Asset allocation: How to simplify your investments to save on estate tax

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Q: I am a 72-year old divorced male with adult children. Can you suggest ways for me to organize my investments so that executing my will is as simple as possible? For example, will some investments be easier come my final taxes? All my investments are with one broker but doing my taxes it seems that some investments are easier to sort out than others. Or is it just poor record keeping on my part?

—William

A: For all intents and purposes, William, your final tax return may not be materially different from your annual tax returns. Your children will have to report your Canada Pension Plan (CPP), Old Age Security (OAS), Registered Retirement Income Fund (RRIF) income, non-registered investment income and other applicable pension, business, employment, investment, or other income.

One difference with regards to your RRIF is that the entire account will be deemed withdrawn on your date of death, so the full RRIF value will become taxable. For any non-registered investments, you will be deemed to have sold them, with capital gains tax payable accordingly.

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If you own real estate other than a tax-free principal residence, that will be deemed to be sold as well with resulting capital gains tax implications.

Most or all information related to your investments should come from your broker, although you may want to ensure your adjusted cost bases for any non-registered investments are up-to-date. You will also want to ensure you have records related to the purchase price or renovations on any real estate that does not qualify as a tax-free principal residence.

READ: Investment fees you can claim on your tax return

There are some other intricacies related to a final tax return that go beyond the scope of this article but suffice to say that your broker will likely be able to provide all relevant information related to your investments.

Since it sounds like your children are your beneficiaries, you could consider naming them as your RRIF beneficiaries. This would keep your RRIF from passing through your estate and being delayed by the probate process. Probate takes time, costs you provincial probate fees, and increases lawyer costs. Assuming your children are adults and there are no extraordinary circumstances, and you name them as outright beneficiaries in your will anyway, naming them as RRIF beneficiaries rather than your estate may be an idea.

Your Tax Free Savings Account (TFSA) can also have a beneficiary or beneficiaries designated, so naming your children rather than your estate based on the same logic as your RRIF may be a consideration.

Beneficiary designations can be changed without changing your will, however unlikely it may be that you would do this, William. But one reason to name your estate instead of your children as beneficiary could be if one or more of your children die before you or at the same time as you. You may want their share to be held in trust for their children – your grandchildren – with certain parameters about when and how a grandchild’s share is made over. It is at least theoretically possible a child dies before you and you forget to change your RRIF or TFSA beneficiary, or you become incapacitated and cannot change the beneficiaries before you die.

Any discussion about estate planning should also include a reminder that you should have up-to-date powers of attorney, personal directives or mandates, as well as a will. These documents, which may vary depending on your province of residence, could appoint your children to manage your financial affairs in the event you are unable to do so on your own. This could be if you were sick, injured, disabled, or incapacitated in some way.

MORE: 3 investments that ease your tax burden

An interesting option that may be worth considering in some circumstances, particularly if you have a lot of assets, William, is an alter ego trust. Someone over the age of 65 can establish this trust, with the stipulation that they are the sole beneficiary during their lifetime. They can be the trustee, but the trust deed can act like a power of attorney equivalent in the event they become unable to act, naming your children as the alternate trustees. Upon your death, the trust would allow your children to expeditiously pay out your estate, avoiding probate fees and delays.

An alter ego trust has pros and cons and should be considered with input from a qualified professional.

There are tax and legal implications upon death. This discussion is hardly exhaustive, as gifting arrangements, joint accounts and insurance products, amongst other solutions, may work for the right family. Hopefully I have given you a few considerations to help your children, William, along with input from the appropriate professionals and potentially your kids themselves.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.