Taxes. They are universally hated. And unavoidable. But did you know there is a way to reduce your taxes by gifting your estate to heirs while you are alive?
When you die, your heirs pay probate fees on your estate. That includes real estate you own in Ontario or hold in someone else’s name, bank accounts, vehicles, including boats or motorcycles, and investments like stocks or bonds.
Your estate will also owe taxes on goods like furniture, your business interests, intangibles like copyrights or franchises and insurance payouts to your estate that don’t have a specific beneficiary (a good reason to name a person and not just “estate” on all of your documents).
Gifting Your Estate
In Ontario, this “estate administration tax” works out to approximately 1.25% of the total value of your estate. That equals $5 per $1,000 for the first $50,000 of assets and $15 per $1,000 for assets over $50,000. (No taxes are due for estates under $1,000.) Even a modest $200,000 estate could cost $2,500 in probate fees.
Wouldn’t you rather see that go to your heirs? Since Ontario has no gift or i nheritance taxes, you could increase the value of your estate by gifting assets beforehand. Your heirs could even save money on executor’s fees. Fewer assets to dispose of can mean lower fees owed to the person handling your will.
Consider joint ownership of real estate. Transferring your home to a child could allow you to live in the home, but keep it out of your estate. Include a “right of survivorship” in the agreement so it is clear you intend for the home to pass to your survivor(s). The clearer your agreement is, the easier it is to transfer assets after death. Your heirs will only need a copy of your death certificate to finalize the deal.
You can even register investments jointly with your children, allowing you to hold investments outside of your estate. Those same stocks, bonds and mutual funds worth $1 million could attract $14,500 in probate fees if left in your will.
Toronto Estate Lawyer
Gifting your estate can be complex as there are always some possible tax implications. Canada Revenue Agency may tax you for a capital gain if assets increased in value between the time you bought and gifted them. Also be aware your heirs could lose some or all of your assets if they divorce or go bankrupt. That could affect you if your family supports you financially. Or you live in a home or cottage you have already given someone else. A financial planner can help you with minimize your risk. Ask us for a referral.
Disagreements between family members can get unpleasant. Talk to all of your children or heirs about what your plans are. Maybe you want your children to sell the home you gifted them and share the proceeds after your death. Put that in the agreement. If you give one child cash, make sure it is clearly documented that it is a gift. That way if the matter goes to court, your heirs at least have some proof of your intentions. Having witnesses can prevent accusations your arm was twisted.
Read more about gifting your estate: Can You Make Your Own Will?
Giving away assets while you are alive can also reduce your income taxes. And you will have the pleasure of seeing your children enjoy your assets, financial or otherwise. Just be sure you keep enough income to live out your own retirement in comfort!
Let’s say you do leave your children your assets after you retire. How much will you need to live monthly? The answer depends on your lifestyle and housing, health or other needs. Average living costs for retired Canadians are around $2,400 to $3,000 monthly. With any private pensions you may have and Canadian Pension Plan, Old Age Security or Guaranteed Income Security payments, even after gifting much of your estate to your heirs, you can probably live a financially content life.
Think your life insurance is just cash to give your heirs when you die? Think again. You can make permanent life insurance do double duty. Since the policy is tax free, it’s a win-win for you and your family.
As you can see, gifting your estate is complex.
Extend or Change Your Insurance
You probably already know that term life insurance saves you money. But it can technically expire before you do. Depending on your policy, that could be in 10 to 40 years. Sure, you could apply for a new term policy, if you are in good health.
But if your health has changed, here are some other options:
- extending your term policy year by year; or
- converting to universal life.
While you can usually extend a term policy annually until you reach 95, it will cost you more. And go up yearly, as you age. If your policy allows it, consider converting to universal life. No new application and no medical exam required. Compare the cost of extending your term policy to converting to universal life to see which works best for you.
Pay Estate Costs With Life Insurance
Once you convert to universal life, considering making your estate the beneficiary. The insurance money will go to pay your estate costs, so they don’t come out of the other assets you leave your family.
Use Life Insurance For Funeral Expenses
You can even preplan and prepay your funeral using insurance. You choose the funeral you want. Your family is spared the emotional and financial burden of planning and paying for it. Funerals can cost upwards of $10,000. Your family could get hit with extra charges if too much time elapses between when you buy a funeral pre-planning package and die. (Just like everything else, funeral home’s costs go up regularly.) You can make it easier all around by buying your own funeral life insurance policy, instead of letting a funeral home put your fee into a trust account or life insurance policy they own.
Being financially saavy now can make all the difference for you and your loved ones.
Thinking about gifting your estate? To plan your next estate move, contact ClearWay Law’s 24/7 Lawyer Hotline at 1-844-466-6LAW (6529) or email firstname.lastname@example.org for a consultation.