Reduce, Postpone or Avoid Real Estate Death Taxes

REDUCE, POSTPONE OR AVOID REAL ESTATE DEATH TAXES

Those soaring values of GTA-area homes has made it an increasingly expensive proposition to die while owning real estate.

Huge probate taxes, officially known as estate administration fees and a result of astronomical prices in the overheated market, must be paid by the deceased person's estate.

The average $1-million Toronto home, with a mortgage of, say, $450,000, would attract a probate tax of $9,250. Without a mortgage, the estate would be dinged $14,500. These taxes are calculated at the rate of $5 per thousand on the first $50,000 of estate value, and $15 per thousand on the rest - and payable on filing a probate application.

Fortunately, with some careful pre-planning and a lawyer who understands this area of law, the taxes can be reduced, postponed or even avoided altogether.

Personal property
Vehicles
Registered plans including RRSPs, TFSAs, RRIFs and life insurance
Jointly owned property to the survivor
Property such as a condominium parking space or locker valued at under $50,000; and
Some property originally registered in the old land registry system

One way to avoid payment of probate tax by the estate is to transfer assets - such as bank accounts and real estate - into joint names of the owner and the intended beneficiaries, typically the children of the owners of the property.

This technique is very risky to the parents, however, and should only be used after very careful planning and thorough legal advice. I typically recommend against it.

Over the years, a number of other options have been developed to keep the government's sticky fingers out of our pockets.

One popular method is to designate one or more named beneficiaries on life insurance policies and registered plans. This device must be used with care because, in some circumstances, the designation will trigger income tax which becomes payable by the estate and not the named beneficiary.

For people with significant assets in the shares of a privately owned corporation, the use of multiple wills can avoid the probate tax grab on a significant portion of the estate.

A secondary or excluded-properties will is not probated and is used to deal with assets like the private company shares, which do not need probate to transfer. A primary, or general will, is probated and deals with everything else. Using multiple wills avoids the tax on the assets in the secondary will, even though the beneficiaries may be the same in both wills.

Another legitimate way of avoiding the payment of the estate tax on real estate is for a property owner to sign a deed for the land and deliver it to the recipient or a lawyer for registration after death. Handled properly with sophisticated legal advice, unconditional advance delivery of a signed deed can be an effective estate-planning tool to reduce the estate administration tax otherwise payable.

Gifting assets during the lifetime of the owner takes the value of the asset out of the estate, but may have unintended tax consequences. As well, the gift results in the complete loss of control and potentially the use of the asset.

Assets transferred to a trust will not be part of the estate of the owner, and there will be no probate fees payable on death. The transfer, however, may trigger a large capital gain, so it must be used with caution.

My best advice in this area is:

Make a will now. Procrastination is not an option.
Considerable tax savings can be achieved with expert legal advice.

And remember, there is no such thing as a simple will.