull.lawyers@gmail.com if you’d like to send us your comments by e-mail.
Ian Hull: Well, Suzana, we’ve got a couple of things we want to cover this week on Hull on Estates and our companion podcast dealing with estate administration issues right now. We’ve been talking about how an estate should be administered and giving some thoughts and sort of a mini-series on that. And I thought it might be fun today to talk about a couple of things relating to the dialogue that we think we should encourage and we certainly encourage with our clients, both before death and after death, before death with their family and then after death with the beneficiaries. But before we get to that, why don’t we spend a minute or two here talking about the
wonderful news about our good friend, Terry Fallis.
Suzana Popovic-Montag: Terry has self-published a novel and that’s a really impressive accomplishment on his behalf which has now won him the Leacock Award.
Ian Hull: Now for those of you who don’t know anything about the Stephen Leacock Award, it’s called the Stephen Leacock Medal for Humour and Stephen Leacock, who, actually in his day, he was described as someone more famous than Wayne Gretzky is today to Canadians. He was known throughout the world. In the early 1900s when you spoke of Stephen Leacock, many people around the world would have heard of him before they would have heard of a prime minister in Canada. But, obviously a great novel writer and a humourist, and every year there is an award that is handed out in his honour. Terry Fallis was short-listed and then ultimately won the Leacock Award for his book, “The Best Laid Plans”.
Suzana Popovic-Montag: And Terry’s book is actually a story about a reluctant political candidate who consents to run in a federal election on the condition, of course, that he won’t campaign, give any kind of media interviews or canvass door-to-door. And it’s an amazingly well-written book that really does deserve, in my humble view, this wonderful award.
Ian Hull: And one of the neat things about this is, one of the many neat things is obviously Terry’s a terrific writer and a great humourist. But what he did was, the classic publisher route he did not follow. He went the social media route and Terry’s obviously on the cutting edge of social media work, generally, and a real mentor to us in the podcasting world here for us. But he self-published his book. He also has his book on the Internet for free in audio form. So he has all of the chapters which he read and published on the Internet. And the remarkable thing, obviously, of winning the Leacock Award is tremendous, but to be coming out of a self-published environment is unheard of, and really a testament to what Terry has been able to do in the social media world. I know the president of Thornley Fallis, Joe Thornley, is another incredible social media expert and I understand that he is going to be speaking out in Calgary where Suzana is also a speaker in the fall, at what looks to be one of the leading social media conferences for professionals and for others who are interested in getting into the social media workforce with a business slant. But Terry turned the business model to perfection because he talked about his book, he blogged about his book, he self-published his book, he published the book in audio, he did all of the sort of core steps that the social media environment allows for. So, tremendous success for him and an exciting time for him, no doubt and him and his family.
Suzana Popovic-Montag: Congratulations, Terry. We’re very, very happy for you.
Ian Hull: Alright, so what we thought we might talk about today was something that we’re going to get actually put on to our webpage. And it came out of The New York Times. It was a special section on wealth and personal finance. It came out on Tuesday, March 18, and I was alerted to it before it came out and picked up a copy of The New York Times because it looked like it was going to be a fascinating special section.
Suzana Popovic-Montag: And it really is, Ian. Flipping through it, it really is a great synopsis of our whole area and it captures all the main headings in terms of the estates and trust planning, the inter-generational transfer of wealth, and finance management, and I just highly recommend it to anyone who is able to pick up a copy or to refer to it on our website.
Ian Hull: And we’ve been talking a lot in our other podcasts, but also in this one, that, you know, from our perspective anyway, communication is crucial and this pull-out section from The New York Times really is a great summary. As I say, we’ll get it up on our webpage in the next little while. It’s a great summary of the different approaches that are going on. We’ve also always said and it appears to be as true as we’ve said it, is that the U.S. are so far ahead of us on talking about wealth management, wealth and inheritance talking in that sense, and really talking about the values of money. The first article in the section is entitled, “Breaking the Silence”. And talking, really, from a standpoint of motivating the family.
Suzana Popovic-Montag: And what I thought was amazing is the statistic that is actually set out there that says that there is going to be the largest inter-generational transfer of wealth in American history now underway. And the Boston College Centre on Wealth and Philanthropy has actually estimated, Ian, that $41 trillion is going to change hands by the year 2052.
Ian Hull: So, you know, given these numbers in the U.S., we continue to obviously pale in comparison in terms of the Canadian experience. But, you know, we continue to encourage our clients to talk about, you know, getting into, entering into discussions because these discussions need to take place against the backdrop of changing estate and tax laws, innovative tax instruments that are now available and, you know, using what is out there, and that’s the sort of an army of newly trained and well trained wealth advisors.
Suzana Popovic-Montag: We also have to recognize the fact that the reality is that there is a lot of upheaval and family discord that’s out there, and this complicates the planning mechanisms that are actually implemented by these advisors. And so the reality is there is going to be divorce, there is remarriage, there is adoption, there are different kinds of domestic partnerships that have become sort of the norm, and all of this is taken into effect and into consideration in the planning mechanisms.
Ian Hull: And you look at it, and in one of the articles in the pull-out section there’s a…Patricia Angus is quoted and she’s a principal of a wealthy advisory service in New York and this is a classic definition. She defines wealth as the following: The definition, she says, is broadening to include not just financial capital but human, social and intellectual capital.
Suzana Popovic-Montag: And then she says that the professionals used to think that it was just, how do I go about transferring my financial assets at the lowest tax cost? Now actually people are asking, well what’s the purpose and the meaning of what it is that I’m doing here and how do I want to pass this down to the next generation or further generations?
Ian Hull: And she makes a great point that it really…it’s not about death, it’s about an experience in life and an opportunity to talk to your family about purpose and values that might not otherwise come up.
Suzana Popovic-Montag: And for people who just write a document and put it in a drawer to be opened up then on their death, it doesn’t foresee or doesn’t take into account the opportunity that you can have that would arise by speaking during your lifetime about your plans.
Ian Hull: So as we work through this section, you know, obviously we’re struck by a couple of the other articles. There’s a great article talking about, it’s entitled, “Protecting Children From Their Money” and the sort of parental distress that comes with situations where parents have accumulated a fair amount of wealth and have indeed begun to pass it down. But there’s a wonderful article as well that sort of works through this whole breaking of the silence of inheritance, and the author goes through specifically and talks to wealthy individuals. There’s one point in the article, a Mr. Rothenberg who had received $10 million in the sale of his company, the company I think was called Syracuse Language Systems that they refer to. And he then set up a charitable foundation and a community foundation for his three children to run, and that was set up with just under $5 million.
Suzana Popovic-Montag: And then with some of the remainder of his funds he started a company that he actually called the Glottal Enterprises which makes speech aids for people who are hearing impaired. Again, it’s a small company that loses money, he called it, at the time.
Ian Hull: But he wanted to do something different and he even notes in the article, he’s quoted, he jokes about the fact that he’s sure his children wanted more of the money themselves, but he has created two separate foundations. He’s created an important legacy from his perspective.
So, anyway, as I say, we’re going to put this on the webpage so that you can have an opportunity to enjoy some of this, but feel free, obviously, The New York Times online, and as I say, it’s on the March 18, 2008 pull-out section called “Wealth and Personal Finance”. But I highly encourage it and good reading, (a) because I think the topic is really well worked through by the various writers, but (b) it’s always good to see what the U.S. experience is and in particular, how the U.S. experience is being, they even deal with this, impacted on a more fragile U.S. economy and how that’s affecting this inherited wealth scenario.
Suzana Popovic-Montag: Well I think, Ian that brings us to the end of this week’s discussion. Thanks for listening to me and for joining me today.
Ian Hull: So thank you Suzana, it’s a real pleasure and I look forward to podcasting with you again soon, and remind people that our call-in number, 206-350-6636, is always available for phone calls.
Suzana Popovic-Montag: Or again, feel free to send us an e-mail at hull.lawyers@gmail.com or visit our daily blog at estatelaw.hullandhull.com. Thanks very much.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.
Our theme music is Upper Structure by DJ AKid and is courtesy of the Podsafe Music Network.
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Read the transcribed version of "Capital Gainst Taxes"
In this week's episode of Hull on Estate and Succession Planning, Ian and Suzana talk about capital gains taxes and what you need to know about them relating to the family cottage.
Click "Continue Reading" for the transcribed version of this podcast.
Capital Gains Taxes - Hull on Estate and Succession Planning Podcast #73
Posted on August 14th, 2007 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #73 of our podcast on Tuesday, August 14th, 2007.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by
Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian, how are you?
Ian Hull: I’m just terrific thanks.
Suzana Popovic-Montag: That’s good.
Ian Hull: We have been working our way around this potentially thorny issue of the family cottage. And while we have not pretended for a moment that we have great tax expertise, we wanted to today talk a little bit about the capital gains tax, what you need to know about capital gains taxes and some of those issues relating to the family cottage.
Suzana Popovic-Montag: Ian, you might recall during our last podcast, we were talking about the fact that family dynamics and emotions play such a strong role when we deal with these cottage issues in estate litigation matters. But I think that next to that, that family dynamic component to it, the other most significant issue really is the capital gains taxes that arise from these kinds of recreational properties.
Ian Hull: And while you can buy or sell your principal residence, the home or the condominium that you might live in without paying capital gains taxes in Canada, on that increased value, you do have to pay capital gains tax on secondary cottages, properties such as the cottage or the chalet or other recreational properties.
Suzana Popovic-Montag: The key exception, though, is when you actually leave this property to your spouse, so that the taxes in that case are actually deferred until your spouse dies. And I know that this is referred to as a spousal rollover.
Ian Hull: But except for that exception, if your vacation property has appreciated in value and your estate may, of course, face a significant tax bill. What we want to talk about a little bit is, you know, what if that tax liability isn’t covered. What do we do?
Suzana Popovic-Montag: And Ian, do you think it would be helpful maybe just to talk a little bit about how that capital gains calculation is actually done on a property?
Ian Hull: For sure, because let’s just use an illustration. Because, of course, if your beneficiaries have to sell the property to pay the taxes, then your estate plan may not be exactly what you had hoped it to be. So here’s an example of how you might calculate a capital gains tax on a property.
Suzana Popovic-Montag: So if you start, let’s say, with a property that was purchased back in the 1970’s. Let’s say that the cottage was actually bought for $50,000.
Ian Hull: So in 1985 though, of course, you’ve had to spend some money upgrading. And let’s put a number of, say you paid $50,000 for the cottage and you spent by about 1985 about $30,000 in upgrading it, putting a little addition on it and that sort of thing.
Suzana Popovic-Montag: And then you look at what the property is actually worth the day you want to sell it and that’s the fair market value of the property. And let’s suppose that now the property has been very successful in appreciating in value and now it’s worth $600,000.
Ian Hull: So you take the sale price of the $600,000 and then you take off from it what we call the adjusted cost base.
Suzana Popovic-Montag: And that adjusted cost base is comprised of, you know, what that property actually cost you when you originally bought and what value you’ve added to it since you purchased it. And that, in our example here, we talked about the $50,000 being the purchase price and the additional, you know, upgrades to the property of $30,000, for a total of $80,000 in terms of the cost base of the property.
Ian Hull: So you’re allowed to deduct that cost base off the $600,000 sale price, leaving you with a resulting capital gain, not a capital gains tax, but a capital gain of $520,000.
Suzana Popovic-Montag: So since you’ve purchased that property, it’s technically appreciated in value by, you know, $520,000. And so if you look at the current capital gains tax rules, at least here in Ontario, 50% of that increase in value, that capital gain, is gonna be taxable.
Ian Hull: So just using our example here, remember we said that there was a capital gain of $520,000, 50% of $520,000 would be $260,000.
Suzana Popovic-Montag: And that $260,000 then becomes taxable at your highest marginal tax rate.
Ian Hull: So if the highest rate, for example, would be 45%, you’d have to pay a tax of $117,000 in capital gains tax.
Suzana Popovic-Montag: And that, of course, raises the question at the end of the day as to whether or not your estate has sufficient cash to pay that tax liability without maybe having to sell that property or coming up with the cash some other way.
Ian Hull: ‘Cause if not, you’re potential heirs and the family could lose what is often a cherished asset that you never intended to have sold on the day of your death.
Suzana Popovic-Montag: But the good news, though, is that, you know, with some advance planning, turning your mind to these possibilities and the fact that this could arise, you can actually arrange to cover that anticipated tax liability with some creative estate planning.
Ian Hull: Alright. Why don’t we talk about those? And let’s start with the first. You know, we’ve got to really essentially manage the taxes. So the first idea is, and we’ve used this example in the past, is the idea of life insurance.
Suzana Popovic-Montag: And life insurance, Ian, really is one of the most I’d say straightforward methods of trying to cover your vacation property tax liability when you die. Because what you’re doing is you’re purchasing life insurance for that very purpose.
Ian Hull: So your estate would receive as a death benefit, a tax free death benefit, the life insurance proceeds. And those proceeds can be used to pay the capital gains tax liability and any other administrative fees and expenses that are associated with settling your estate.
Suzana Popovic-Montag: And the clearest advantage of that then is that you have the comfort of knowing that your family’s not going to have to sell your cottage or your vacation property and that at the end of the day, they’ll actually receive a larger estate.
Ian Hull: Now in terms of managing taxes, there’s another sort of series of steps that you can think of. And we sort of qualify them under transfers during your lifetime.
Ian Hull: And so Ian, as you say, it’s another way of actually managing the issue by proposing to deal with your property during your lifetime as opposed to transferring it on death. And it has some advantages do that kind of operation as well.
Ian Hull: So besides selling the property maybe to your family members outright, there are several ways to consider transfers during your lifetime that will help manage the tax.
Suzana Popovic-Montag: And one of the clearest examples that comes to mind is actually gifting the property to the people you intend to get it.
Ian Hull: Another example is making one or more of your children joint owners of the property with you.
Suzana Popovic-Montag: Or even by transferring the property to a trust where you can actually name your children or the other family members as beneficiaries of that trust.
Ian Hull: So if we step back with these three different options and we’ll work through these in some detail. But all three options will trigger an immediate capital gain in your name.
Suzana Popovic-Montag: So when you do transfer the property during your lifetime, suddenly that tax liability is gonna be crystallized and it’s gonna be your responsibility as opposed to that of your beneficiaries.
Ian Hull: Alright. Let’s turn to the gift idea. So if you can afford to pay the capital gains tax yourself that’s been accrued to death, and we’ll come back to our example before. It’s a significant number, it’s $117,000 on what is a $600,000 property. And you can afford to pay that capital gains now and you want to sort of defer the future gains to the next generation. You may want to consider gifting the property to your children.
Suzana Popovic-Montag: And the effect of gifting the property really is to trigger an immediate capital gains tax that, as we said, you know, would be your responsibility to pay that, which is gonna be taxable in your hands.
Ian Hull: So the long and short of it is you gift it, you pay the tax, you better have the dough at the time you’re gifting it or else this plan doesn’t really work.
Suzana Popovic-Montag: The good news, though, is that the future capital gains on that property, so if it continues to appreciate in value, that future gain is going to be the responsibility of your children. And it’s not going to be taxable until they in turn either die or sell the property. So your death is not going to trigger any tax liability to them.
Ian Hull: So an added bonus is that Land Transfer Tax…there’s an extra tax that often applies when you transfer properties. But it doesn’t apply when there’s gifts and when there’s an estate in that situation.
Suzana Popovic-Montag: And there’s the added benefit also to your estate of avoiding probate fees at the end of the day which, you know, in most provinces here in Canada, are payable based on the value of your estate.
Ian Hull: Alright, let’s turn to the idea of a sale.
Suzana Popovic-Montag: Well, Ian, you can certainly choose to sell your property to, you know, a non-family member or even family members during your lifetime.
Ian Hull: So if you do this, it is usually best to sell the property at fair market value from a tax standpoint.
Suzana Popovic-Montag: And why do you say that Ian?
Ian Hull: Well because you’ll still be charged the capital gains tax on the full market value even if you sell it for less. So if you try to give your child a benefit of a lower price then the differential between the actual fair market value and the lower price that you give to your child will be taxable like the gift that we just talked about.
Suzana Popovic-Montag: And in addition to that, the adjusted cost base that we talked about, you know, the original cost of the property plus any value that you’ve added to it, that adjusted cost base is going to be what your family members are going to be presumed to have paid for it. And it’s not the fair market value that they’re going to have attributed to them. So they could possibly end up paying a hefty capital gains tax bill down the road.
Ian Hull: So you’re sort of, you know, you don’t get that far ahead if you try to do the sale route from the tax standpoint. But anyway, why don’t we at this point, wind up our podcast for today. We’ve touched on some of the issues and there are more issues to address in the context of the transfer of the cottage property and we’ll save those for our next podcast.
Suzana Popovic-Montag: Okay. Well thanks very much, Ian. I look forward to our next podcast.
Ian Hull: Thanks Suzana.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.
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To carry on with the discussion of trustee/director conflicts of interest: the very stringent duties applying to trustees can clash with the equally stringent duties applying to directors of a corporation, when the trustee and director are one and the same person. Many corporations are speculative in nature. This is fine during a testator's life, but the prudent investor rule, (as discussed in prior blogs and podcasts) may dictate that a speculative corporation is not the best investment for an estate.
Being a director of a corporation may require an entirely different skill set than a trustee, and may require specialized expertise that the trustee may not have. Since often a trustee becomes a director only as an afterthought, it may well be that the testator has not thought through the fact that the same person will need to fulfil both roles. If the executor also happens to be a shareholder of the corporation and keeps the estate assets invested in the corporation, there may be an obvious avenue for argument by the beneficiaries that the director used the estate assets improperly to enrich his interest in the corporation.
Given the risks of conflict, and even the risk of an allegation of conflict which can lead to litigation, an obvious question is whether the executor should become a director at all. At law however, she probably has no choice if the estate holds a substantial or controlling interest in a corporation and the trust provides for the continuation of the business of the corporation. Using those facts, in all likelihood the trustee must become a director to oversee the management of the estate's investment. This obligation cannot be delegated. The obligation to become a director in cases where the estate holds substantial shares in a corporation should not be taken lightly by a potential trustee who may be considering whether to accept the trust.
One way to avoid this conflict would be simply to choose not to accept the role of an executor and trustee at all. In addition to the common law fiduciary duties applicable to directors there are numerous liabilities imposed on them by statute in the corporate, labour, environmental and taxation areas. This is another reason to potentially refuse to accept a role as trustee if it were victate also accepting a role as a director. The following factors, among others, can lead to inherent conflicts of interest faced by a trustee director:
1. Risk - successful corporations, in order to be successful, need to take significant risks, but any executor who takes substantial risks with trust assets is exposing him or herself to complaints by the beneficiaries and potential personal liability.
2. Income/Capital - a corporation will often reinvest income or profit over time in order to ultimately benefit the corporation, but in most estate situations there is an income beneficiary who will take all the income from the trust. The need to pay out income and the fact that an income beneficiary will likely immediately complain if the income stops, can mitigate the corporate objective of ensuring there are sufficient assets in the corporation to grow the corporation over time.
3. Time Lines - corporations are theoretically immortal as long as the corporation is successful. Trusts for the most part have a defined end point, usually the end of life of a specific person. Investing in a corporation over an extremely long term may make perfect corporate sense, but for a trust there may well be different timing considerations in play.
Thanks for reading. Sean. --------
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