Different Assets, Different Estate Planning

It is important to spend some time on important considerations when planning for the succession of your estate. Prior to death, one’s estate is made up of various assets that can be dealt with and passed to loved ones in different ways. The method chosen to pass assets can have various implications including tax consequences and interference with the owner’s true intention.

For this reason, it may be appropriate to get a range of advice from a number of professionals, depending on the nature of your assets. There are a few kinds of assets known to be problematic when administering estates. These include Registered Retirement Savings Plans and Retirement Income Funds, joint bank accounts, and real property held jointly with a right of survivorship.

RRSP’s and RIF’s can cause headaches. The problem stems from the tax treatment of these assets combined with the ability to designate a beneficiary. A major purpose of retirement accounts is to shelter the funds from taxes at the time of investment, allowing the source fund to grow more quickly and substantially. However, the asset is not sheltered indefinitely. The tax consequences are simply deferred until the funds are withdrawn as income and taxed accordingly at that time.

Except in very limited circumstances, when someone dies there is a deemed disposition of the entire asset. It is assessed as income to the deceased and tax is applied on that basis. This can draw a significant tax penalty (again, dependent on the value of the account) that is payable by the estate. The problem can arise where the deceased has designated a beneficiary other than the estate (and other than a spouse or dependent child). The named beneficiary is paid the proceeds directly, leaving the estate with the tax bill. Clearly this can cause issues if there are insufficient funds flowing through the estate to cover the tax bill. In addition, if a person has named a beneficiary with the intention of equalizing that person’s inheritance with another beneficiary under the will, this scheme may have the unintended consequence of depleting the inheritance under the will. That beneficiary essentially becomes responsible for the tax bill while the designated beneficiary of the RIF or RRSP receives tax-free funds.

Another scenario that can attract unintended consequences involves assets held jointly with another person. Problems commonly arise where a parent names a child jointly on their bank accounts or on title to their home or other real property. This has been a recent trend in estate planning because joint assets pass directly to the survivor rather than flow through the estate. This means their value is not calculated into the value of the estate for assessment of probate fees. However, the unintended consequences of structuring your estate plan this way might far outweigh the benefit of saving the minimal amount of probate fees.

Although accounts are often put into joint names with the actual intention that the added party will hold it in trust for the estate and its contents will be divided equally between all of the account holders’ residual beneficiaries, this may not happen. First, if the account passes directly to the joint holder, there is no guarantee that other beneficiaries will become aware of its existence. Although it should be included in the application for probate as an asset passing outside of the estate, beneficiaries often do not see the application and the account contents are not automatically drawn into the pot of estate assets to be divided among named beneficiaries. The process is particularly vulnerable to conflict if the joint holder is also the executor. The original owner of the account is dependent on the joint holder’s willingness to be upfront about the original intention and the existence of the account.

Joint accounts can also cause issues if the original holder loses capacity to maintain control of the account and the joint holder has automatic access to the funds in the account without being granted power of attorney or property guardianship. While the deceased may intend for the joint holder to obtain the remaining contents upon death, he/she may not intend for that person to have access to the contents during his/her life.  However, this is the inevitable result of naming a joint account holder.

There is a recent estate planning trend that has seen parents adding one or more of their children to title of their home to avoid probate fees and/or create an easier transfer upon death. This scheme can have unintended consequences, the most significant being that the home owner(s) can potentially lose control over their own home during their lifetimes. Many older couples or individuals discover the problem with this scheme after it is too late, when they decide to sell their homes and secure alternate living arrangements. Many people don’t realise that they will require the consent of their children to sell the property and many face refusal from their children to cooperate in the sale. This can cause costly delays and tear families apart. The likelihood of disagreement increases after death of the parent, where one child is named jointly and the siblings believe they are entitled to share in the value. If the joint owner insists he/she is solely entitled, the other beneficiaries are required to prove their case in Court. This is costly and can destroy families.

Another aspect of joint ownership of real property involves the tax implications of transferring the property. Depending on whether or not the property is a principal residence there can be capital gains implications. The extent of the tax and who it is assessed against will depend on factors that are best answered by an accountant.

The nature of assets in one’s estate will affect the methods available for passing value to loved ones. It is also the nature of these assets that will determine the risks associated with each method. Any of the methods discussed here can be initiated without the assistance of legal counsel and are relatively easy complete. However, the effects are lasting and potentially risky, warranting a thorough discussion of your estate planning goals and intentions prior to taking any steps.