For most of us, the biggest tax bill we will ever pay in our lives is at death. Unfortunately, planning how to reduce that bill right before that inevitable day is often too late.
Here are some estate planning tips that can help reduce your tax burden and make things easier for your family financially when you die.
Disclaimer: Estate planning is a complex process that needs to be carefully reviewed on a case by case basis. Though this review will provide some valuable estate planning tips, it is by no means extensive enough to be relied upon as an estate planning guide. Please reach out to us directly if you have any questions or want to review your estate plan with a professional.
6 Estate Planning Tips To Prepare Your Family Financially
1. Have A Named Executor Of Your Will
The most important thing to consider is to ensure that you have a will and a named executor of the will. If you die in BC, without a will, your property will be divided according to BC law. This will increase the cost to administer your estate.
2. Consolidate Your Investment Accounts In One Place
Consolidating your investment accounts in one place helps to lessen the work of an executor. It’s easier for an executor to reach out to one advisor versus tracking down all your accounts in various investment firms.
You might have asked yourself if it makes more sense to have your investments diversified amongst different advisors. But the truth is all advisors should have access to the same products. If you’re pitting your advisors against each other to see who can get you the greatest returns, that should be enough to tell you that none of them is the right fit for you.
We highly recommend working with one advisor that you like and trust to oversee all of your investment accounts. Your family will thank you for it when you’re gone.
3. Add your spouse as a joint owner on your investment accounts
If you’re married and you want to prevent your spouse from having to deal with unnecessary taxes, make sure you’re both set up as joint owners. Unfortunately, at the second death between you and your spouse, there will be taxes on all those non-registered accounts and properties (aside from your principal residence). Be sure to make it clear in your will who you would like these assets to pass on to.
4. Add beneficiaries to all your registered accounts
If you’re married and your spouse is a beneficiary of your RRSP and TFSA, these accounts will roll over completely tax-free.
If your spouse is not the beneficiary on your TFSA, it can pass on to a beneficiary of your choice. However, any future growth after death may be taxable.
As for your RRSP, unless your RRSP passes on to your spouse or dependent child, the RRSP’s value at the time of death is included in the taxable income of the deceased for that year of death.
5. Spend your RRSPs while you are alive
Many advisors tell their clients to push off drawing from their RRSPs for as long as possible in order to avoid taxes. This strategy is flawed because paying those taxes is inevitable. If you die without a spouse or beneficiary, and you have a large RRSP balance, half of that will be given away to CRA. The solution we see is to start drawing early from your RRSPs, and to pay those taxes equally over a longer period of time.
If you don’t plan on retiring but have a large RRSP balance, consider not paying yourself from your corporation. Instead, start drawing from your RRSPs. There are simple strategies to help draw the funds out of the corporation tax-free and minimize the corporate tax bill upon death.
6. Utilize your life insurance effectively
Life insurance pays out tax-free directly to the beneficiaries of your choice. We recommend owning life insurance inside your corporation, and naming your corporation as the beneficiary. When you die, the proceeds can be drawn out of your corporation through a notional account known as the capital dividend account. Then it can be paid to whomever you have named as the beneficiary.
Life insurance is a great product to minimize taxes, cover debts, even out your estate, between your beneficiaries, and much more.
Watch the video on this strategy
If you want to learn how to prepare your family financially for when you pass away, book a call and we’d be happy to run you through our full financial Blueprint process.