End-of-life planning can be difficult, morose or tense at the best of times.
But if you fail to have these discussions in advance, it can lead to even further, compounded grief: excessive probate fees, will disputes or key planning opportunities missed.
This is where Manning Elliott Vancouver partner Ted McLellan enters into what can often be a complicated discussion. With diligence, expertise and a vital understanding of protecting assets, McLellan offers strategies covering both pre-and-post-mortem planning to maximize your money.
McLellan helps clients focus on how to avoid double-tax consequences in estate planning, specifically related to the holdings a person has in Canadian private company shares, and how these can be passed on while maximizing value for the benefciary who inherits them.
The planning process encompasses two key concepts: a life interest trust (such as an alter ego trust, or a joint spousal trust) and pipeline planning.
A pre-mortem planning technique for those 65 and up, a life interest trust’s two main benefits allow you to firstly avoid probate fees upon death, and secondly help secure assets such as shares in your private corporation, a stock portfolio or your principal residence. The probate fee price tag is $150 plus 1.4 per cent of the market value of all assets valued at more than $50,000.
“If you don’t have a life interest trust, everyting is subject to probate fees — so right there you can easily calculate the benefit of doing this from a financial perspective,” McLellan says.
The life interest trust also protects assets from being mired in messy disputes. Because wills are subject to the British Columbia Wills Variation Act, they can be challenged by someone who is perhaps displeased by what they’ve been left.
“Nothing is guaranteed but because it’s in the form of a trust, assets are more protected than if they were subject to the terms of a will,” McLellan says. “It gives the person more comfort in leaving their estate to whom they think it should be left.”
Pipeline planning, on the other hand, comes up in the post-mortem stage.
When someone dies, all of their assets are valued and a capital gain tax is paid on the date of death. Fast forward a few years later: the kids who inherit the shares of the company will decide to sell all the assets in the company and pay themselves out – it’s a taxable dividend to the shareholders, and therefore double taxation typically otherwise arises on these transactions.
As part of the pipeline plan, a new company is created and shares are transferred into it – what is taken back is a promissory note equal to the fair market value of the shares as of the date of death. Distributions can then be made to the new shareholder tax-free, as repayments of the the promissory note.
Picture a $10 million estate – the shareholders, as a promissory note of that $10 million, can now be paid tax free.
“The pipeline is created to funnel the value on which tax was paid by the deceased, tax-free, from the newly created company, to the beneficiary shareholder,” McLellan says. “This comes up quite frequently as generations pass away. We always look at things from an estate planning standpoint, and this particular strategy effectively avoids double taxation.”