Plan Ahead to Minimize Taxes on Death
Nobody likes to think about their death, but who wants to pay more tax than they have to? With a little planning, you can help minimize the taxes your estate might pay at death.
LEAVE ASSETS TO YOUR SPOUSE
Assets left to a spouse or spousal trust are deemed to be disposed of at the deceased’s adjusted cost base (the amount of your investment that has already been taxed), thereby deferring tax until that spouse (or trust) sells the assets, or until the surviving spouse’s death.
GIVE ASSETS AWAY
If you actually dispose f assets before your death, your estate will avoid the potential tax bill on death. If you have already decided who will receive certain assets, and will not have to use those assets to fund your day-to-day living expenses, you might consider giving those assets away during your lifetime.
Giving assets away is generally considered a disposition for tax purposes, and therefore could give rise to a tax bill if the fair market value at the time the asset is gifted is greater than its adjusted cost base. As a result, this strategy works best if assets you’re giving away are likely to grow in value in the future.
CHOOSE BENEFICIARIES CAREFULLY
To maximize tax deferral, you could leave assets that have appreciated in value to your spouse first, if you can. If you’re going to leave assets to others, it’s best to consider leaving tax-friendly assets such as cash, Guaranteed Interest Contracts (GICs), money market funds or assets that have not greatly appreciated in value.
MAKE THE MOST OF THE EXEMPTIONS
The two most common exemptions are:
1) The principle residence exemption, which can be sued to offset capital gains on one property you own. This could be your home, but it could also be a cottage or other second property that you ordinarily inhabit (rental properties do not qualify).
2) The enhanced capital gains exemption, which can be used to offset up to $750,000 of capital gains on your shares in certain private companies, a qualifying farm or fishing property.
GIVE TO CHARITY
You can choose to give to charity on your death (usually via your will). Your estate will be able to claim a donation tax credit for the fair market value of the gift on your final tax return.
FILE MULTIPLE TAX RETURNS
In the year of death, four tax returns can potentially be filed. A claim can be made for some personal tax credits, such as the basic personal amount, on each of the returns filed, effectively multiplying the number of credits claimed. In addition, your estate benefits from the lower graduated tax rates more than once a year of death.
BUY LIFE INSRUANCE
Once you’ve done all you can to minimize your tax liability on death, you may want to consider life insurance to assist in funding your estate’s eventual tax liability. This helps to ensure that your heirs will be left with as much of the estate proceeds as possible, and that your assets will not have to be liquidated in order to pay your estate’s tax bill.
IDEAL CANDIDATES FOR THESE STRATEGIES
The people who will benefit most from these strategies are individuals with assets that will attract taxes on death who want to: understand the income tax implications on death related to those assets; Minimize or reduce their estate’s income tax bill on death and leave more assets to their heirs.
If this applies to you, then:
Identify assets that may present tax planning opportunities
Consider one or more of these strategies to reduce taxes on death
Review your estate plan with a tax or legal advisor
Finally, get advice from a tax professional if you have any questions about how to minimize the taxes your estate might pay at death.