National Post article: How to leave RRIF, TFSA, property and other wealth to your children while avoiding probate and minimizing taxes?

The National Post asked me to review the retirement and estate planning situation of Frank, 84, a widower in British Columbia.

Frank owns his home outright, worth $1.4 million. He has about $743K in a RRIF, $265K in a TFSA, and $473K in a non-registered investment portfolio, bringing his invested wealth to $1.48 million, rounded. His indexed pension and CPP provide $140,000 a year after tax, while his OAS is fully clawed back, so he receives $0.

Frank wants his estate to transfer to his two adult children equally, without exposing his assets to avoid a fee that, in most cases, is manageable.

Some of the key questions we explore in the article:

• The strategy most people assume helps, but may backfire.
• When avoiding fees accidentally creates taxes instead.
• The move that protects paperwork, but may expose assets.
• The planning blind spot that shows up later.
• The estate tool everyone talks about, but few actually price.

Estate planning is simple in concept, complicated in execution. This case shows why the popular answer isn’t always the best answer.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

How to leave RRIF, TFSA, property and other wealth to your children while avoiding probate and minimizing taxes?

You can also click here to read it on PressReader 

Frank is 84 years old, a widower and thinking a lot about how to pass on his accumulated wealth to his two adult children in the most efficient and cost-effective way possible. 

He’s not alone. According to Statistics Canada, nearly 2 million Canadians are aged 80 and older – legacy and estate planning is no longer a far-in-the future goal. 

Frank is in reasonable health and expects to live to 90. He lives debt-free in British Columbia where he owns a home valued at $1.4 million. His indexed pension, investments and Canada Pension Plan benefits provide an annual income of $140,000. He lives comfortably on his pension and CPP income, which covers all of his expenses, including tax related to dividend and capital gains income. His Old Age Security is 100% clawed back.

Frank reinvests his investment income into a balanced investment portfolio, which is currently valued at $700,000. The portfolio includes a Retirement Income Fund, and Tax-Free Savings Account.

He has a will and has given his children power of attorney and health oversight. His estate will pass to them equally. 

“Assuming I die without ever having to move into a care home and draw down monies from my investments, how do I have the investments and my home pass on to my two children without complications or lengthy probate?” asked Frank. 

“Should I establish a limited trust which, I understand, would make them automatic owners of the home and investments?”

Frank has also considered selling his home, investing all proceeds and then renting or living in an assisted living residence that could be paid with the income from his pension and CPP. Is this a good idea?

If he doesn’t sell his home, should his children consider keeping it and renting it out rather than selling it?

Frank plans to advise his children to keep the investments as joint owners and not liquidate or make major changes without first getting good advice. 

“I have three grandchildren and at times gift them money and will continue to do so, but I am not leaving them any inheritance at this time,” I have decided to instead let the parents decide if they want to use their inheritance from me to help their children.”

 I have a RIF of 743,000 for which I pay the annual tax on the required withdrawal. I have a TFSA of 265,000 and an investment account of 473,000. For a total of 1,481,000.  These are rounded off amounts.

My understanding is that the RIF must be fully withdrawn by 90 or death and taxes paid.  The TFSA must be closed.  The balance of both would be transferred to the investment account which could be maintained by my daughters.

As stated earlier, I do not use the withdrawals from the RIF.  I pay the tax from the withdrawal and then transfer the balance first to the TFSA and the remainder to the investment account.

Estate Plan

“Assuming I die without ever having to move into a care home and draw down monies from my investments, how do I have the investments and my home pass on to my two children without complications or lengthy probate?”

One of the most common mistakes people make in estate planning is to make major changes just to avoid probate. Probate is generally small – not like income tax. In BC, probate fees are 1.4%, while Frank is paying a marginal income tax rate of 41%.

Frank can avoid probate on his RRIF and TFSA by putting his 2 children as 50/50 beneficiaries. His estate will pay tax on the RRIF value only and then both can be transferred to his 2 children for their non-registered investment accounts.

Note that the RRIF value at death will be subject to a 30% tax withholding, which is probably not nearly enough. The value is considered income. The top marginal income tax rate is 54% on income over $260,000. His RRIF and TFSA can be transferred tax-free relatively quickly, but then they are gone and cannot pay the rest of the income tax. His estate should keep the non-registered investments around to pay all the taxes before transferring them to the children. 

Probate should apply to his home and to his non-registered investments. It would be about $29,000 today, but likely higher on his estate, since both his home and investments should continue to rise in value.

Many people add their children’s names to their home and investments to avoid probate. Frank’s home and non-registered investments are worth too much for this to be a good idea. There is a risk that CRA will consider adding their names to be a taxable transaction, thinking he is giving them part ownership. He could write a letter stating he is adding their names for estate planning reasons only, but CRA might not accept that. Income tax would be far more than probate fees.

Adding their names also means that his home and investments could be seized by creditors of his kids or could become part of a divorce settlement. Probate fees on both is about $20,000 at the current values, which is likely not enough to be worthwhile exposing himself to the tax and other risks.

The general rule of thumb is that adding your children’s names is not worthwhile if your home is worth more than $1 million or if your investments are worth more than $250,000-$500,000.

Adding their names to his non-registered investments would create a “bare trust” under the new rules and he would have to file a T3 trust tax return and special schedule every year, since the value is over $250,000.

“Should I establish a limited trust which, I understand, would make them automatic owners of the home and investments?”

A trust would not make sense for his home, but might for his non-registered investments if they grow to at least $1 million.

A “limited trust” is not a type of trust. He could use an “inter vivos trust” or a “bare trust”.

For his home, transferring it into a trust would mean that his principal residence exemption would not apply. In other words, if he owns his home until death, there will be no income tax on it, but if he transfers it to a trust, there is no income tax now, but there would be on the capital gain from now until death.

The capital gains tax on his home from now on is likely to be a lot more than probate.

For his non-registered investments, he could avoid probate and simplify his estate by transferring them to a trust, but it is likely not worthwhile until his non-registered investments grow to $1 million or more.

Creating a trust requires special legal documents and typically costs $5,000-$10,000. Then a trust income tax return must be prepared by an accountant every year, which likely costs $1,000 or more.

Probate fees on $700,000 of non-registered investments is just under $10,000.

In short, creating a trust is a lot of effort and expense and complications and may or may not save any money.

Frank is not spending his non-registered investments, and he adds to them every year, so they might get over $1 million during his life.

Frank has also considered selling his home, investing all proceeds and then renting or living in an assisted living residence that could be paid with the income from his pension and CPP. Is this a good idea?

Whether he stays in his home or moves to an assisted living residence should be a lifestyle decision. It is not worthwhile just to try to save some probate.

Retirement homes can be very nice and Frank can afford a good one. It can be like being on a permanent all-inclusive vacation. You still have your own space. All your meals are paid, so you don’t need to buy groceries, plan your meals or cook. They have a variety of activities and you can make a bunch of friends that you see regularly. It can be a very nice lifestyle.

Selling his home would not really save him probate fees anyway. He would avoid probate on his home, but the proceeds would be added to his non-registered investments which are subject to probate.

If he does this, then he would have over $2 million in non-registered investments, so creating an inter vivos trust would be worthwhile for him.

If he doesn’t sell his home, should his children consider keeping it and renting it out rather than selling it?

His children should make up their own minds about what to do with his home. Do they want to keep it and be landlords or do they prefer to sell it and each get the proceeds. Frank could give them his opinion, but the decision should be made by his children.

Frank plans to advise his children to keep the investments as joint owners and not liquidate or make major changes without first getting good advice. 

Frank’s investments can be transferred “in kind” to his children, instead of in cash, so they will have the investments. Part of his RRIF and non-registered investments would have to be sold to pay the income tax, but the rest can all be transferred “in kind”.

This can make sense if Frank is confident in his investments and his children have less investment knowledge & experience.

My understanding is that the RIF must be fully withdrawn by 90 or death and taxes paid. 

No. The minimum RRIF withdrawal rises every year until age 90 when it is 20%/year. You can keep your RRIF indefinitely, but have to make large minimum withdrawals every year. They are deemed cashed in on death and taxes withheld.

Ed