Top Strategies for Reducing Tax Burden on Inherited Properties

Your assets may be significantly impacted after your death due to taxes and other charges. As such, when you think about your estate planning, considering life insurance plays an important role. 

Putting a lot of effort into retirement savings is great, but have you thought about your legacy yet? Consult an advisor and start planning early if you want your assets to go to your beneficiaries without any problems.

In this article:

• The Importance of Having Power of Attorney 
• Choosing the Right Executor
• Using a Joint Account 
• Determine if Life Insurance is Needed
• The Benefits of Trusts in Estate Planning
• Frequently Asked Questions (FAQs) About Reducing Tax Burden on Inherited Properties

The Importance of Having Power of Attorney 

Make sure you have a will and powers of attorney. In the event that you become unable to care for yourself, having a power of attorney in place is key. It’s usually advised to prepare separate wills for your health and finances. (Once you die, the powers of attorney expire and the will takes precedence.) If your affairs are very complicated, you may choose to complement your will with a statement of wishes that explains your reasoning for writing it in a specific way. 

If a person fails to have a comprehensive power of attorney when they become incapacitated, another party must petition the court to designate a guardian or conservator on their behalf. As long as the incapacitated person is alive, the court will continue to oversee the appointment of a guardian to handle the incapacitated person’s financial and/or health affairs. Not only is it an expensive procedure, but the disabled person also has no say in who is chosen to fill the position.

Another key consideration with powers of attorney in Canada is “durability.” This means that even though the person granting the power (the grantor) has given the agent (the attorney) legal authority to act on their behalf, the grantor still retains their own ability to perform these tasks. Canadian law allows the grantor to specify that the power of attorney remains valid even if the grantor becomes mentally incapacitated. This creates a “durable power of attorney,” which stays in effect until a specified end date, event, or the grantor’s death.

Family members who would otherwise have to seek legal permission to do mundane things like write checks or set up home health care services can rest easier when a power of attorney is signed. It brings immense comfort to families to know that this has been prearranged.

Choosing the Right Executor

Be careful who you name as executors. When the time comes, the first person you think of may not be up to the task. Feel free to mention as many people as you like. However before you do, think about their life, judgment, and financial experience, as well as their principles. In addition, you should contact them ahead to make sure they’re on board.. Concerns about money and taxes could arise if an executor is not a resident (or could become non-resident in the future), so it’s best to avoid this if possible. Another option is to designate a trust company, or even appoint an individual alongside a trust company.

Because of the weight of responsibility and the personal nature of the position, you may wish to appoint a trusted family member or friend to serve as executor. This person will have a better grasp of your wishes and the wishes of your beneficiaries than a paid expert would, and they may be more careful with your valuables.

While each province in Canada has its own rules regarding who may serve as an executor, there are three basic requirements that are imposed by most provinces.

Consider these five essential questions before selecting an executor:

Do they have the time and willingness to manage all the necessary paperwork? This could involve paying bills, handling insurance claims, dealing with hospitals, and addressing various final expenses, as well as locating and managing financial accounts. It’s important to choose someone who has the time and capacity to manage these tasks effectively.

Can they handle potential heirs and creditors with fairness and composure? It’s wise to pick someone who is calm and level-headed, capable of resolving any conflicts that might arise after your passing.

Do they have any financial issues of their own? Since your executor will be responsible for managing the financial aspects of your estate, choosing someone with a solid track record in financial management is a smart decision.

Are they organized and able to manage multiple responsibilities? Given the significant amount of paperwork involved in settling an estate, it’s crucial to choose someone who is well-organized and capable of multitasking.

Do they have financial or legal expertise? While not a strict requirement, having such experience can be a great asset. If the person you choose lacks this experience, they can always seek the assistance of a qualified attorney or accountant to help manage the estate.

If you don’t have a clear choice, consider appointing a corporate fiduciary. A corporate trustee can offer your estate an unbiased, professional approach to decision-making and investment management. However, keep in mind that such an executor will require compensation (typically a fee based on a percentage of your estate’s value), Whereas, a family member might choose to serve without compensation, especially if they are also a beneficiary.

Using a Joint Account 

If the person you choose to be your executor does not have access to your personal bank accounts, you might consider alternatives to ensure that expenses can be covered before the will is administered. One option that some people think about is opening a joint account with their executor, but this approach comes with significant risks in Canada.

When you open a joint account, the joint account holder may automatically gain ownership of the funds upon your death, even if your intention was solely for them to manage expenses. This could cause disputes among heirs or lead to unintended ownership of assets. While you can clarify your intentions in your will, the legal outcome can still be complicated and contested.

Rather than opening a joint account, you might consider giving your executor or another trusted individual power of attorney (POA) for financial matters. This allows them to manage your finances while you’re alive, but the POA ends upon your death. After you pass, your executor will need to obtain probate to gain access to your accounts and settle your estate.

It’s essential to speak with your financial institution to understand what can and cannot be done with your bank accounts after death. This will help you ensure that necessary expenses can be covered while the estate is being administered without transferring ownership of funds prematurely. Always consult a legal or financial professional before making decisions like adding someone to a joint account, as the choice may have irreversible consequences.

Determine if Life Insurance is Needed

Think About Getting Life Insurance. Life insurance can help with two aspects of estate planning: establishing an estate to support your heirs after you die and protecting an existing estate if liabilities such as taxes would be incurred upon death. Either way, you should have an assessment done to figure out how much of an estate you want to leave behind and whether or not you need insurance to cover any gaps. Life insurance might not be essential if your heirs won’t have any particular financial needs and there will be a large estate. The premiums might add up over time, and it might not be worth it. One important consideration is whether there will be non-liquid assets remaining after death alongside any outstanding taxes. It could be wise to look into purchasing life insurance to cover any shortcoming in cash that might prevent the payment of the tax.

Consider the case of a cottage that you intend to pass on to the next generation. The property is now worth $4 million, even though you only paid $300,000 for it. Upon your death (and if your spouse has predeceased you), the deemed disposition of the cottage will result in a capital gains tax unless it has been designated as your principal residence. An insurance policy can provide the necessary funds to cover the tax bill within the estate, preventing the need to sell the cottage. Similar challenges can occur for business owners when ownership is passed on within the family after death.

The Benefits of Trusts in Estate Planning

Consider establishing a trust, which can be created either upon your death as part of your will or in advance. A trust can be useful in various situations, such as when a beneficiary may not be financially responsible, is a minor, or when there are children from a previous marriage, making a spousal trust a suitable option.

Typically, the funds will be held in the trust until it is no longer needed. For example, in a spousal trust, the property can be held in trust for the surviving spouse’s lifetime, allowing them to benefit from the income earned on the property while designating children from a previous marriage as the residual capital beneficiaries.

The tax treatment of trusts can vary significantly depending on factors like when and how the trust is established, its duration, and the intended beneficiaries. Therefore, it’s highly recommended to seek specific tax advice.

Frequently Asked Questions (FAQs) About Reducing Tax Burden on Inherited Properties

Find a solution for what you’re looking for 

Ultimately, a well-structured trust can provide peace of mind, knowing your estate will be managed and distributed exactly as you wish.  At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need. 

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, Alberta, and Manitoba including areas such as Kitchener, Victoria, Edmonton, and Winnipeg.