Fine Tuning required for Some Estate Plans

Norman and his wife Mary have a significant portfolio of mutual funds and other investments. Even after the recent downturn, the pool of investments still exceeds $1 million.

Until recently, those investments were owned jointly in a series of accounts in the names of both the husband and the wife with rights of survivorship. That meant that when the first of them dies, the survivor would inherit all of the investments outside of the estate. That kind of joint ownership avoids or avoids the probate process. Probate taxes may not be an issue in Alberta, but many couples prefer joint ownership for the convenience when one of them dies.

Norman and Mary are in the process of taking those joint accounts and separating them into two accounts, one in the name of Norman and the other in the name of Mary. No more joint ownership.

When the first dies, the investments in his or her name will fall into his or her estate. If Norman dies first, half of the investments will fall into his estate. The survivor will be put to the trouble of applying for probate, a step that might have been avoided if the investments were left joint.

The survivor, whether Norman or Mary, will be happy to go to the trouble of applying for probate. It means that the investments will be available in the estate to fund a spousal trust each is creating for the other. The spousal trust will generate annual tax savings for the survivor. Those tax savings should amount to approximately $4,000 each year. That means $4,000 in the first year, $4,000 in the second year, and so on. It will add up.

What is more, Norman and his wife are pursuing an estate planning strategy called “spring boarding” (described in an earlier column). It involves having their combined wealth funnel down to their children contained in four testamentary trusts. It is intended to save income taxes for the children on income generated on investments held in the trusts.

For the strategy to work to optimum advantage, they need roughly half of their combined wealth to funnel down to the children in the spousal trust that comes into existence at the first death. Making sure that happens involves some fine tuning while they are still alive. That includes the changes they are making to their non-registered investment portfolio.

No income taxes are triggered when the portfolio is broken into two parts. Transfers between husband and wife do not trigger capital gains taxes. The same is true of transfers between common laws.

If Norman or Mary were to be diagnosed with a terminal illness, things might change again. Say Norman is diagnosed with fast moving, terminal cancer. Under those circumstances, Norman and Mary might be well advised to transfer a significant portion of Mary’s portfolio to Norman. Called “death bed loading,” the ideais to load the dying spouse with assets so, in turn, those assets can fall into the estate of the dying spouse andform part of the spousal trust. It is macabre, but good planning.

Norman and Mary are real. Names and details have been changed to protect the family’s confidentiality.

None of this deals with their registered investments. Registered investments are subject to special tax rules. Those rules make it advisable to have the registered investments pass directly to the survivor and not into a trust.

All of this is a lesson for wealthier families engaged in specialized income tax planning, like Norman and Mary.

There are also lessons here for families of more modest means.

First, good estate planning means not only looking at a person’s will, but looking at their asset holdings to make sure that assets are owned and structured in a way that furthers the estate plan and does not work interference on it. A farmer died in Saskatchewan with a will attempting to give a section of farm land to a specific child. It failed. The land was in fact owned by the deceased’s family farm corporation. The farmer’s will was inconsistent with the structure of his asset holdings. Someone should have checked that along the way. The result for the family was bad.

Second, when a person is terminal and getting his or her affairs in order, there may be last minute adjustments that can be made that will make things work more efficiently. Consider a situation where a wife is dying with a ski chalet in British Columbia in her name. Land in BC attracts probate taxes. A last minute transfer might be considered over to her husband, or into joint names. In the right case, avoiding probate and other legal complications can be valuable. Simple can be good. The right answer in each situation is specific to the situation itself.

Next week’s column: Second marriages and blended families.

John Poyser practices as a wills and estate lawyer with The Wealth and Estate Law Group (Alberta). A former chair of the Wills, Estates and Trusts Section of the Canadian Bar Association, he co-authors a textbook for lawyers and accountants on trust and estate taxation. Contact him at (403) 613-2128 or jpoyser@welglawyers.ca , or visit www.welglawyers.ca

© John E. S. Poyser 2009.

This article was current when it was written. No effort has been made to update it. It is not a replacement for legal advice.