Many Canadians overlook the importance of effective estate planning. This includes updating beneficiary designations for all plans and policies and reviewing your will periodically to ensure it is current based on changing circumstances. But effective estate planning also means ensuring that your will distributes your estate according to your wishes in the most tax-efficient manner.
When drafting or updating your will, it may be useful to consider various ways to minimize taxes and enhance the amounts to be distributed to your beneficiaries.
For tax purposes, an individual's assets are considered to have been sold at their fair market value immediately before death. This may be problematic if capital gains have accrued on your assets as that may lead to a significant tax liability. Under some circumstances this tax can be deferred by transferring assets to a spouse or a qualifying spousal trust, for example.
When reviewing the distribution of assets in your will, you should estimate your expected tax liability at death. This will allow you to plan now to ensure you have sufficient liquid assets or enough insurance on hand to fund the estimated future tax liability.
There are a number of ways to minimize taxes on your estate. Testamentary trusts, or trusts created by way of your will, may provide tax savings through income splitting opportunities. Here, the trust is considered to be a separate taxpayer subject to tax at progressive rates, just the same as individuals, for the first 36 months of the estate. After such time, income splitting would result only if the beneficiary(ies) of the estate are not subject to tax at the highest marginal rate. Testamentary trusts also provide the benefit of having specific terms surrounding the administration of assets, allowing you to determine when certain beneficiaries will be entitled to receive their portion of your estate.
Charitable giving may also be another way to help minimize taxes. Careful planning will ensure
that any tax benefits resulting from donations made in your will are fully utilized.
To ensure that your will best takes advantage of tax minimization opportunities, you should
provide your trustees with sufficient powers to allow for tax planning on behalf of the estate.
Most generic will templates are either silent on this issue or provide very basic and insufficient
Some jurisdictions assess estate administration fees (or probate fees). Here, you may consider
the use of multiple wills (i.e., a primary will to hold assets subject to probate and a secondary
will to hold assets not subject to probate, such as private company shares) to reduce the fees
charged to the estate. These fees can also be avoided by holding assets in joint tenancy such
that they will pass directly to the joint owner upon your death or by transferring the assets to a
trust during your lifetime.
If you or any of your proposed beneficiaries are U.S. citizens or green card holders, you may
require specialized terms and conditions in your will to avoid U.S. tax and/or U.S. estate tax
As always, we recommend seeking advice from legal and tax professionals to ensure that your
will takes into account all tax-efficient opportunities available.